Credit Card or Debit Card? What's the Difference?

Looking at debit and credit cards side-by-side it is hard to see any real, physical difference between the two. They are both plastic rectangles, embossed with a series of numbers, and are acceptable tender in most shops, restaurants and hotels in Britain, as well as around the world. It is likely that you were first given a debit card as a teenager; a credit card following later as a more adult way of handling money.

However, debit cards offer access to money that you already have, whilst credit cards provide money that you need to pay back, usually a minimum amount every month, plus interest accrued. Debit cards are therefore restricted by the state of your current account; if you do not have the money you cannot purchase something unless you wish to incur overdraft interest charges, or even be penalised for going over your limit. In some ways, this is a traditional way of managing money put simply; you cannot spend what you do not have. In fact, many people from older generations find credit an often alien concept.

Today, this attitude may seem outdated and unnecessary. If you do not have 1,000 in savings it does not necessarily mean that you cant afford a new music system. Perhaps you are confident that on your current salary you can set aside enough every month to pay off a credit card debt? In this way, a lump sum of expenditure can be afforded, if the context is extended from what you can afford now, to what you can afford over a number of months. It is this principle that essentially underlies mortgages.

In order to finance a purchase you can use existing savings, take out debt in the form of a loan or credit card or perhaps use a mixture. If you dont already have one, to apply for a credit card or loan often means you may need to have an acceptable credit rating, even if there are hundreds of cards on offer. Even simple things like changing your address regularly can negatively affect your credit rating, while steering clear of credit in the past may not be a good thing either. Some bank managers advise using your credit card for the weekly shopping and paying the amount off immediately, as a good way of quickly boosting your credit scores.

However, while some companies may have stringent guidelines when it comes to credit card or loan applications, others may not be so fussy so if your application is turned down by a particular lender, it might be worthwhile approaching a different one whose criteria for acceptance may be different. Be careful not to apply for too much credit too quickly, though, as this can also have an undesirable effect on your credit applications.

Store cards are a form of credit cards, but they only allow you to buy from specific outlets. This may be fine if your music system is sold there, but the interest rate charged on these cards can be much higher that what you might find from a credit card. Setting aside the teasing discounts offered and considering the full picture is the sensible, if slightly dull thing to do.

Credit may be an effective and easy way of purchasing goods and services, but it does require effective financial management and a fairly stable income. But then again, with the rise of such Internet sites as E-Bay, making a fast buck in times of need is no longer a such a pipe dream.

Elisha Burberry is an online, freelance journalist and keen traveller and watersports enthusiast. Originally from Scotland, she now resides in London.

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15 Important Credit Card Terms to Consider Before Applying for a Credit Card

If you don't understand the language, credit card offers and statements could lead you to deep debt -- or at least furious frustration. For the big scoop on the fine print, here's what these frequently used credit card terms mean.

1. Average daily balance -- This is the method by which most credit cards calculate your payment due. An average daily balance is determined by adding each day's balance and then dividing that total by the number of days in a billing cycle. The average daily balance is then multiplied by a card's monthly periodic rate, which is calculated by dividing the annual percentage rate by 12. A card with an annual rate of 18 percent would have a monthly periodic rate of 1.5 percent. If that card had a $500 average daily balance it would yield a monthly finance charge of $7.50.

2. APR(Annual percentage rate) -- A yearly rate of interest that includes fees and costs paid to acquire the loan. Lenders are required by law to disclose the APR. The rate is calculated in a standard way, taking the average compound interest rate over the term of the loan, so borrowers can compare loans.

3. Balance transfer -- The process of moving an unpaid credit card debt from one issuer to another. Card issuers sometimes offer teaser rates to encourage balance transfers coming in and balance- transfer fees to discourage them from going out.

4. Cash-advance fee -- A charge by the bank for using credit cards to obtain cash. This fee can be stated in terms of a flat per-transaction fee or a percentage of the amount of the cash advance. For example, the fee may be expressed as follows: "2%/$10". This means that the cash advance fee will be the greater of 2 percent of the cash advance amount or $10.

The banks may limit the amount that can be charged to a specific dollar amount. Depending on the bank issuing the card, the cash advance fee may be deducted directly from the cash advance at the time the money is received or it may be posted to your bill as of the day you received the advance. The cost of a cash advance is also higher because there generally is no grace period. Interest accrues from the moment the money is withdrawn.

5. Card holder agreement -- The written statement that gives the terms and conditions of a credit card account. The cardholder agreement is required by Federal Reserve regulations. It must include the Annual Percentage Rate, the monthly minimum payment formula, annual fee if applicable, and the cardholder's rights in billing disputes. Changes in the cardholder agreement may be made, with written advance notice, at any time by the issuer. Rules for imposing changes vary from state to state, but the rules that apply are those of the home state of the issuing bank, not the home state of the cardholder.

6. Finance charge -- The charge for using a credit card, comprised of interest costs and other fees.

7. Floor -- The minimum rate possible on a variable-rate loan or line of credit, after any initial introductory rate period. For example, on a credit card with the Prime rate as its index, no matter how low the Prime rate drops, the rate on the line may never decrease below the stated rate floor.

8. Free Period -- Also called a "grace period," a free period lets you avoid finance charges by paying your balance in full before the due date. Knowing whether a card gives you a free period is especially important if you plan to pay your account in full each month. Without a free period, the card issuer may impose a finance charge from the date you use your card or from the date each transaction is posted to your account. If your card includes a free period, the issuer must mail your bill at least 14 days before the due date so you'll have enough time to pay.

9. Minimum payment -- The minimum amount a cardholder can pay to keep the account from going into default. Some card issuers will set a high minimum if they are uncertain of the cardholder's ability to pay. Most card issuers require a minimum payment of two percent of the outstanding balance.

10. Over-the-limit fee -- A fee charged for exceeding the credit limit on the card.

11. Periodic rate -- The interest rate described in relation to a specific amount of time. The monthly periodic rate, for example, is the cost of credit per month; the daily periodic rate is the cost of credit per day.

12. Pre-approved -- A credit card offer with "pre-approved" only means that a potential customer has passed a preliminary credit-information screening. A credit card company can spurn the customers it invited with "pre-approved" junk mail if it doesn't like the applicant's credit rating.

13. Secured card -- A credit card that a cardholder secures with a savings deposit to ensure payment of the outstanding balance if the cardholder defaults on payments. It is used by people new to credit, or people trying to rebuild their poor credit ratings.

14. Teaser rate -- Often called the introductory rate, it is the below-market interest rate offered to entice customers to switch credit cards or lenders.

15. Variable interest rate -- Percentage that a borrower pays for the use of money, and which moves up or down periodically based on changes in other interest rates.

I hope this terms will help you out a little when choosing your next credit card.

Thomas Lindstrom is author and researcher regarding credit card issues.

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