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Credit Cards…Debit Cards: What's The Difference?
We hear a lot these days about debit cards taking the place of credit cards, and being used at point of sale terminals. To a lot of our customers, and even some of our bankers, we may as well be talking in a foreign language!
Credit Cards
Most of us are familiar with the way a credit card works. You buy something with a credit card and the merchant who accepts your credit card imprints a charge slip with your number. They then send that charge slip to the card-issuing financial institution and get their money. The financial institution bills you, and you send them a check in payment. You have the option of paying the whole charge, or, if you don't want to pay the whole charge at one time, you can make monthly payments which include interest charges.
Sometimes, as in the case of gasoline companies or department stores, the merchant is also the card issuer. Your bill will come directly from the merchant, and you send off a check to the merchant to pay the charge.
Debit Cards
Debit cards are used most commonly at automated teller machines. You put the card in the machine, it takes money out of your account, and gives you cash.
Debit cards, unlike credit cards, withdraw funds directly from your account. They can also be used to purchase goods from merchants right in the store.
The sales clerk will take your debit card (the same one you use in the ATM) and swipe it through a machine that "reads" the magnetic stripe on the back. That stripe has your account number and the bank number in it. You must add your PIN (Personal Identification Number) to the information already in the machine in order to access your financial institution's computer and activate the transaction. Once all the information has been "read", the amount of the sale is automatically transferred from your account at your financial institution to the merchant's account at their financial institution.
Point Of Sale Terminal
All of this is accomplished right at the point of sale, through the merchant's terminal. That, of course, is why we call the machine in the store where all of this takes place a Point of Sale Terminal (POS).
To summarize, the old way is: Credit card-charge, send, pay, charge, send, pay.
The new way is: Debit card-charge, pay.
It's not hard to see the signs of the future. Debit cards and POS terminals will become much more common.
Copyright © 1993 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 3, No. 11, 4/93
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