Card Confusion: Is Debit, Credit or Prepaid Right for You?

Plastic money has now become an essential fixture in your wallet. But are all cards created equally? From bank-issued debit cards and point-earning credit cards to prepaid cash cards, navigating the many available options can be enough to make your head spin if you aren’t well-versed in finance jargon. Here’s the lowdown on each type of card in plain old English to make it a little easier for you to decide which type of card is best for you.

Debit Card

Credit Card ConfusionA debit card offers you instant access to money in your checking account without the hassle of having to go to the bank or ATM to withdraw and carry around cash. If you’re concerned about racking up debt, this is an ideal option because your spending is limited to the money that you already have in your account. There is the possibility of over drafting your checking account with a debit card, which can come with steep fees, however, most banks offer overdraft protection if you ask for it. If you keep a close watch over your finances, have a budget and spend within your means, this shouldn’t be an issue for you.

If your credit is less than perfect, a debit card is a solid option that doesn’t require usage fees or a good credit history, as most prepaid and credit cards do. However, be aware that using a debit card will not help you rebuild your credit score.

Credit Card

A credit card provides you with access to a pre-determined amount of money, known as a credit limit, which is temporarily loaned to you by the financial institution through which you have the credit card. In most instances, if you don’t repay the amount of money borrowed for purchases each month in full, you are also obligated to pay an interest fee on the repayment amount. Since credit card companies rely on their customers to repay all funds in full plus any interest, you need to apply and be approved for a credit card. Before approving you for a card, your credit history will be assessed to determine eligibility. If approved, your credit limit and interest rate will also be determined based on your credit history.

If you pay your bill off in full each month, credit cards can be a great way to earn rewards points or even cash back on your purchases. However, for some, there is a great temptation to spend more than you can actually afford and put off payments, which can cause you to get into severe debt over time. If you use a credit card responsibly and pay it off regularly, it can be a great resource for emergency funds.

If you are concerned about becoming a victim of identity theft, credit cards can be a more reliable option. Fraudulent spending is limited to your credit limit. Also, the credit card companies have a vested interest in resolving any fraudulent changes. As a consumer, you are better protected by the liability laws with a credit card than with any of the other card option.

Prepaid Card

A prepaid card is pre-loaded with money and can be used in the majority of the same places that credit and debit cards can be used. It can be reloaded at any time and can be a great option to help you limit your spending and maintain a budget. Unlike a debit card, you don’t have to worry about overdraft fees with a prepaid card since you obviously cannot spend more than you’ve loaded into the account.

Though you won’t risk overdraft fees, one of the major downsides of prepaid cards is usage fees. These fees can vary greatly from card to card. Be sure to read the fine print before getting one so you are aware of the fee schedule and how much it will really cost you to use a prepaid card.

Of course if all those plastic money guidelines seem a bit much, you could always go back to using cash. In fact if you ever really wanted to get back in touch with your money, you can always try doing a “plastic money fast”. Put your plastic away for a few days and notice what it’s like to operate only with cash. Now there’s an eye opening experience.