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
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
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, 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
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.
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
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
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.