Credit, debit, pre-paid… On the surface, there are so many similarities between these plastic cards it can be difficult to tell which is which. But, dig a little deeper and the differences become clear. Each type of card carries its own set of pros and cons, so knowing how the cards work can help you choose the right plastic for every purchase.
Essentially a line of credit, credit cards offer a revolving supply of funds. The card itself gives its user easy access to these funds and can generally be used anywhere card payments are accepted.
Pros: When you purchase something on your credit card, the bank makes the payment to the vendor. You are obligated to pay the bank only after you are in agreement that the charge is legit and the item or service you bought was delivered as agreed. It’s like having a firewall between you and any bad guys who might steal your credit card information.
Cons: Credit cards can give the illusion of having money when you’re really borrowing funds. Many credit card companies will give users a 30 day window to repay an outstanding balance before they charge interest. So, you will need to pay your bill in full each month to avoid added interest payments.
Like an electronic check, debit cards pull funds directly from your checking account. Most banks provide a free debit card when you open your checking account.
Pros: Debit cards are safer than checks because they do not contain your checking account number or any personal information often required of check users. Your spending is also limited to the available funds in your checking account unless you have opted-in to overdraft protection from your bank. Unlike other card options, debit cards may also be used to withdraw cash from an ATM.
Cons: Because debit cards are tied to your checking account, a misused card will directly affect your available account balance. So, if your card is lost or stolen, you must contact your bank as soon as possible to avoid fraudulent purchases. If your card is used fraudulently, your checking account funds may be unavailable until you and your bank can resolve the disputed charges.
The newest member of the plastic card regime, the pre-paid card, has grown exponentially in popularity over the past few years. Money is added to the card, which can then be used anywhere card payments are accepted.
Pros: Pre-paid cards are much safer than cash. If they are lost or stolen, fraudulent charges may be disputed as long as the card has been registered to its owner. And, the card will not allow the owner to spend more than the funds available. A pre-paid card is a good choice for someone who wants to limit their spending, and wants the convenience of a debit card.
Cons: There are added fees associated with pre-paid cards such as loading fees and periodic convenience fees, so you’ll want to read the fine print when purchasing a card. While pre-paid cards are a good option for some purchases, they do nothing to help a person establish credit, which will likely be a factor when you are ready to purchase a vehicle or home.