The Mathematics of Money

420 Chapter 10 Consumer Mathematics

the last decade. A debit card may look like, and may be used in essentially the same ways

as, a credit card, but using it does not involve any actual borrowing. Purchases made with

a debit card are paid for out of a checking, savings, or similar account immediately. Since

the money comes directly from your account, you are not borrowing when you make a

payment with one of these cards.

Credit Card

When you use a credit card to pay for

something, the card issuer pays the

merchant right away, and then you

pay the card issuer later.

Debit Card

When you use a debit card to pay for

something, the card issuer pays the

merchant right away by deducting

the money from your checking

or savings account.

Your

account Merchant

Right away

Bank Merchant

Right away

Later

You

While debit cards work just like credit cards at the point of use, they are really quite a dif-

ferent thing. Since no loans are involved, there is no interest to consider with debit cards

(which makes them a lot less interesting mathematically). Also, a consumer should be

aware that despite their many resemblances to credit cards, the regulations and consumer

protection laws that apply to credit cards may not apply, or may apply differently, to debit

cards. It is also important to remember that, while credit cards allow some flexibility as to

when you actually pay for your purchases, with a debit card the money is withdrawn from

your account right away. You need to have the money in your account at the moment that

you use the card.

As a merchant you would also need to be aware that credit and debit card transactions

may require different processing procedures, and the expenses of accepting payment by

credit or debit cards may differ. While it is easy to confuse credit and debit cards because

of their similarities, it is important not to forget the significant differences between

them.

“Travel and Entertainment Cards”—Also the Same, and Also Different

Another similar type of card is sometimes known as a travel and entertainment (T&E)

card. The American Express card is probably the best known example. Payments for

purchases made with these cards are handled in much the same way as with credit cards:

the issuer pays the merchant, and you pay the issuer back later. However, while a credit

card allows you flexibility in when you pay the money back, with a T&E card you are

normally required to pay off any charges in full each month. Even though you are essen-

tially borrowing money, albeit for a short time, there is usually no interest charged on

these cards.

Calculating Credit Card Interest—Average Daily Balance

The calculation of credit card interest poses a bit of a challenge. On the one hand, since

statements are produced and payments are due monthly, it makes sense that interest should

be computed and charged to the account monthly. On the other hand, since the balance

changes from day to day, it seems that interest should be calculated daily, to take care of the

fact that the principal owed is not the same for the entire month.