Different Types of Credit and Debit Cards
Credit, charge, ATM, and debit cards are not all alike. Here's some information to help you choose wisely.
Credit cards, charge cards, ATM cards, and debit cards are all ways to make purchases or get cash. But each one works differently -- and these differences are important. In order to use these cards wisely, you should know what each one is and how it differs from the others.
Credit Cards
The way credit cards work is fairly straightforward: The credit card issuer gives you a card. You use the card to pay for items and services up to a certain total amount -- your credit limit. The store merchant or service provider collects what you owe from the card issuer, whom you repay.
Carrying a balance. If you carry a balance, credit cards function like very expensive loans. The credit card company allows you to pay off what you owe little by little each month, as long as you pay a minimum amount each time. In exchange, you pay interest on the balance you owe (as high as 29% each year) at the end of each period.
How credit card companies make money. Credit card companies earn high profits in several ways.
- High rates of interest -- interest on credit cards accounts for the bulk of the profits earned by banks that issue credit cards.
- Annual fees.
- Late fees, over-the-limit fees, and other miscellaneous charges.
- Charging merchants and service providers a fee each time a customer uses the company's credit card in the merchant's establishment.
Charge Cards
Charge cards, also called travel and entertainment cards, are a little different from credit cards. Charge cards, such as American Express and Diners Club, have no credit limit. You can usually charge as much as you want, but are required to pay off your entire balance when your bill arrives.
You cannot carry a balance. If you don't pay your charge card bill in full, you'll get a one-month grace period without interest charges. After that, you'll be charged interest that can be as high as 30 to 35%. If you don't pay after about three months, your account will be closed and your bill sent to the collections department.
How charge card companies make money. Charge card companies make their profits by charging high annual fees -- up to about $90 -- and by charging merchants relatively high fees each time a customer pays using the company's charge card. Some merchants don't accept charge cards for this very reason.
Cash Advances
Many people use their credit cards to obtain cash advances. Similarly, many credit card issuers send cardholders "convenience" checks they can use to pay for goods or services. The amount of the check appears on your credit card statement as a charge, but is generally treated as a cash advance.
Cash advances are more expensive than standard credit card charges and offer more onerous terms for consumers, including:
- Transaction fees. Most banks charge a transaction fee of up to 4 to 6% for taking a cash advance.
- No grace period. Most banks charge interest from the day the cash advance is posted, even if you pay it back in full as soon as your bill comes.
- Higher interest rates. The interest rate is often substantially higher on cash advances that it is on ordinary credit card charges.
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