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.
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. (Get information about getting a credit card if you have bad credit.)
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. (Read about how to dispute a billing error on your debit or credit card statement.)
How credit card companies make money. Credit card companies earn high fees in several ways.
The federal Credit CARD Act of 2009. President Obama signed the Credit Card Accountability and Disclosure Act of 2009 (the Credit CARD Act) into law on May 22, 2009. The law provides additional protections to consumers, including better disclosures of account terms, limits on interest rate hikes, and restrictions on certain billing practices and fees.
(If you're in the market for a new credit card, read Choosing a Credit Card: What You Need to Know.)
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. With most charge cards, you're required to 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 once you default. Some charge cards give you the option 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.
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 have more onerous terms for consumers, including:
ATM cards are issued by banks, essentially to give bank 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.
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. Many 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 checks for two reasons:
Cons of debit cards. There are disadvantages to using debit cards.
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 Amy Loftsgordon and Cara O'Neill.