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5 Facts About Debit, Credit, and Prepaid Cards

Whatever card you choose, you should make sure you understand how it works and whether there are any fees, other costs, and limitations on using the card.

1. Credit, debit, and prepaid cards each work differently.

  • A credit card pays for things with borrowed money. When you use a credit card, you are using "borrowed" money to make a purchase or obtain a cash advance, and you must pay it back. If you don't pay the entire amount by the payment due date, most credit card issuers will charge interest on the unpaid balance.
  • A debit card pays for things with money from your bank account. A bank account debit card is linked to a checking account. With a bank account debit card, you can generally spend only the amount that is in the linked checking account, unless you have opted-in to your bank's overdraft protection program.
  • A prepaid card is like paying with cash. A prepaid card is not linked to a checking account and does not involve borrowing money. Instead, when you use a prepaid card, you use the money that has been loaded to the card in advance by you or a third party. In most cases, you cannot spend more money than what has already been loaded to the card. But unlike cash, a prepaid card provides some protection if it is lost or stolen. There are various types of prepaid cards, including general purpose reloadable prepaid cards, prepaid loyalty cards, prepaid gift cards, prepaid payroll cards, prepaid employee benefit cards, and prepaid government benefit prepaid cards. Each type of card may have different eligibility requirements and account terms and conditions.

2. Eligibility requirements are different.

You need to be of legal age (18 or 19 depending on your state of residence) to get your own credit, debit and some prepaid cards. In addition:

  • Credit cards require an independent ability to make minimum payments. Many credit card issuers offer credit cards to students who are 18 and older. A credit card tailored for students often can be a first step in establishing a good credit history.
  • Debit cards require a bank account. When you open a checking account, some banks issue a debit card that is linked to that account.
  • Prepaid cards are not linked to a checking account and do not require an independent ability to make minimum payments. You may be offered the opportunity to get a prepaid card by the bank where you do your checking or maintain a credit card. You may also purchase certain types of prepaid cards with a specified value at retail stores, drug stores, and online.

3. Fees can vary.

The fees associated with prepaid, debit, and credit cards vary widely from card to card. For example, late payment fees are often charged for late and missed credit card payments. A fee may be charged for using your debit card at an ATM outside your bank's network. Also, for prepaid cards, common fees include monthly usage fees, cash reload fees, and inactivity fees. For any card you plan to use, make sure you understand what fees may be charged.

4. Only a credit card can help build a credit history.

It's important to make credit payments on time. Making payments on time and otherwise using a credit card responsibly may help you establish and maintain a good credit history in your own name, which in turn may one day help you get a job or qualify for a mortgage. Debit and prepaid cards do not have any impact on your credit history.

5. No card will save you from yourself.

It's no secret that if you're not careful, you can get into financial trouble using a credit card. While most student cards have low credit limits, it's still easy to charge more than you realize and find yourself paying interest on a balance that you can't afford to repay.

Some money-management experts consider debit and prepaid cards better for students because they limit spending to just what's on the card or in your account. But no card will stop you from overspending. Most debit cards, and even some prepaid cards, offer overdraft protection, which in some cases may permit you to make purchases that exceed your balance -- usually for a hefty fee.

A credit card can still be a wise choice for college students if you're careful to purchase only what you can afford to pay for. That way, the card can help you stick to a budget and help you begin to establish a solid credit history.

Information in this article is of a general nature. It is provided by CollegeData for educational purposes only and may not apply to you or your situation. Please consult a financial or legal advisor before acting on such information. CollegeData is a service of 1st Financial Bank USA.

What's Next?

Learn more about credit cards and how to use them responsibly.