Differences between Debit, Credit, Prepaid and Charge Cards explained
Most of us use a credit card of some description for most of our financial transactions. But with the vast array of current offerings on the market it’s hard to keep an eye on which bit of magic plastic is right for us.
From cards that allow you to only spend money you have, to those that work in similar ways to a personal loan, there’s a card to suit all personal requirements.
Read on to find the Guru’s guide to the four main breeds of flexible friend, and be safe in the knowledge that the card you choose will prevent you falling into a financial frump.
Debit cards are linked to your personal bank account. In the modern age, most bank accounts come with a debit card. Given that any money spent comes directly from your bank account, they are often easier to secure than a credit card, and they’re designed to let you spend the money you have.
Many cards come with a daily spending limit, and may get locked by your provider if you attempt to spend monies not covered by your bank balance. It’s important to keep a personal check on your spending to avoid being overdrawn and charged high fees by your bank. A simple solution to this is to organise an overdraft in advance as a precaution.
Pros of Debit Cards
- Good for budgeting
- Accepted almost everywhere
- Easy to apply for
Cons of Debit Cards
- Lower levels of fraud protection
- Potential fees for going overdrawn
- Less spending options to other cards
Credit cards are like a flexible personal loan, allowing you credit at your fingertips, simply by flexing your plastic pal. Any spends should then be paid back at the end of the month, or interest will be charged by your lender. A credit card gives the user more options than a debit card, and many can be used globally. When it comes to choosing a credit card, it’s essential to shop around and read the small print. Fee-free spends on one card may cost on another.
There is an astonishing range of credit cards available, and the ones you will be entitled to will depend largely on your credit rating. Two popular credit card types are detailed below.
Balance transfer cards can be used to consolidate debt. All existing debts can be shifted to a balance transfer credit card and paid off that way. With debts accumulated into one, any interest paid is usually lower than interest amassed across several debts in different places.
Some balance transfer cards may come with 0% interest for a period, allowing you to save money if you can pay off your debt by this time.
A purchase credit card is intended to be just that – for making purchases. A 0% purchase credit card would allow you to spread the cost of a big value purchase without paying interest on it.
Purchase credit cards have a set period before interest kicks in, so be sure to compare rates to find the best deals to suit your needs.
Compare, Compare, Compare
Anyone considering a credit card should compare the various types, compare interest rates and purchase limits. Credit cards often have specific purposes – choose the wrong one for your needs and you could end up paying more back than you need to.
Any advantages of using a particular card comes when they are used for their intended purchase. There may be financial disadvantages to say, using them to withdraw cash, so be aware of the pros and cons of individual cards.
Pros of Credit Cards
- Certain networks accepted almost globally
- Cash on demand in emergency situations
- Reward schemes and incentives
Cons of Credit Cards
- Interest charges
- Potential fees for owning and use
- Temptation to spend money you don’t have
Like debit cards, prepaid cards have a spending limit, but unlike debit cards, they aren’t linked to your bank account. Prepaid cards need to be ‘loaded’ with money in advance, and it’s impossible to go over your limit – once you’ve spent it, it’s gone. For this reason, prepaid cards are highly popular with those who find budgeting tricky. They also remove the temptation to spend money you don’t have.
Those interested in a prepaid card should check any fees before signing up. All cards are different, but they’ll all come with charges, which can range from withdrawal fees to monthly rental costs or even applying for the card in the first place.
Pros of Prepaid Cards
- Good for budgeting
- Accepted almost anywhere
- High level of fraud protection
Cons of Prepaid Cards
- Not all carry protection for losses
- A range of potential fees
- A range of potential charges
A charge card is similar to a credit card, in that you are loaning any money you spend on it. Unlike credit cards, the balance on a charge card must be paid back in full every month. This is sound financial advice to follow for credit card users as well, although they do come with the option to delay payback as long as you’re happy to pay the interest.
Charge cards are usually suitable for higher earners. They tend to come with a fee and yearly ‘rental’ costs. Failure to pay back money borrowed on time every month could see you hit with high interest rates, and your card may even be cancelled.
Although less flexible than a credit card in terms of places that accept payment from them, they are favoured by some for the reward schemes and financial incentives that many come with. As with all cards operating on credit, ensure you shop around as no two charge cards are the same.
Pros of Charge Cards
- No interest unless payment is late
- Reward schemes and incentives
- Potential for higher borrowing than credit cards
Cons of Charge Cards
- No option to borrow beyond a month
- User fees
- High charges for non-payment
Now you’re au fait with the quirks and quibbles of the magic plastic, search the market at Money Guru today and find the right card for you.