There are really only three basic types of what are termed "credit cards." Over the past decade Americans have embraced plastic in exchange for their bills and coins. In fact, hard cash has become and relic of the past, making that extra pouch in wallets obsolete. Credit Cards, Charge Cards and Debit Cards have made purchasing in stores and online easier. But each one works differently and those differences are important to understand in order to use them wisely.
CREDIT CARDS
Credit cards, also known as Bank Cards, include Visa, MasterCard and Discover. They are known as Bank Cards because they are issued by banks or credit unions- not by Visa. How they work is pretty simple. You use the card to pay for purchases up to a certain amount- your credit limit- then the merchant collects the amount from the card issuer. You then repay the issuer the amount you spent plus interest.
Think of it like taking out a loan- a very expensive one. You borrow the money you need to buy the item you want then pay the card issuer back in monthly installments plus the interest on the balance, which is sometimes as much as 29%. Most merchants world-wide accept both Visa and MasterCard. Discover is only accepted in the United States. Another disadvantage of Discover cards is that they compute the interest you pay in ways that could be to your disadvantage. Credit Card companies make money off you by charging high interest rates, annual fees, and late fees. They also charge the merchant a fee each time a customer uses the card.
CHARGE CARDS
Charge Cards, also known as Travel and Entertainment Cards (T&E), include American Express, Diners Club, Department Store cards and Gas cards. All these cards, for the most part, do not allow you to carry balances forward; you must pay them off in full at the end of each billing cycle (usually each month). They also do not have limits on how much you can charge- so watch out!
If you do not pay off your balance, you have a month without interest. After that, you may be charged interest up to 35%. Since Charge Cards do not (normally) charge interest, they make money off annual fees ranging from $50 to a few hundred. They also charge merchants higher fees than credit cards. For this reason, many merchants will not accept Charge Cards. Beware Department store cards. Often the only advantage is that you get a big discount on that day's purchase. However, it will end up costing you much more in interest rates.
DEBIT CARDS
Debit cards are issued by banks and look just like credit cards. Do not be fooled, however. The money you spend comes directly and immediately out of your account. You can only spend what you have (although some cards offer overdraft protection which is a loan at an often high interest rate). Think of debit cards as having an ATM in your pocket or as an electronic checkbook. Since the transaction is immediate, you do not have the right to withhold payment or stop a cyber-thief from emptying your account. Avoid using your debit card for online purchases for this reason.
In this electronic world, some type of credit card is often a necessity. You cannot check into a hotel, rent a car or shop online. Nevertheless, credit and charge cards are a dangerous game to play. They make you feel richer than you really are and prompt you to make purchases you really cannot afford. Debit cards, on the other hand, have the capability to do all those things while not getting you in over your head. If you do enter the credit world, however, do not have more than two and use them only for emergencies.
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