A:

Consumer debt instruments allow people to borrow money at specific interest rates. In recent years, the credit industry has become very imaginative in the creation and marketing of consumer debt instruments and, as a result, there is a lot of overlap between debt and non-debt instruments.

By definition, all credit cards are debt instruments. Whenever someone uses a credit card for a transaction, the card holder is essentially just borrowing money from a company, because the credit card user is still obligated to repay the credit card company. Credit card companies generally make money off of credit cards by charging high interest rates on credit card balances.

Debit cards, on the other hand, are not debt instruments because whenever someone uses a debit card to make a payment, that person is really just tapping into his or her bank account. With the exception of any related transaction costs, the debit user does not owe money to any external party because the money used in the debit transaction came from the available funds in the user's bank account.

However, the distinction between debt and non-debt instruments becomes blurred if a debit card user decides to implement overdraft protection. Whenever a person withdraws more money than what is available in his or her bank account, overdraft protection can come into effect and the bank will lend the person enough money to cover the transaction. The bank account holder is then obligated to repay the account balance owed and any interest charges that apply to using the overdraft protection.

Overdraft protection is designed to prevent embarrassing situations, such as bounced checks or declined debit transactions. However, this protection does not come cheaply; the interest rates charged by banks for using overdraft protection are as high, if not higher, than the ones associated with credit cards. Therefore, using a debit card with overdraft protection can result in debt-like consequences.

To read more, see Credit, Debit And Charge: Sizing Up The Cards In Your Wallet and Take Control Of Your Credit Cards.

RELATED FAQS
  1. How can you pay your Walmart credit card?

    Holders of Walmart credit cards can make payments on their balances due by mail, online or at Walmart and Sam's Club stores. ... Read Full Answer >>
  2. Does Netspend accept wire transfers?

    NetSpend accepts some types of wire transfers to add money to the prepaid debit cards it issues to its customers. There are ... Read Full Answer >>
  3. Is Apple Pay safe and free?

    Apple Pay is a mobile payment system created by Apple to reduce the number of times shoppers and buyers have to pay for goods ... Read Full Answer >>
  4. Does Netspend report to credit bureaus?

    NetSpend does not report to credit bureaus in any capacity. NetSpend is a prepaid debit card program that allows cardholders ... Read Full Answer >>
  5. Where can you use a Walmart MoneyCard?

    You can use a Walmart MoneyCard anywhere Visa Debit or Debit MasterCard are accepted. In addition, the Walmart MoneyCard ... Read Full Answer >>
  6. Can you use your Walmart credit card at Sam's Club?

    Consumers can use their Walmart credit cards to shop at Sam's Club. However, they cannot use their Walmart credit cards when ... Read Full Answer >>
Related Articles
  1. Credit & Loans

    10 Reasons To Use Your Credit Card

    There are several benefits to paying with credit instead of debit, if you use a credit card responsibly.
  2. Credit & Loans

    5 Extreme Ways To Raise Your Credit Score

    Desperate to rebuild your credit score because you can’t obtain a loan with a decent interest rate? Here are some extreme options to try.
  3. Personal Finance

    The Top 5 Personal Finance Experts to Follow in 2016

    Here is a look at five money and investing experts who can help you reach your financial goals for 2016.
  4. Economics

    What is a Trade Credit?

    Trade credit means that a customer purchases goods from a seller who allows the purchaser to pay for those goods at a later time.
  5. Investing

    Amazon Financing Now in the U.K.: Is America Next?

    Amazon has unveiled a great credit product in the U.K. Will America be the next country to have access to this financing option?
  6. Credit & Loans

    Why You Should Use Your Credit Card For Purchases

    Responsible credit card users who always pay off their monthly balances should use their cards to buy everything.
  7. Credit & Loans

    The Fed's Interest Rate Rise & Your Credit Cards

    The U.S. Federal Reserve recently raised the lending rate from 0% to 0.25% – the first time since 2006. How does that affect your credit card payments?
  8. Investing News

    Warren Buffett: Be Fearful When Others are Greedy

    It is prudent for the investor to understand when the party has gone on long enough and the clock is about to strike midnight. Be fearful when others are greedy.
  9. Savings

    Building an Emergency Fund

    Do you have enough savings to cover the costs of unforeseen crises? We show you how to plan ahead.
  10. Retirement

    Understanding Credit Card Interest

    Paying these rates can impact your disposable income and your investment returns.
RELATED TERMS
  1. Debit Card

    An electronic card issued by a bank which allows bank clients ...
  2. Transferable Points Programs (UAL)

    With transferable points programs, customers earn points by using ...
  3. Luhn Algorithm

    An algorithm used to validate a credit card number.
  4. Roll Rate

    The percentage of credit card users who become increasingly delinquent ...
  5. Truncation

    The requirement mandated by the FTC for merchants to shorten ...
  6. Purchase Money Security Interest (PMSI)

    A security interest or claim on property that enables a lender ...
Trading Center