Debit cards are growing in importance and are now used more frequently than credit cards by Australians, and this trend is likely to continue. Often they are seen as simply an alternative to other payment methods, such as cash from an ATM or cheques. However, some people do use a debit card as an alternative to credit cards, and so it’s a good idea to look at how credit cards are similar to debit cards and how they are different.
Internationally, debit cards and credit cards use the same payment system, which means debit cards are accepted as widely as credit cards. This means that the associated account will always be debited the transaction amount, even if the bank holding the account doesn’t maintain branches or operations in the region.
However, purchases made on a credit card are a loan and the amount of each transaction is added to a moving balance, whereas debit cards deduct the transaction amount from the balance of an associated bank account, usually but not always a transaction account. This account will either be in credit, or “in the black,” in which case interest may be credited to the account holder, or the account will be in overdraft, or “in the red,” in which case the debit card holder will be charged interest.
Overdraft arrangements with banks tend to have lower interest rates than credit cards. But transaction accounts may have direct debits or regular payments that are withdrawn from the balance, in addition to the associated debit card. In other words, there’s a greater danger of a transaction account accidentally going into the red, which may attract a penalty interest rate or fees that is higher than credit card interest rates.
Another way to use debit cards as an alternative to credit cards is to carry debt on the debit card. Debit card may now be associated with a mortgage account. There are a number of ways this is done, but the most common are indirect access through offset accounts or direct access through a current account mortgage.
