What Is the Difference Between a Prepaid Card, a Credit Card, and a Debit Card?

by TBF Finance

Sooner or later every bank card owner wonders about the difference is between prepaid, credit, and debit cards? With so many different cards, it’s easy to get confused over what each card does and what makes it stand out.

Despite their differences, they have some key similarities. The most important is that all three of them are generally accepted in most places you would want to use your bank card. Because of this, they make convenient alternatives to cash that you have to always carry on you.

The differences lie in the fact where the money is actually coming from. To put it simply:

  • Debit cards only use the money you have on your bank account.
  • Credit cards charge your credit line when you make a purchase.
  • Prepaid cards can only be used if you have previously deposited money onto them. Below are some details about each of the cards.

What Is a Debit Card?

A debit card is probably one of the most convenient ways to make purchases. Unlike credit cards, which can damage your credit, or prepaid cards, which must diligently have money deposited on into order to use, debit cards are conveniently connected to bank accounts. That means when you pay with a debit card for anything, money is directly drawn from your account and a hold is placed on the total amount of any given purchase.

While the hold is taking place, the merchant you bought from sends the transaction details to its own bank, and the funds are moved from your account to the merchant’s account. Typically, the entire process takes about a day or two to complete.

While convenient, it’s important to be up to date on any outstanding transactions and holds, so you don’t make the mistake of overdrawing your account. When this happens, you may end up having to pay large overdraft fees from your bank. Depending on the bank, if you go an entire day over drafting your account at more than one merchant, you could end up getting slapped with multiple hefty overdraft fees.

You can use your debit card wherever credit cards are allowed. Your debit card also has a PIN that can be used during transactions or when withdrawing money from an ATM. PINs are an added layer of security against theft. Because debit cards are connected to bank accounts, it’s easier to track suspicious and fraudulent activity and remedy such situations when or if they arise.

What Is a Credit Card?

Credit cards are an ideal method of payment if you’re trying to establish a credit history. Credit card transactions allow consumers to borrow money from their line of credit. They are easy to use when making simple transactions at a variety of merchants around the world wherever MasterCard, Visa, Discover, or American Express is accepted. It’s a powerful tool because it essentially allows you access to an instant loan with a repayment term of whatever you want it to be.

While it’s always wise to pay off credit card balances each month to prevent the buildup of debt and credit problems, it’s up to the credit cardholder to decide when and how fast they want to pay off their balance.

It’s important to note that credit cards usually have hefty interest rates attached to them. When card balances are carried over from month to month, you will notice interest charges on your account being added to your overall balance.

In addition to giving cardholders more access to money and helping them build a credit history, many credit cards also offer rewards programs, such as cashback. Cashback rewards allow cardholders to accumulate points when certain purchases are made. Over time, those points can really build up and can eventually be exchanged for financial rewards, such as cash or gift cards.

What Is a Prepaid Card?

Prepaid cards are ideal choices for people trying to stick to budgets or who want to avoid falling into debt problems. This type of cards is preloaded with an amount of money, and cardholders are only able to use the money that’s loaded on the card.

Some prepaid cards are designed to allow cardholders to add more money to the card when the funds are depleted. However, some prepaid cards can only be used once, meaning that when the money is gone, the card loses its usefulness.

Because prepaid cards aren’t tied to bank accounts, there’s no risk of over drafting. Additionally, the cards are usually accepted anywhere that accepts major credit cards. On top of that, they can be used:

  • For online shopping.
  • To pay bills.
  • When making everyday purchases, such as groceries and gas.

Like credit and debit cards, prepaid cards also have expiration dates and can even be used to withdraw money from ATMs.

The Verdict

Each of the three cards has its share of advantages and disadvantages.

  • If youre looking for a simple card to make everyday payments without the hassle of overdraft fees and credit card interest rates, then prepaid cards are the way to go.
  • However, if you have solid credit and have the self-discipline to make monthly payments, you may want to take advantage of using a credit card, so you can reap rewards, such as cashback bonuses.
  • Debit cards also have their share of benefits, such as convenience. They’re also useful if you’re trying to avoid going into debt.

What do you think? Do you have a favorite type of card that you use on a regular basis?