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Charge cards, credit cards, and debit cards may look alike, but they offer different services and benefits. Learn the basics of each card and determine which is best for you.
There are many variations when it comes to those little plastic cards. The common feature is the convenience they provide. But are you aware of the unique differences? Understanding how different cards work will help you use them smarter.
A credit card is a means of buying goods and services on credit. Credit cards are issued to you based on your income and information on your credit report. When you use a credit card, you are borrowing money against a line of credit. You pay it back with interest each month if you haven't paid the balance in full by the payment due date. If you do pay your balance in full before the grace period expires (usually about 25 days), you won't be charged interest.
VISA, MasterCard, American Express, and Discover – What comes to mind when you think of a credit card? If you're like most people, you probably think about VISA or MasterCard. If you carry one of these cards, you can charge goods or services anywhere the VISA or MasterCard logo is displayed.
But did you know that your credit card was not issued directly from the VISA or MasterCard company? VISA and MasterCard credit cards, also known as bankcards, are issued by financial institutions and banks that are affiliated with these organizations. VISA and MasterCard are actually organizations that provide credit authorization systems, processing services, and operating guidelines to the issuing financial institutions or banks.
Two other major credit card names are American Express and Discover. The American Express card was originally a charge card (see the explanation below for the difference between charge cards and credit cards) but the company made revolving credit cards available in 1987. The Discover card is another major credit card issuer, started by Sears in 1985, but now a separate company.
Private label card – This is just a fancy way of referring to a department store card or gas company card. Retailers such as JC Penney's, Sears, and Exxon issue this type of card for use at their locations.
Affinity card – This type of credit card is offered by a bank and another sponsoring organization, often a charity group or other non-profit. The sponsor's name or logo is often placed on the card. The bank typically gives a portion of your annual fee and purchases to the sponsor. An example of an affinity card is one that lists your college or perhaps AARP (American Association of Retired Persons) as a sponsor. You may be entitled to discounts or special deals from the sponsoring organization.
Co-branded card – Similar to an affinity card, this type of credit card is offered jointly by a bank and a retail organization. The names and logos of both companies are displayed on the card. Typically, you receive points or rebates based on your spending levels. The points or rebates are redeemable for specific goods or services, such as frequent flier miles, meals at restaurants, Internet banking fees, and electronics, to name a few. It's not uncommon for the points or rebates to have an expiration date. Make sure the card you choose meets your needs. You should evaluate not only the terms, but the incentives as well.
Home Equity Line of Credit – You can get a credit card that is tied to the equity in your home. Although interest rates may be lower, these credit cards have some big risks for you if you fail to make payments — namely, losing your home through foreclosure. See the U.S. Federal Deposit Insurance Corporation article about home equity credit.
A charge card is similar to a credit card, but it is generally used for purchases during a single billing cycle. Unlike a credit card, a charge card doesn't offer you a revolving line of credit, and you must pay the balance in full each month. Some examples of charge cards are American Express and Diner's Club.
Issuing banks want to be sure you have the ability to pay back the money you borrow. They market credit cards in “flavors” that are precious metals. Depending on your situation, you may be eligible for:
Standard card – This is the basic credit card. It generally has a credit limit of $1,000 to $3,000.
Gold card – This card usually offers a credit limit of $5,000 or more. Gold cards also offer perks or incentives to cardholders, such as emergency assistance services while traveling and extended warranties on purchased items.
Platinum and Titanium cards – These cards generally have credit limits ranging from $10,000 to $30,000. They come with special benefits, such as concierge service or access to an airport club while you are waiting for your flight.
A debit card may have a VISA or MasterCard logo, but that doesn't mean it's a credit card. A debit card (also known as a check card) is linked directly to your checking or savings account. Money is withdrawn from your account when you make a purchase, so it's more like a check than a credit card. A debit card can either be used online or offline.
Online debit card – With this type of transaction, money is deducted from your account immediately. It works like an ATM card, so you'll need a PIN (personal identification number). Frequently you are charged a fee by your bank for making an online debit. Although online debits are cheaper for the retailer where you make your purchases (for example, Wal-Mart), the bank makes more money from offline transactions, and tries to encourage the consumer to choose offline debits. Your fee can range from $0.25 to as much as $3 for each online debit transaction. Before using your debit card with a PIN, make sure you know how much your bank is charging you to pay for your purchase online.
Offline debit card – This type of transaction is available with check cards that have the VISA or MasterCard logo and can be done anywhere bankcards are accepted. The money isn't deducted from your account immediately; it usually takes 2 to 3 days. No PIN is necessary, but you'll have to sign a receipt.
Identify theft is another point to consider when deciding how to use your debit card. If a thief uses your debit card offline, like a regular credit card, you are protected by law for a maximum liability of $50 of unauthorized charges. But if a thief steals your PIN number and makes online debit transactions, you can lose all the money in the account tied to that debit card. See the Consumer Action article about fraud protections for debit cards. For more information about using debit cards, see the article Are You Riding the Debit Card Wave?
For more information on selecting a credit card, see the U.S. Federal Trade Commission article Choosing and Using Credit Cards.
There are many ways for banks and retailers to offer you credit. This article has focused on unsecured credit cards. Depending on your current situation, however, a secured credit card may better suit your circumstances. To learn more about secured credit cards, read the related articles in our Knowledge Center Library.
For more information on personal finance, or debt consolidation, search the CareOne Credit Knowledge Center Articles.
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