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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.

Although you might think that credit cards, charge cards, ATM cards and debit cards are basically the same thing -- a way to make purchases or get cash -- they are quite different. In order to use these cards wisely, you should know what each one is and how it differs from the others. Here's a primer.

Credit Cards

If you carry a balance, credit cards can be like very expensive loans made by banks, gasoline companies and department stores. 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. You're allowed to pay off what you owe little by little each month, as long as you pay a minimum amount each time. You're charged interest on the balance you owe (as high as 26% each year) at the end of each period, unless you pay the full balance each time your bill arrives.

Credit cards yield high profits to their issuers for several reasons. The most important is the high rate of interest -- interest on credit cards alone accounts for the bulk of the profits earned by banks that issue credit cards. Also, many companies charge an annual fee for issuing a credit card, and most companies charge late fees, over-the-limit fees and other miscellaneous charges. Finally, the companies profit by 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 you are required to pay off your entire balance when your bill arrives, with one exception. If you charge air fare, cruise fees or hotel fees for a hotel room booked through a travel agent on an American Express card, you can pay off your balance over 36 months. You'll be charged between 19% and 21% interest and will have to make minimum monthly payments of $20, or 1/36 of your balance, whichever is greater.

Charge card companies make their profits by charging very high annual fees -- up to $100 -- and by charging merchants relatively high fees each time a customer pays using the company's charge card.

If you don't pay your charge card bill in full (unless the charges are travel expenses on an American Express card), you'll get a one-month grace period, when no interest is charged. After that, you'll be charged interest that averages about 18%. If you don't pay after about three months, your account will be closed and your bill sent to the collections department.

Cash Advances

Many people use their credit or charge cards to obtain cash advances. Cash advances are generally more expensive than standard credit card charges. Most banks charge a transaction fee up to 4% for taking a cash advance. They also charge interest from the date the cash advance is posted, even if you pay it back in full when your bill comes. Finally, the interest rate is often higher on cash advances than it is on ordinary credit card charges.

ATM Cards

ATM cards are issued by banks, essentially to give bank customers flexibility in their banking hours. In most areas, with an ATM card you can 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

Debit cards combine the functions of ATM cards and checks. Debit cards are issued by banks but are used at stores, not at the banks themselves. When you pay with a debit card, the money is automatically deducted from your checking account. Many banks issue a combined ATM/debit card that looks just like a credit card and can be used in places where credit cards are accepted. But don't be mistaken -- they are not credit cards. The money you spend comes out of your checking account immediately.

Many people prefer debit cards over checks for two reasons:

  • You don't have to carry your checkbook and present identification, but are still able to make purchases directly from your checking account.
  • You pay your bills immediately, unlike when you use a credit card and get the bill later.

But there are disadvantages to using debit cards. Many people prefer having 20-25 days to pay their credit card bills. Also, consumers using debit cards don't have the right to withhold payment (the money is immediately removed from the account) in the event of a dispute with the merchant over the goods or services paid for. In addition, many banks and merchants charge transaction fees for using debit cards. Finally, if your debit card number is stolen on the Internet, the thief may drain your bank account before the bank is able to complete its investigation. For this reason, it's better to use credit, rather than debit, cards for online purchases.