Though most people refer to the shiny pieces of plastic in their wallets as “credit cards”, some of them are not. While debit and charge cards are often found next to their credit card cousins, each type of card is separate and distinct from its peers.
Credit cards set a spending limit based on your credit rating and the money you make. They enable consumers to carry a balance from month to month and charge interest on outstanding debt.
As you spend more money, your credit limit may increase. If you are chronically late with your monthly payments – or miss payments altogether – your limit will be reduced, your interest rate will increase or your credit will be cut off.
While many credit cards charge no annual fee, interest rates can be obscene. Shop carefully when selecting a new card.
If you have had trouble managing your credit and cannot obtain a standard card, some companies offer secured credit cards. With such a card you can obtain a spending limit equal to the amount of money you are able to deposited on your card. The deposit earns interest and will usually be refunded once you have built a good credit history.
Unlike credit cards, charge cards do not have monthly spending limits. However, the full balance must be paid each month. Charge cards generally impose penalties to discourage you from carrying a balance. American Express is one type of charge card.
Like credit cards, some charge cards impose yearly fees. Regardless of these fees, the cost of having a charge card is often significantly lower than the cost of having a credit card due to the interest-related debt that can be racked up with credit cards.
Debit cards work like plastic cheques. When you make a purchase with a debit card, payment is taken directly from your bank account. If your there isn’t enough money in your account to cover the expense, your payment will be declined.
Debit cards come in two varieties, online and offline. Like ATM cards, online cards require that you enter a personal identification number (PIN) to initiate the immediate transfer of funds from the your bank account to the merchant’s bank account. In some countries, such as Canada, online debit cards are the only cards that are accepted.
Offline cards do not require you to enter a PIN. When you make a purchase, you sign for it as you would with a traditional credit card. Several days later, funds to cover the purchase are transferred from your bank to the merchant’s bank. Many debit cards can be used in both an online and an offline capacity.
If you want to avoid the urge to buy stuff that you can’t afford, debit cards are the right choice. There are generally no monthly bills, interest charges or fees to obtain a debit card from your bank. Most debit cards are issued by Visa and MasterCard affiliates. Most businesses that accept their credit cards will accept their debit cards as well.
The Power and Perils of Plastic
Putting plastic in your wallet is a convenient way to avoid carrying cash and still be able to make purchases. Credit and charge cards often come with perks, like earning airline miles whenever you make purchases.
From a financial perspective, debit and charge cards pose little danger to your financial health. Their very setup won’t allow you to carry a balance, making it difficult to make purchases that you can’t afford.
In contrast, credit cards have brought financial ruin on many careless consumers as they cry “restore my credit”. Interest rates border on the obscene, and as minimum monthly payments can stretch out the payback period of a purchase for years, credit cards encourage consumers to live beyond their means. To avoid the dangers that accompany credit card use, monitor your spending habits carefully. Being able to make the minimum monthly payment does not mean that you can afford to make the purchase, and interest payments will increase the total cost of the item to well beyond the sticker price.