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 are the differences between debit cards and credit cards?

    Learn how the major difference between a debit card and a credit card is where the money comes from when a customer makes ... Read Answer >>
  2. What's a better way to borrow money: overdraft or credit cards?

    Overdraft and credit cards will allow you to spend more money than you have, but whichever option you choose, be sure to ... Read Answer >>
  3. Where are secured credit cards accepted?

    Repair a damaged credit history or establish one by opening a secured credit card account with a collateral deposit into ... Read Answer >>
  4. How do prepaid debit cards work?

    Learn about how prepaid debit cards work, including where they are accepted and how the financial part works like a checking ... Read Answer >>
  5. How do secured credit cards help me build my credit score?

    Find out how secured credit cards function and why they can be very useful for those looking to build or rebuild their credit ... Read Answer >>
Related Articles
  1. Personal Finance

    Credit vs. Debit Cards: Which Is Better?

    Be strategic about the card you choose
  2. Personal Finance

    Debit Cards: Why They're Not As Safe As You Think

    Ditching your credit card can be a smart move, but debit isn't yet an equal alternative.
  3. Personal Finance

    The Downsides Of Debit Cards

    The convenience of debit cards makes them a popular method of payment, but here are some downsides to consider.
  4. Personal Finance

    Credit, Debit And Charge: Sizing Up The Cards In Your Wallet

    Not all plastic is equal! Learn the difference between the three kinds, and how each can affect your finances.
  5. Personal Finance

    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.
  6. Personal Finance

    10 Reasons To Use Your Credit Card

    Charging purchases is not always a no-no. In fact, there are some very sound reasons for choosing this option.
  7. Personal Finance

    How To Keep Your Debit Card Transactions Safe

    Debit card use has become more popular than ever, but not every consumer knows what they need to do to make sure they keep their debit card safe.
  8. Personal Finance

    How Debit Cards Work

    Unlike credit cards, debit cards rely only on the funds available in the user’s account, so they do not let users borrow on credit. They frequently come with purchase limits, and using one at ...
  9. Personal Finance

    8 Ways To Avoid Getting Burned By Prepaid Debit Cards

    These cards have many differences from traditional debit and credit cards that can cost you money if you don't know what to watch out for.
  10. Personal Finance

    How To Get Your First Credit Card

    Here's a rundown of how you can go about getting your first credit card.
  1. Debit Card

    An electronic card issued by a bank which allows bank clients ...
  2. Offline Debit Card

    A card that combines characteristics of both a traditional (online) ...
  3. Authorized Amount

    A sum that a merchant transmits to a credit or debit card processor ...
  4. Credit Card

    A card issued by a financial company giving the holder an option ...
  5. Credit Card Funding

    The ability to electronically fund a new account, business, or ...
  6. Secured Credit Card

    A type of credit card that is backed by a savings account used ...
Trading Center