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Types of Credit Cards and other Plastic

Not all “Plastic” is Created Equal

While we tend to call them all "credit cards," there are three different types of credit cards we usually use to "charge" things. When you hand the clerk a card and say "put it on this" what happens will depend on which card you handed the clerk.

Debit cards take the money right out of your checking account. Most of these cards have Master Card or Visa symbols on them, but they are not credit cards. They are directly tied to your checking account.

Instead of signing a slip when you use a debit card, you have to punch in a code.  Once you do that, your checking account is “debited” and your money is now in the hands of the vendor.

You can use these cards on your ATM to withdraw money, and you can use them to pay at any place that takes Master Card or Visa, but you do not get the same privileges with a debit card that you would get with a credit card.

 

For one thing, your money is gone. There is no grace period, and you cannot pay over time.   Should there be a problem, it will be your job to get your money back.  Had you used a credit card or a “charge card”, it becomes the responsibility of the issuer of that card to investigate any complaints you file in writing.   If they do not get a good answer from the vendor, they will remove the charge from your bill.   You will keep your money.  See Credit Card Disputes details.

Debit cards used for personal purposes do share one thing.   In most cases they provide zero liability for fraud.  If someone steals your card you will not be held liable for what they do with it as long as you have met certain requirements, such as “having exercised reasonable care in safeguarding” your card and alerting the bank as soon as you see the card is missing.

Recently, Master Card has said it will join Visa in extending this same protection to debit cards used for business in the last quarter of 2006.

 

Charge cards.American Express is the main issuer of charge cards in the United States. A charge card does not attach to your checking account, and does provide a grace period before you have to pay, but it requires full payment at the end of the billing cycle. No “minimum due.”  No loans. Other than that it operates pretty much like  a credit card.  Amex offers “zero liability” coverage on its charge cards and provides complaint service as well.

 

Credit Cards. This is the one that is most common in the United States. You “charge it”, and at the end of the cycle you get a bill. You can pay it all, or just some of it. If you pay only a portion, the rest is turned into an “unsecured” loan for which you are charged interest. Interest is usually high as the loan is not backed up by any collateral asset (like a car or a house). Amex, Master Card and Visa offer zero liability on personal use credit cards and by the end of the year, they should all have the same coverage on business use credit cards.

Credit cards also offer good help with vendor problems and errors. See the explanation of how this works in Credit Card Disputes.

 

Prepaid credit cards. These are only for people who cannot get real credit cards. And they are not realy "credit" cards because you are not borrowing anything. They are really a special form of debit card. The basic idea is that you pay in advance by depositing money in your card account. When you use the card, the money is deducted from the account. When you use up your deposit, you cannot use the card until you have made another deposit.

Before you think about this type of card, think about a debit card (see above). Debit cards look like credit cards, and like prepaid credit cards, they take money out of your account whenever you make a "charge." However, debit cards tend to have much lower fees. Prepaid credit cards can choke you with fees, One card I checked bragged that they had "no upfront fees." Great, but they had a whole array of other fees, including monthly fees that could be as high as $9.95 per month, plus fees for every transaction, including deposits.

Generally, debit cards have none of these fees. If you want help limiting your use of the debit card. attach it to a savings account that you do not use for anything else. When the account goes down, you stop using the card until you make a deposit.

 

'"Rewards" Credit Cards. Everyone loves a gimmick. it's human nature. The MIT economist who studies irrational economic behavior says that he paid more for a car than he should have because he loved the idea of "free oil changes for three years." Rewards credit cards are often like that. They give you free miles on various airlines, or points to use at hotels, or cash back, or prizes -- or even make contributions to your favorite organization (these are called "affinity cards").

You may wish to use these cards, but be careful. I have one for my college that gives money to the school every time I make a charge, but I pay it off every month so I do not have to worry about the interest rate they are charging, which is higher than it needs to be.

The short rule is that unless you pay the card off every month, you can probably get a better interest rate with a card that does not offer any rewards. You will likely be better off doing that and skipping the rewards. nd even if you pay it off, make sure the other terms, like late fees etc. are not disadvantageous compared to other cards.

 

"Kiting" Credit Cards. This is not a type of card but a way to use credit cards. Simply it means using one card to pay off another. When your bill comes due on one card, you borrow from another to pay it off. This can get you into big trouble, I had a friend who used this technique to drive his total outstanding credit card debt up to an astonishing $100,000, forcing him into bankruptcy.

On the other hand, you can also use this technique to keep your interest rates close to zero. By taking advantage of every offer you get for "zero interest for six months" or "low interest on all transferred balances" you cna move your debts from one card to another, always seeking the lowest possible interest rate. it's a lot of work but it can save you a lot of money, too.

 

 

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