Different Types of Credit & Debit Cards

Credit, charge, ATM, and debit cards aren't all alike. Here's some information to help you choose wisely.

By , Attorney Northwestern University School of Law
Updated by Amy Loftsgordon, Attorney University of Denver Sturm College of Law
Updated 3/05/2024

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.

To use these cards wisely, you should know what each one is and how it differs from the others.

How Credit Cards Work

Credit cards work relatively straightforwardly: The issuer gives you a card. You use the card to pay for items and services up to a certain amount—your credit limit. The store merchant or service provider collects what you owe from the card issuer, whom you repay. Here are some terms and conditions associated with most credit cards that you should know.

What Is an Annual Percentage Rate (APR)?

Credit card companies must disclose the interest rate as an "annual percentage rate" (APR). The APR is the percentage you'll pay in interest each year, assuming you carry a balance. Credit card companies charge different APRs and have various terms based on the individual applicant's credit report or score.

Each month, if you haven't paid the balance in full by the due date, the credit card company applies the APR to the account balance to compute the finance charge for that month. The finance charge is the dollar amount you pay to use the credit.

Because a federal law, the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 (see below), requires that the APR be calculated in a standard way, you can easily compare the cost of credit among various credit card companies. The APR is the best indicator of the actual interest you will pay. If different APRs apply (for example, to balance transfers or cash advances), the credit card company must disclose those as well.

If a credit card company offers you a card with a less-than-stellar interest rate, it might be required to give you information about its decision. In any event, you can ask the credit card company why your APR is so high, and you can always get your credit reports and figure it out yourself. Armed with this information, you'll be in a good position to figure out what you need to do to improve your credit history and get a better APR down the line.

What Is a Credit Card Grace Period?

A "grace period" is the interest-free period between the purchase date and the bill's due date. It's usually available only to those who don't carry a balance.

Grace periods generally don't apply to cash advances or convenience checks, which begin accruing interest right away, often at a higher rate than purchases.

How Do Credit Card Companies Compute Balance for Purchases?

Different credit cards calculate finance charges differently, like by using the daily balance method, adjusted balance method, previous balance method, or average daily balance method. A credit card offer must explain which way the company uses to calculate the balance on which it applies the APR.

Carrying a Balance

If you carry a balance, credit cards function like costly 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 fees in several ways. They often charge:

  • high interest rates (interest on credit cards accounts for the bulk of the profits earned by banks that issue credit cards)
  • annual fees
  • transaction fees to make purchases, do balance transfers, or get cash advances
  • returned-payment fees
  • late fees, over-the-limit fees, and other miscellaneous charges, and
  • fees charged to merchants and service providers each time a customer uses the company's credit card in the merchant's establishment.

If you're not careful, credit cards can also trap you in debt for years. Some, but not all, credit cards have one or more potentially harmful features, and certain cards have worse terms than others.

Different and Varying Interest Rates

Generally, you want to choose the lowest and most stable APR that will apply to how you plan to use the credit card. For example, if you plan to carry a balance, look at that APR. Even a small difference in the APR can make a big difference in how much you'll pay.

Here are some guidelines when considering APRs:

  • If you won't ever carry a balance on your credit card, then the APR isn't important. You won't ever pay interest.
  • If you don't pay your bill in full each month, the APR is crucial. The lower the APR, the better.
  • Watch out for "introductory rates," which are also called "teaser rates." If conspicuously disclosed, credit card issuers can increase teaser rates after six months.
  • Make sure the advertised rate applies to you. Sometimes it only applies to specific people, such as those earning a high income. Those who don't qualify get a higher rate.
  • Card issuers generally can't raise your interest rate for the first year after you open the account. But some exceptions apply, like when a variable rate changes, a promotional rate ends, or a required minimum payment is over 60 days late. So, be sure to read the fine print.
  • Some APRs vary monthly based on a benchmark like the prime rate. The application or solicitation must disclose that the rate may vary and state how the rate is determined.

Over-Limit Fees

Credit card companies can charge you over-limit fees if you opt in, which means that you agree in advance that the credit card company can allow transactions putting your balance over the credit limit. But if you don't opt in, the company can't charge you this kind of fee even if the company processes a transaction over your limit.

So, the best strategy to avoid over-limit fees is not to opt in. If you do so by mistake or change your mind, you can revoke this agreement at any time. However, fees would still apply to over-limit transactions already processed.

High Penalty Fees and Interest Rates

Credit card companies routinely charge penalty fees for late payments and payments returned for insufficient funds. Under federal law, late fees are limited to the actual amount the violation cost the company or to a maximum of $8 (more on this below). If you sometimes have insufficient funds, compare how much different companies charge for this fee.

In addition, if you go over the limit, your payment is returned, or you have one or more late payments, your interest rate might go up. The default rate then applies to any new balance, not just to the late payment.

After a credit card company raises your APR, it has to reevaluate it every six months, but you could still end up paying the default rate for quite a while. And if you're more than 60 days late with a payment, the default rate can apply to the outstanding balance as well (but you usually can get it reduced on the outstanding balance by making the next six payments on time).

High Cash Advance Fees and Interest Rates

Getting a cash advance or using the convenience checks that a card issuer sends you can be quite costly. Credit cards tend to charge a fee of up to 5% (or a minimum amount like $5 or $10) for taking a cash advance, but some waive the fee on convenience checks. Also, the APR is normally high—around 25%—for cash advances.

Annual and Other Fees

Again, some credit cards charge annual fees, while others don't. Generally, you should look for one that doesn't require a yearly fee. But if you plan on carrying a balance, a card with an annual fee but a lower interest rate might be less expensive than a card with no annual fee and a higher interest rate.

Also, beware of other fees. New fees seem to pop up all the time.

No Grace Period

If you don't get a grace period, the card issuer can impose a finance charge from the date you use your card or from the date each transaction is posted to your account—even if you pay your bill in full each month. So, if you pay your account in full every month, make sure you have a grace period.

Costly Balance Computation Methods

Different cards might appear to offer the same APR, but the balance computation method might not be the same, which could cost you very different amounts. Again, credit card disclosures have to tell you which way the company uses to determine your monthly charge (the finance charge).

The method that results in the lowest balance each month will be the cheapest card for you.

Enticing Rewards, Points, Discounts, and Other Perks

Don't get lured in by cards that offer bonuses, let you design the card, or give you discounts. If you will pay high interest or could get hit with high fees of various sorts, or if the card uses one of the worst computation methods, you'd be better off without the perks.

The CARD Act of 2009

The CARD Act provides protections to consumers, such as requiring certain disclosures of account terms, limits on interest rate hikes, and restrictions on certain billing practices and fees. Under the CARD Act, penalty fees for insufficient funds and over-limit charges are limited to $32 for the first violation and $43 for a second violation if it occurred within six billing cycles of the first violation (2024 figures). (12 C.F.R. § 226.52.) These amounts are adjusted annually.

In 2024, the Consumer Financial Protection Bureau (CFPB) finalized a rule lowering the maximum late fee amount to $8 or the actual amount the violation cost the company. This reduction ensures that the late fee is reasonable and proportional to the costs credit card companies incur to handle overdue payments. (Banks could theoretically charge more if they can show it's necessary to cover their actual collection costs.) The rule goes into effect around May 2024.

The rule also eliminates the automatic annual inflation adjustment for the late fee amount and applies to large credit card issuers with more than one million accounts. However, it doesn't restrict a credit card issuer's ability to raise interest rates, lower credit lines, or take other actions to deter consumers from making late payments.

Comparing Credit Cards

Many websites compare credit card features and offer side-by-side comparisons of different cards. Keep in mind, however, that these websites don't assess all cards available, and some might only include cards that have paid a fee to be on the website. Be sure to shop around.

And if you find a card that looks good, check the card's website to read the actual terms and conditions. Credit card companies must display their credit agreements online. When you go to a credit card company's website, look for a link that says "Terms and Conditions" or "Pricing and Terms." You might have to hunt around. Use this information to compare terms between cards.

When you get a credit card application or pre-approved solicitation, the company has to disclose certain terms of the agreement. They could be tucked away on the back of one of the documents, so you could have to do some searching to find them.

When shopping for a new credit card, be sure to look for a card that matches your needs. Here's the bottom line: If you think you might carry a balance, look for a card with a low APR even after any introductory rate expires. If possible, get a card with a fixed rate rather than a variable rate. If you sometimes pay late, compare fees for late payments. Avoid cards with high start-up, annual, or other periodic fees, and, of course, don't agree to allow over-the-limit transactions.

How Charge Cards Work

Charge cards, also called "travel" and "entertainment" cards, are a little different from credit cards. Charge cards like American Express and Diners Club have no credit limit. You can usually charge as much as you want but must pay off your entire balance when your bill arrives.

You Can't Carry a Balance

With most charge cards, you must pay off the entire balance when your bill arrives. If you don't, you'll owe a late fee. If you don't pay the amount due for two billing periods in a row, you'll typically have to pay a heftier late fee of around $35 or a percentage of the past due amount (typically around 2 to 3%), whichever is greater. Also, the creditor can cancel the card if you default.

Some charge cards allow you to pay a bill off over time. If you choose to do this, you'll accrue interest on any charges you pay over time and face a penalty APR if you don't keep up with the minimum payment amounts.

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.

How Cash Advances Work

Many people use their credit cards to get cash advances. Similarly, many credit card issuers send cardholders "convenience" checks they can use to pay for goods or services. The check amount 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 have 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 than on standard credit card charges.

How ATM Cards Work

Banks issue ATM cards to give customers flexibility in their banking hours. In most areas, you can use an ATM card to withdraw money, make deposits, transfer money between accounts, find out your balance, get a cash advance, and even make loan payments at all hours of the day or night.

How Debit Cards Work

Debit cards combine the functions of ATM cards and checks. When you pay with a debit card, the money is automatically deducted from your checking account.

Combo ATM/Debit Cards

Some banks issue a combined ATM/debit card that looks just like a credit card and can be used wherever credit cards are accepted. But don't be mistaken—they're not credit cards. The money you spend comes out of your checking account immediately.

Pros of Debit Cards

Many people prefer debit cards over credit cards because you pay your bills immediately, unlike when you use a credit card and get the bill later.

Cons of Debit Cards

Some disadvantages of using debit cards are:

  • Payment is immediate. Many prefer having 20-25 days to pay their credit card bills.
  • No right to withhold payment. Because the money is immediately transferred, consumers using debit cards don't have the right to withhold payment in the event of a dispute with the merchant over the goods or services purchased.
  • Transaction fees. Some banks and merchants charge transaction fees for using debit cards.
  • High risks if stolen. If your debit card number is stolen during an online purchase, the thief may drain your bank account before you notice it's gone.

Getting Help

For a comprehensive discussion of credit and debit cards, along with information about budgeting and dealing with debt collectors, get Nolo's Solve Your Money Troubles: Debt, Credit & Bankruptcy, by and .

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