Confused by the many credit cards offered by banks and financial institutions? What are the differences between credit, prepaid credit, debit, charge and store cards? Plenty. To make the best of these cards and determine which cards are more suitable, it’s important to have some basic understanding on how these cards work.
Credit Cards
Credit cards are essentially loans given by banks, building societies and credit unions. The two most common credit cards are Visa and MasterCard. Each card comes with a spending limit, from as low as $1000 to as high as $150,000 or beyond, depending on the card holder’s annual gross income and credit score. In exchange for the convenience, the credit card issuer charges annual fees, interest and other fees.
Many credit cards have up to 55 interest-free days. This means the card holder will not be charged any interest within 55 days from the date of purchase provided that the balance is paid in full by the due date. Not paying in full is a costly affair as interest rate ranges anything between 10% and 20%. As such, credit cards should only be used by those who are disciplined about paying back the money spent in full and on time.
Debit Cards
Debit cards work like credit cards but instead of using money lent from the bank, users are actually using their own money available in their bank accounts. There are no credit limits and no interest charges. Debit cards are becoming increasingly popular because they give people some control over their spending. They are widely accepted now and can even be used to make online purchases.
Prepaid Credit Cards
These work like prepaid cards for mobile phones where a certain amount of credit is loaded and the card holder will use it whenever it suits them until the money runs out. When that happens, the prepaid credit card holder can transfer another amount or reload the card with more funds so that it can be used for purchases again.
A prepaid credit card can serve as a useful budgeting tool. It helps control spending as users can only use what’s available on the card. The downside is that money already transferred to the card is not earning any interest while waiting to be spent.
Charge Cards
Charge cards don’t usually come with pre-set credit limits and the balance must be paid in full each month. Otherwise, heavy penalties will apply. The two most commonly used charge cards are American Express and Diners Club.
Store Cards
Store cards are issued by big retailers and department stores. They are flashy, offer lots of perks for shoppers but the interest rates are probably the highest among credit cards. It’s not unusual to see store cards charging hefty rates ranging from 18% to 20%. Avoid using store cards if possible. The interest that users have to pay for their use is just not worth it.
Know that credit, debit, prepaid credit, charge and store cards all work differently. Debit and prepaid credit cards are good for controlling spending. Credit cards and charge cards work well for people who pay their balance in full before due date. Store cards are very attractive but are typically the most expensive credit card to hold.
Found this article useful? Read also Credit Card Guide, How to Choose a Credit Card and Practical Credit Card Management Tips.
References:
Power, Trish and Drury, Barbara. Investing for Australians All-in-On for Dummies. Queensland: Wiley Publishing, 2008.
Tait, Allison. Credit Card Stressbusters. Queensland: Wrightbooks, 2009.
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