Credit and debit cards have revolutionized the way we spend our money. These pieces of plastic can be used everywhere, from the remotest corner of the world to the bustling global business capitals.
Before these cards and checks were invented, the only mode of payment was cash. Making purchases of high value items involved transporting huge amount of money to the seller’s location. This was a very unwieldy and highly risky process. With organized banking came checks, which made it considerably easier for the buyer, but still involved risk for the seller. There are other instruments, which can be used in lieu of cash for purchases but none are as convenient or as popular as these pieces of plastic.
Differences Between Debit Cards and Credit Cards
The credit card lets the holder make a purchase without paying cash upfront. When the holder signs the receipt for the transaction, he agrees to pay the credit card issuer the amount of the purchase. The issuer allows him or her a line of credit with which the holder can make purchases and defer the repayment until the due date. In exchange for the convenience and the delayed payment, the issuer charges interest on the amount owed after the due date. Some credit cards come with additional costs, which include initial fees in addition to annual charges.
The debit card works on a much simpler concept. Typically purchases made on a debit card use funds directly from your account. As you are debited directly on purchase, these cards are also called bank cards or check cards. There is no possibility of delayed payment with the debit card and hence, no question of any interest payment on the dues. Basically the debit card makes the funds in your account directly available, much like a check. However, it is much more versatile than a check, easier to use, and accepted widely across merchant locations.
Navigation of the Different Types of Debt Cards and Credit Cards
1. Secured Credit Cards
2. Debit Cards
3. Affinity Credit Cards
4. Charge Cards
5. Prepaid Credit Cards
6. Gift Credit Cards
7. Reward Credit Card
8. Balance Transfer Credit Card
1. Secured Credit Cards
A secured credit card is for those with compromised credit scores or those who are just starting to build their credit history. The working of the secured card is pretty much the same as that of a regular card. To mitigate the risk of the issuer in case of default, the secured credit card requires that a deposit be made initially to cover the credit, which will be extended to the holder.
Typically, the available credit will be lower than the deposit amount so that the issuer is completely safe in case of default. But there are some secured cards, which allow 100% credit against the initial deposit.
Before you get a secured credit card, make sure you understand all the terms and conditions that apply on it. Pay special attention to the rate of interest that will be charged on your overdue balances. Ask your issuer about the APR charged – this will give you a fair idea of what kind of costs to expect if you delay the repayment.
Another aspect to check is how and when your deposit will be used. Some issuers draw on your deposit even for one late payment while others may give you some grace period, typically, 5 months. On the positive side, some secured card issuers pay you an interest on the deposit amount. This is evidently a better deal than locking away your deposit indefinitely without any returns.
Making timely payments on your secured card can help you reestablish your credit score. Make sure your issuer reports to all three rating agencies to gain the maximum advantage here. Many secured cards can also be converted to unsecured ones if you prove your credit worthiness over a stipulated time period.
2. Debit Cards
A debit card is a great replacement for cash, especially when you are traveling. Imagine carrying bunches of cash to cover all possible expenses on your vacation. There will be enormous anxiety and stress associated with keeping all this money safe and accessible at the same time. Now, consider the debit card, a very compact piece of plastic, which fits comfortably into your wallet. It lets you use your account balance just as easily as if you had withdrawn the cash and with far less hassle and risk too.
Debit cards are easier to get than credit cards. Your bank may offer you one when you open a checking account. There are some nominal annual fees charged with many debit cards, but you can find banks that offer fee free debit cards for a specified period. A debit card also allows you to access your account from ATMs of banks other than yours for a nominal charge. If you need funds immediately and do not have your own bank’s ATM nearby, look around to find an ATM that has the lowest charge for using another bank’s card.
With debit cards, you avoid running up huge fees, late payment bills and interest charges. However, you are limited to the amount in your account. It is a good idea to check the balance in the account before you go on a shopping spree with your debit card. These cards are very useful when you want to do some online shopping as well.
It is important to be aware of the risks associated with the debit card. In case it gets stolen, the account it is linked to can get wiped clean by whoever has possession of the card. The good news is you can speedily block the card by intimating your bank as soon as you discover the loss.
3. Affinity Credit Cards
Affinity cards allow you to make donations through your purchases. Charitable organizations partner with card issuers to come up with these cards. When a user makes a purchase using his affinity card, a proportion of the purchase amount is given to the charity sponsored by it. If you like to make regular philanthropic contributions, but never find the time to actually do them, this is a good option.
The issuer usually charges higher interest than comparable regular cards. This is how the issuer manages the donations. If you normally maintain repayments on time and don’t revolve often, then this card is a good option. If you frequently end up making high interest payments on overdue balances, then de-link your philanthropy from the card by opting for a regular credit card. You can always make contributions separately in a more economical way. Remember that donations made via the affinity card are not tax deductible, while direct donations by means of check are.
Affinity cards are a great way for charities to raise funds and they have been remarkably successful at this. If you have a particular cause in mind that you want to donate to, check whether the organization has an affinity card that you can enroll for. Most big conservation groups, and non profit organizations have partnerships with card issuers to offer these cards.
4. Charge Cards
Charge cards are very similar to the credit cards in their working. The main difference between the two is that charge cards do not offer a line of credit. The balance due on the charge card or the total amount spent has to be paid back without fail at each month’s end. This is why there are no minimum payments for a charge card.
The user is dissuaded from delaying payment by the huge fees and penalties that will be levied for late payments. The use of the card may be restricted or the card can be cancelled if the dues are not paid on time.
The amount you can spend using your charge card is usually high enough to accommodate all your monthly expenditure. Some issuers offer a limitless charge card too. When you do not know how much exactly you will need on a trip or are not sure of the cost of a particular item that you have set out to purchase, then a charge card can come in very handy.
The issuer covers his risk by means of extensive pre qualification checks on your credit worthiness, which include an assessment of your credit history. This is why charge cards can be difficult to get, if you have a damaged credit score.
5. Prepaid Credit Cards
A prepaid card allows you to restrict your spending to your budgeted limits. This kind of card requires you to pre load a specific amount onto the card. This card can then be used for purchases up to the amount that you have loaded. These cards are also called stored value cards.
The prepaid card works in a very similar way to a debit card. And it can also be used for ATM withdrawals, phone purchases and all the other transactions that other cards are used for.
The purchasing power of the user is limited to the preloaded value leaving no room for risk of default to the issuer. This enables issuers to offer these cards with minimum processing hassle and no background checks on the user. Almost anyone can get one of these cards. This fact makes the prepaid card a very popular payment mode among those who have a compromised credit score.
Before getting a prepaid card there is an important point that you must note. Make sure that your issuer has enough options for you to load your card. Typically, the most popular ones can be topped up by cash transfer from banks and post offices. You can even make bank transfers to top up your prepaid card. You gain enormous flexibility with these options, as it is easy to add value quickly and get a depleted card back in action again. These cards are especially popular among parents of students, who want to give their children financial freedom within reasonable limits. In an emergency, the parents can always add more cash to the card.
6. Gift Credit Cards
Gift cards are a good way to ensure that you do not end up buying a gift that the recipient already has or simply does not appreciate. They are similar to stored value cards, as in these too the value up to which you can make purchases is pre determined when you buy the card. Although some people do consider these a very impersonal way of gifting, studies shows that most Americans would prefer getting gift cards rather than gifts.
Many retailers offer gift cards that let the holder shop up to the value of the card at their store. Restaurants also offer similar gift cards. For recipients who live away from your locality, you can always opt for the general purpose gift cards, which major credit card issuers offer. Usually general purpose cards can be used very much like credit cards at a host of merchant locations.
For issuers like retailers and restaurants, the gift card is a zero risk product, which ensures that the recipient is also converted into a customer even if he/ she may not actually pay for that particular transaction. The issuer can expand his reach immensely with gift cards.
For the recipient, the gift card lets him/ her get something that they really need rather than hope for the best in gifts. The giver of the card can avoid the effort and trouble of trying to figure out what the receiver would like. This can be a difficult task especially when the gift is for someone you do not really know that well – maybe a church acquaintance or an office co-worker. And the gift card is certainly far more decorous than gifting cash or check.
7. Reward Credit Card
Reward credit cards are used by many banks, retailers, companies and leisure establishments as very effective marketing and loyalty products. These are also called club cards or loyalty cards and ensure that the holders continue to visit or shop within the issuer’s establishment repeatedly. In exchange for this ‘loyalty’ to the establishment, the holder of the reward card gains some redeemable points or discounts on his purchases. Some issuers offer gifts on the basis of the reward points accumulated on the card.
The holder may be required to show the card during each transaction in order to have the reward points added to his/ her card. Getting the card is usually a very simple and hassle free process. Since it is in the issuer’s favor to have loyalty cards given to customers, these cards may be offered to most of the establishment’s customers.
Usually there is no cost involved for the holder either for use, activation of the card or during transactions. For the issuer, the cost of producing the card is the main expense involved. However, this cost as well as the cost of discounts or gifts offered are more than offset by the addition of one more loyal customer who will make repeated purchases on a regular basis.
8. Balance Transfer Credit Card
A balance transfer credit card lets you pay one debt with a loan from another lender. The balance transfer card allows you to move the balance on your card to another one. The holder of the card may be able to take advantage of initial low interest offers, joining discounts and other perks, which the other card may bring with it. It also lets him/ her gain some leeway in repaying the balance amounts by means of extended repayment due date or lowered interest.
While this can be a good debt consolidation tactic, it does come at its own costs. The user will need to pay a fee to the other lender to pay off his/ her balances and accept the debt. This fee may be a percentage of the balance due on the old card. It is a good idea to check if there is a specific dollar limit to this fee rather than a percentage. This will help keep the costs of the balance transfer in check. Shop around for 0% APR cards to keep your interest rates to a minimum.
For those who are seriously aiming at paying off debts, the balance transfer credit card is a great option. Typically, these come with manageable rates and also offer many perks. If you can move your balance into a rewards card then you gain added benefits of the reward program while paying off your debt at easier terms than before. Make sure there no additional one time or annual charges, which could end up hiking your actual costs.
With more and more people relying on cards to funds their everyday expenses, these payment tools have become indispensable parts of our life. Understanding how they can help us better manage our spending and also benefit in other ways is important to use them optimally.