The difference between credit cards, debit cards, and prepaid cards
In today’s modern world, there are several ways for consumers to make purchases. Both online and offline, an array of payment cards available can enable these transactions to happen – all with their own benefits.
Whether it’s a debit card, credit card, or prepaid card, it’s much easier nowadays for consumers to pick an option that works best for their situation. Providers should be considering which one is the most effective for their own customers – what are their spending habits, what benefit do they value the most and what format do they interact the best with?
This article breaks down the three options, highlighting how they work, their key benefits and how they compare to one another.
What is a prepaid card and how does it work?
A prepaid card is a card that can be loaded with funds that are not associated with a bank account. The user can spend up to the amount on the card.
Prepaid cards are often used as gifts and rewards, but those with limited access to standard banking options or those on a budget use them in place of a regular bank account.
Similar to credit and debit cards, prepaid cards have their pros and cons. With a prepaid card, consumers can top up the card with money and use it to make purchases or withdraw money from an ATM. Prepaid cards can be topped up using the following options:
- Arrange for a paycheck to be directly deposited onto the prepaid card
- Customers can add funds to the card at retailers or specific financial institutions
- Transfer funds onto the card from an existing bank account.
There are different prepaid cards available to customers: free prepaid debit cards, reloadable prepaid cards with no fees, and no-limit prepaid debit cards, are just a few. All of these options come with varying benefits and offers for customers, so take a look at them carefully to understand what will be best.
What is a debit card and how does it work?
Debit cards are one of the most commonly used bank cards. A debit card is linked to a person’s bank account. When they are used to make a purchase, the money is deducted from the consumer’s bank account.
Essentially, customers pay with the money they already have. Debit cards speed up transactions and allow customers to receive cash back on their bank account purchases without going to the ATM.
What is a credit card and how does it work?
A credit card is separate from a bank account and allows customers to make purchases by borrowing a credit limit based on their credit rating and other factors.
Credit cards offer enhanced security, robust features, and long-term payment options, but they also have drawbacks – not just for the consumer but for providers too.
Difference between credit card and debit card
When something is paid for using a credit card, consumers borrow money from a credit card company. The credit card company will send the customer a monthly bill for the money they borrowed to buy items.
On the other hand, when a debit card is used, customers use funds available in their bank accounts to purchase items.
For example, with debit cards:
- Customers can get this from their bank when they open a bank account
- Money comes out of this bank account when purchases are made
- There is no extra interest to pay
- It can be used at an ATM to get money out of the bank account
- It does not build a credit history.
Whereas with credit cards:
- A credit card is applied for at a bank or store
- A bill is issued each month for payments made with the credit card
- There might be an extra payment for interest if the bill isn’t paid for in full each month
- It acts as a safer way to make purchases online
- It helps to build a credit history if the bill is paid in full each month when it’s due.
Difference between a prepaid card and debit card
A prepaid card is basically a type of debit card. However, the clear difference between the two is that the customer can only spend the amount previously charged to the card. This means there is no credit facility, and customers cannot borrow money from their provider.
A prepaid debit card may be easier to think of as a “pay-as-you-go debit card”. Debit cards traditionally offer overdraft functionality. This means that the available amount may be more than the available balance in an actual account.
The prepaid card only has the amount available, but nothing more. A prepaid debit card is a great alternative to traditional checking accounts. It can also act as a budgeting tool when customers need to control their spending or want their children to have their own cards to learn how to manage their money.
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