In the world of personal finance, there are countless tools that can be used to help manage your money from day to day. In recent years, consumers have shifted their focus to plastic, or in some cases, metal cards as opposed to cold, hard cash. Using some form of payment card often makes transactions easier and less time-consuming, whether the purchase is big or small. However, not all cards work in the same manner, and not all provide the same benefits. If you’re curious about the differences between prepaid, debit, credit and charge cards, we’ve got you covered.
How Prepaid Cards Work
A prepaid debit card may be the simplest form of plastic you can use for making purchases. With this type of card, you add money to your account either through a bank or credit union, and as it is spent down, you can reload as needed. The benefit of a prepaid card is that you can only use the amount loaded on the card. There is no concern about overspending, but it may limit your purchasing power if you do not have enough money in your account.
The Debit Card Difference
A debit card works differently than a prepaid card in a few ways. First, debit cards are linked to a checking account held with a bank or credit union. Money deposited in that linked account is then available for use to purchase items. Some debit cards allow you to spend more than the available amount, but you may be charged an overdraft fee in doing so.
Financial institutions may also post transactions to a debit card balance slower than a prepaid card. This could make it more difficult to see how much you have left to spend until the next deposit is made. However, you can also use a debit card to access cash through an ATM, which may not be available through a prepaid card.
Using Credit Cards
Credit cards are much different from both prepaid and debit cards. Individuals with a credit card have a revolving line of credit with the card issuer. The amount of the credit line is determined based on your credit history, income, and credit score, so it varies greatly from one person to the next. Credit cards can be used to make purchases up to the available credit limit, and then paid down over time. As a balance is paid, the credit line goes back up. Because credit cards have a revolving credit line, overspending can be an issue for those who aren’t careful.
Credit cards come with fees not included with prepaid or debit cards. Card issuers charge interest on balances that are left unpaid each billing cycle, and there may be other costs for over-the-limit spending, late fees for missed payments, and foreign transaction fees. However, credit cards can be a smart way to finance a large purchase or earn points or rewards on everyday transactions. It is important to note that credit cards are only available to those who have a solid financial track record, unlike debit and prepaid cards which areavailable to almost anyone.
How Charge Cards Differ
Charge cards are a form of credit card, but they have significant differences. Charge cards do not typically come with a credit limit like credit cards, but they are issued by similar card companies. This is because charge cards require a full payment each billing cycle. Cardholders with charge cards do not have an option to roll over a balance from month to month, which can make overspending a concern.
However, because the balance is paid in full, there are no interest charges with charge cards. This option can be a smart choice for those who want to earn rewards on charge card purchases, but who also have the financial capacity to pay off any amount charged each billing cycle. Only those who have strong credit and verifiable income are offered charge cards.
Final Thoughts on Prepaid, Charge, Debit, and Credit Card Differences
Making the right choice for the card you use either for major purchases or everyday spending is important, but it requires some understanding of the various card types. Be sure to consider your need for plastic, or metal, before making your selection, and know that you can have more than one option.
