Are you deciding between getting a new credit, debit, or prepaid card? All of these payment types are popular, and many people use a combination of cards. But what are the differences between credit cards and debit cards? And how do prepaid cards work?
Keep reading to learn the differences between and pros and cons of prepaid, debit, and credit cards.
Prepaid cards, credit cards, and debit cards defined
Prepaid cards
A prepaid card works a bit like a debit card, but these cards allow you to spend money without it being linked to a bank account.
You can transfer money from your checking account to your prepaid card and only spend up to that amount until you reload your card. It’s a handy way to limit your spending and separate your money. For example, you might want to use a prepaid card just for groceries to keep that money separate from other bills in other accounts.
Prepaid card benefits
Prepaid cards don’t require a bank account — As prepaid cards aren’t linked to a bank account, you don’t need to go through the process of opening a new one. You can quickly set up a prepaid card account with a provider such as Netspend and start using it.
Prepaid cards help to control spending — One of the biggest benefits of prepaid cards is that you can use them to limit overspending since you can only spend what you have on the card until you reload it.
Prepaid card disadvantages
Some providers charge fees — In some cases, you may find the provider charges fees such as card reload fees, ATM withdrawal fees, or overdraft fees.
Credit cards
Credit cards enable the cardholder to borrow funds from a financial institution such as a bank. You can use your card whenever needed and spend up until your limit. Cardholders agree to pay back the money with interest.
Credit card benefits
Builds credit history — Using your credit card can help to build up your credit history. A history of on-time payments and low credit utilization shows potential lenders in the future that you are responsible with paying off debt.
Fraud protection — Credit cards generally provide fraud protection as long as you report the fraud as soon as possible.
Rewards — Many credit cards offer a rewards program when you use a card. This can include shopping vouchers, cash back, or air miles.
Credit card disadvantages
Debt — Debt can quickly become unmanageable the more you keep adding to it. There’s a limit on credit cards, but you can keep on regularly spending up to that limit, putting yourself in more and more debt.
Potential damage to your credit score — If you can’t pay off your balance on time, this could have a negative effect on your credit score, which could affect your future chances of being approved for bigger loans such as mortgages.
Interest— Credit card debt comes with interest, which can be higher than many personal loans. Some credit cards also charge an annual fee, balance transfer fees, cash advance fees, late payment fees, or foreign transaction fees.
Debit cards
A debit card is a card that makes payments directly from your checking account. It means you should only be spending what you have in your account rather than taking on debt from the bank.
Debit card benefits
It can help you avoid debt — By only spending what you have, you can avoid getting stuck in a cycle of debt.
No annual fees — Most banks don’t charge annual fees on basic debit cards, unlike many credit cards.
Debit card disadvantages
No rewards — Most debit cards don’t come with rewards unless you have a special rewards checking account. This means that you won’t earn air miles, points, or cash back on your purchases like you might with a credit card or prepaid card.
Fees — While you are unlikely to have any annual fees, you may still incur costs through your checking account. This could include a monthly maintenance fee, overdraft fees if you overspend, or foreign transaction fees. This will all depend on your current bank’s rules.
Which card type is right for you?
While it’s a personal choice, each card type has some clear differences to be aware of before you make your choice.
If you’re looking to spend only the money you have (and avoid debt), then a debit or prepaid card is best. Credit cards can help with larger purchases or with building up your credit score but should be used wisely to avoid unmanageable debt.
