How to Choose the Right Bank Card for Your Needs

With the convenience of electronic payment options, billions of people use bank cards for everything from shopping to paying bills both online and in-person. Many industries, such as hotels and car rentals, require a bank card in order to make reservations, and it seems the modern economy demands that people have at least one bank card.

Whether you’re getting your first credit card, modifying your budgeting system, or opening a new bank account, it’s important to be aware of the different types of bank cards available. Here are the most common types of bank cards and some tips about who should use each one.

Debit Cards

As an alternative to carrying around a checkbook, a debit card allows you to make payments in-store and online, immediately deducting the amount of the purchase from your checking account. Debit cards can also be used to withdraw funds from an ATM or in stores that offer cash back options at the register. In some cases this can result in a transaction fee, though this is usually only a few dollars. Because funds can be accessed directly using debit card information, it’s worth noting that debit cards may pose more financial risks than other options if someone steals your card.

Debit cards are a convenient way for anyone with a bank account to access their money on a regular basis without having to carry cash or checks.

ATM Cards

ATM cards are designed to allow you to withdraw cash from your account using an ATM. As with debit cards, funds are taken directly out of your account when you make a withdrawal. Though some retailers will accept payments directly from ATM cards, this is not common. ATM cards are useful for people who prefer to use cash but want the added convenience of accessing their funds through ATMs.

Prepaid Cards

Prepaid cards are similar to debit cards in that the funds used for a purchase are removed immediately, though prepaid cards are not linked to a checking account. Instead, you pay a fee to load the card with a certain amount of money. Once your pre-loaded funds have run out, you won’t be able to use it again until you refill the card. This means banking benefits like overdraft protection do not apply to prepaid cards. If you attempt to make a purchase greater than the amount on the card, your payment will be declined. Also, prepaid cards have fewer consumer protections than debit cards if they are lost or stolen.

Prepaid cards offer a cash-free option for people who don’t have bank accounts. They can also be useful for people with bank accounts who are on a fixed income and want to make sure they don’t overdraw their accounts.

Credit Cards

A purchase made using a credit card functions like a small, short-term loan. Rather than paying all the money up front, you have the option to pay off the balance in smaller installments. In exchange for this regular line of credit, you’ll pay as much as 29 percent interest on any balance that carries over the month, though these rates vary based on your credit score. In addition to gaining interest, if you don’t make the minimum required payments each month, you can incur hefty late fees. Other charges may include annual fees, balance transfer fees, and over-the-limit fees.

Credit cards are a useful tool for anyone who wants to build their credit in order to qualify for favorable rates on future loans. This will have the most impact on larger purchases like buying a house or a car. Some cards also offer perks like cash back or travel rewards.

Secured Credit Cards

The card described in the previous section is the most common type of credit card and is useful for most people who qualify. However, there are also secured credit cards designed for people with bad or no credit. These cards work more like a debit card in that you use your own money rather than a loan from the bank. First you pay a security deposit, usually around $300 to $500, and this money remains in the lender’s possession as collateral and may be used to recover any missed payments. Your spending limit is determined based on this deposit amount, not your credit score. Although spending limits will vary, they are usually 50 to 100 percent of your deposit.

You should only use a secured credit card for as long as it takes to build your credit and qualify for an unsecured card. Since secured credit cards are designed for high-risk borrowers, they will often have much higher service charges and fees than unsecured credit cards.

Charge Cards

These work much like credit cards, except they have no limit to the amount you can put on the card. Also, you are required to pay off the balance in full when your bill arrives. If you don’t pay your balance, a lender will usually offer a one-month grace period without interest charges. After this grace period, you’ll be charged up to 35 percent in interest, and if your balance isn’t paid within three months, your account will be closed and the lender will send your bill to the collections department. Charge cards have high annual fees, sometimes up to $90, and because lenders charge merchants high fees as well, some stores will not accept charge cards.

Since the major benefit of a charge card is the fact that they have no spending limit, they are useful for business owners and individuals who make frequent, high-priced purchases. Sometimes there are added benefits such as sign-up bonuses, access to airport lounges, credits for travel expenses, and memberships with hotels.

Understanding these basics will give you the best chance at selecting the best card. As the rates and fees associated with each of these will vary between lenders, always remember to read the fine print before choosing any bank card.

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