Almost everyone either has a credit card, a debit card, or a prepaid debit card. But do you really know the differences between the three?
Credit. Every time you use a credit card, you are actually borrowing money that is made available to you by a bank or other financial institution. The institution pays the debt to the vendor, and in turn, you pay the money back to the institution. By signing up for a credit card, you agree to pay back the money that you borrowed, in addition to any interest drawn on the amount you borrowed.
Debit. Issued by your bank, debit cards take funds directly from the money that you have in your bank account—in a sense acting like a check, just faster. With a debit card, you don’t have to carry cash or checks, and it is very convenient to shop at a variety of places including gas stations, grocery stores, restaurants, and retail stores. They provide instant access to your money and are accepted worldwide.
Prepaid. Prepaid debit cards are reloadable cards that allow you to only spend up to the amount you have pre-deposited into the account. If you tend to overspend or would like to control your spending then prepaid debit cards could be a good card for you.
Pros & Cons of Debit, Credit, and Prepaid Debit Cards
Credit Cards: Pro
• Credit cards offer more consumer protection. Credit card companies are held to strict liability laws; the law limits consumer liability for credit card fraud to $50. For example, if you notice suspicious charges on your credit card statement such as double billing or an incorrect charge, the credit card company is obligated to investigate if you send in a written request within 60 days.
• In addition to stricter liability laws, credit cards also offer more consumer protection on purchases made. Credit cards offer more consumer protection for large purchases, fragile purchases, and for objects that arrive after you’ve paid for them.
• Credit cards are a great tool for consumers that are seeking to establish or reestablish an attractive credit history. Responsible credit card usage can improve one’s credit rating. Credit cards typically report account activity to at least one of the three major credit bureaus on a monthly basis. An attractive credit rating will improve your chances of obtaining favorable credit terms (low interest rates, low fees, etc.) for automobile loans, mortgages, personal loans, etc.
• Reward cards can help you build up frequent flier miles or get cash back when you use your credit card.
• If you are good at paying your balance right away then you have more time to accrue interest (the time between buying and object and paying for it).
Credit Cards: Con
• There may not be many cons but in this case it’s really all about quality over quantity. And this is a huge reason not to have a credit card: the chance to get into debt. If you don’t pay your credit card balances on time you may end up paying for the same thing over and over with high interest rates and exorbitant late fees. It doesn’t take long to destroy your good credit. Some people spend a very short time getting into credit card debt and a lifetime crawling out.
• Many credit cards also have annual fees.
• Just like credit cards offer a good chance to build up your credit score, they also provide the chance to demolish it—paying credit card balances late are a fast way to ruin all that good credit you worked so hard to amass.
• Theft of the users PIN using skimming devices can be accomplished much easier with a PIN input than with a signature-based credit transaction. However, theft of users’ PIN codes using skimming devices can be equally easily accomplished with a debit transaction PIN input, as with a credit transaction PIN input, and theft using a signature-based credit transaction is equally easy as theft using a signature-based debit transaction. A credit card PIN is no safer than a debit card PIN.
Debit Cards: Pro
• Use of a debit card is limited to the existing funds in the account to which it is linked, thereby preventing the consumer from racking up debt as a result of its use, or being charged interest, late fees, or fees exclusive to credit cards. This is a huge plus. If you can’t easily get into debt, you can’t easily ruin your financial life.
• You don’t need great credit to have a debit card. Even if you find it nearly impossible to get a credit card you may still be able to get a debit card, allowing you the convenience of plastic transactions.
Debit Cards: Con
• One of the biggest downsides of debit cards is the possibility of overdraft. Overdraft happens when your account balance does not have sufficient funds to cover a purchase. Your purchase will still be authorized but your bank will assess an overdraft fee which in some cases can run as high as $35. Consumers often report multiple overdraft fees if they make several purchases where they have insufficient funds.
• Almost everyone has been asked “credit or debit?” Debit cards may charge you an extra 50cents each time you use them. That may not seem like much but those charges can add up. And if they add up to an overdraft fee, you could default on other payments.
• Debit cards don’t have as much protection as credit cards. Your liability is $50 if you notify the bank within two days of noticing the fraudulent charges. After two days, your liability increases to $500 and up to your entire account balance after 60 days.
• Merchant disputes are harder to win. You don’t have the bank on your side to help you.
• Not all debit cards may be helping you to build your credit score. You should make sure that good use of your card is being noticed.
• Just like balancing your checkbook, you have to get into the habit of keeping track of your purchases if you want to avoid overdraft occurrances.
• Some banks are now charging over-limit fees or non-sufficient funds fees based upon pre-authorizations, and even attempted but refused transactions by the merchant (some of which may not even be known by you).
• Since debit cards are typically linked to bank accounts, if a debit card and PIN number is stolen, the entire bank account could be drained of funds.
Prepaid card: Pro
• The number one thing about prepaid debit cards? There is no chance to get into debt.
• These cards are even safer than regular debit cards. You put a certain amount of money onto the card and then you can only use the money you have. You don’t have the risk of damaging your credit.
• Since your prepaid debit card is not attached to your bank account, if it is lost or stolen your entire bank account will not be drained.
• The account holder can add money to their pre-paid charge account at any time, or money can be automatically transferred from another separate account on a scheduled basis. Sometimes, there are no fees associated with the card at all.
• Convenience: Prepaid cards are used like credit cards, meaning that the store you are shopping at ‘swipes’ them, and then you sign off on the receipt. You don’t have to show a picture ID, and there is usually no PIN number for you to punch in.
• There are no interest rates applied to prepaid debit cards, although there are sometimes fees associated with them. Make sure you check the schedule of fees that comes with your card.
• Guaranteed approval, worldwide acceptance, and ease of use are just a few of the benefits of a prepaid card.
• Some of these cards even report to credit bureaus, meaning you can get your credit back on track without the use of a credit card.
• Prepaid cards are great training cards for teens and students. Prime candidates for prepaid cards are young adults who have never owned a credit card and need practice, parents who want to give a card to their children but prefer an alternative to credit credit, and people who would rather not use cash .
• As long as you carefully read the fees and understand them you should have no problems with prepaidcards.
• If your prepaid debit card gets stolen you may have a hard time getting your cash back. You need to check with each prepaid card and read the policy for dealing with theft and fraudulent use.
There are hundreds of available credit cards, debit cards, and prepaid debit cards. No matter what type of card you think is best, it’s important to do research and find the best one that fits your needs. The YOUNG MONEY credit card finder is a great way to check out different cards. Debit cards come with your bank account: keep this in mind when choosing who to bank with—avoiding ATM fees may factor into your banking decision. A good prepaid card for students, and anyone who would like an alternative to traditional credit and debit cards, is facecard. Getting the wrong card now can cause major problems in the future. You need to honestly look at your spending habits. No one plans to get into a lot of debt. If you’re not the type of person who can pay down their balance each month or make sure you don’t overdraw your bank account then consider the safer route of a prepaid card. Facecard offers the convenience of using plastic without any of the risk.