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.

  1. What is the difference between "closed end credit" and a "line of credit?"

    Depending on the need, an individual or business may take out a form of credit that is either open- or closed-ended. While ... Read Full Answer >>
  2. What is the best way to start to rebuild your credit after a bankruptcy?

    Bankruptcies can be devastating to your credit score. Even worse, a bankruptcy will be listed on your credit report for between ... Read Full Answer >>
  3. What were the primary financial crimes involved in the ZZZZ Best case?

    ZZZZ Best was a company started by Barry Jay Minkow that claimed to be a carpet cleaning business. In fact, it was a Ponzi ... Read Full Answer >>
  4. Can a creditor sue me for a delinquent account?

    If a credit card account becomes delinquent, the creditor can sue the debtor for the balance as soon as the delinquency occurs. ... Read Full Answer >>
  5. How do I transfer my credit card history from one country to another?

    It is currently not possible to transfer your credit history to another country if you relocate. The credit metrics used ... Read Full Answer >>
  6. What are some examples of simple interest loans?

    Two good examples of simple interest loans are simple interest car loans and the interest owed on lines of credit such as ... Read Full Answer >>
Related Articles
  1. Credit & Loans

    5 Credit Cards For the Super Rich

    Understand the difference between an average credit card and an elite credit card for the wealthy. Learn about the top five credit cards for the super rich.
  2. Budgeting

    Key Questions to Ask Before Moving in Together

    Moving in together is a big step. Here are some key financial questions to ask your partner before you make the move.
  3. Credit & Loans

    Explaining Equated Monthly Installments

    An equated monthly installment is a fixed payment a borrower makes to a lender on the same date of each month.
  4. Economics

    Debit or Credit at the Gas Pump: An Easy Choice

    Using credit rather than debit at the gas pump doesn't just provide more fraud protection. It also could give consumers lucrative benefits.
  5. Personal Finance

    How Sending Money on Facebook Works

    Learn how Facebook users can send and receive money within their social network, and understand how the site benefits financially from offering this service.
  6. Professionals

    Small Business: Minimize Your Credit Card Fees

    Accepting credit cards is a must these days, but small business owners can take steps to minimize profit-eating credit card fees.
  7. Personal Finance

    How Sending Money on Gmail Works

    Learn how sending money via Gmail works, and understand how Google makes money from offering this service despite it being free to use.
  8. Credit & Loans

    Does a Lost or Stolen Credit Card Hurt Your Credit Score?

    Learn the ways in which a lost or stolen credit card can hurt your credit, and understand the steps you can take to protect yourself if this happens.
  9. Investing

    Debit or Credit Card: Which to Use for Car Rentals

    Before you rent your next car, think twice about purchasing the added insurance if you're using a credit card.
  10. Credit & Loans

    5 Surprising Things That Will Hurt Your Credit Score

    Here are five ways that you can damage your credit score without even knowing it.
  1. Transferable Points Programs

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

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

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

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

    A security interest or claim on property that enables a lender ...
  6. Linked Transfer Account

    Accounts held by an individual at a financial institution that ...

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!