People often misuse the term “credit card”. While Credit, Debit, and Prepaid cards have a lot in common they are all different. Here is a simple guide and how to choose the right card.
Credit Cards
What Is a Credit Card?
A credit card is an unsecured line of credit issued by the bank to an individual to make purchases, transfer balances and get cash advances. The money is borrowed and free as long as you pay it back in full. If you make minimum payments, interest will be charged and this is where the banks make their money. Sticking to your payment agreement is critical as any defaults can cost you more in long term.
How Do Credit Cards Work?
Before you apply for a credit card, do an eligibility check to see your likelihood of being accepted. This is commonly known as a ‘soft check’. You get to preview the credit cards you are likely to be accepted before you put in a ‘hard’ application.
If you’re approved for a credit card, the provider will give you a spending limit (this is based on the amount you’ve requested and the bank’s assessment of what you can afford). The spending limit can be as low as £200 (if you are new to credit) and as high as £10,000.
Each month, you receive a balance statement where your provider will tell you how much you have spent during the billing cycle. To enjoy the real benefits of a credit card, pay your balance in full and you won’t pay any interest on purchases.
The lowest amount you can pay each month is called your minimum payment. Most banks will set up a direct debit to deduct the amount from your bank account. If you don’t have a direct debit set up, make sure you transfer the minimum payment before the due date as any delays may increase your costs (late payments fees). When you don’t pay the balance in full, you’ll pay interest on what’s left. You’ll also still owe on purchases in your next billing cycle.
How Do You Get a Credit Card?
Applying for a credit card is a lot easier now. You can easily find the right card for you in a matter of minutes using one of the aggregator sites.
As part of the application process, they will capture personal information such as your name, date of birth, income, household information, and committed expenses. This information is used to match you with the right lenders. If you already know the credit card you want, you can just apply directly on the banks’ website.
Is a Credit Card worth it?
A credit card is now a necessity. It builds credit history which is needed to make any future borrowings like a mortgage or leasing a car.
It allows you to make large purchases like holidays or kitchen refurbishment to meet your immediate needs with the option to repay over a longer time.
Depending on the type of credit card you get, you can earn rewards like cash back or air miles.
It gives your full protection against any purchases over £100 and up to £30,000. Under section 75 of the Consumer Credit act, you are covered by credit card purchase protection if you use your card to buy goods and services that results in you not receiving as indicated by the merchant.
To enjoy the full benefits of a credit card, make sure you pay your balance in full as you can easily incur high-interest debts.
Debit Cards
What Is a Debit Card?
A debit card is linked to your bank account. Unlike a credit card, you can only spend the money you deposit in the account. Some accounts offer an arranged overdraft facility where you can go into a negative balance on your account.
For example, if you have £100 in your account but make a purchase of £200 taking you into a negative balance of £100; interest will be charged up to a maximum of 40% APR based on the number of negative balance days.
How Do Debit Cards Work?
A debit card is a digital form of cash. When you make a purchase with a debit card the money is immediately deducted from your account balance (even though the funds may not reach the retailers’ account until 3-5 working days).
As part of a debit card, you receive a 4 digit pin code (which you can change) to withdraw cash from an ATM machine. The daily amount you can withdraw varies based on your agreement with your bank. If you need to withdraw a higher amount, you will typically need to visit a branch or call customer service to increase your daily limit for a 24hr period.
How Do You Get a Debit Card?
A debit card is automatically issued the moment you apply for a bank account. As it is a physical card, it may take up to 5 working days to receive the card by post. All bank accounts come with a debit card as it’s the most convenient way to get access to your money across the world.
Is a Debit card worth it?
If you want to have instant access to your money to make purchases in person or online then a debit card is a must-have. Unlike a credit card, you only need to prove who you are to the bank and you are guaranteed a bank account with a debit card.
As you can only spend the money in your account balance, it is impossible to get into debt. However, a debit card on its own can not help you build credit. If you are looking to make large purchases beyond how much you own, you will need a credit card as well.
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Prepaid card
What is a prepaid card?
A prepaid card works exactly the same way as a debit and credit card. You can use the card to make purchases online or in person.
Unlike a debit card that is linked to your bank account, with a prepaid card you need to load money into an electronic wallet that it’s linked to the card. You can only spend the amount on the prepaid card, making it impossible for your to overspend.
How Do Prepaid Cards Work?
Prepaid cards can be used to make purchases and pay bills, just like debit or credit cards. They are accepted nearly everywhere since they are often backed by a major card network, such as Visa, or Mastercard.
Similar to a debit card, you can apply for a prepaid card with no credit checks required and be guaranteed a card. When you receive the card, you will be required to top up the wallet. You can either transfer money using the UK faster network or move money into the card using your debit card.
Some prepaid card providers may charge you a fee to move money in and out of the account and also withdraw cash from the ATM. So make sure you always read the terms and conditions before you apply for one.
How do you get a prepaid card?
It is very easy to get a prepaid card. The application process is typically online and once approved you may be issued a virtual card to start your online purchases and may receive a physical card via post in a few working days. The ScribePay prepaid virtual card takes less than 5 minutes to complete an application. Once approved, the virtual card is instantly issued in the wallet for online purchases and subscriptions.
Is a Prepaid card worth it?
A prepaid card is the best alternative to credit and debit cards If you want to stay out of debt and have better control of your money.
They are also a useful budgeting tool. You can put a fixed amount on a prepaid card each month for certain spend categories such as eating out or subscriptions.
However, one of the downsides of prepaid cards is the fees associated with operating the account. Because the providers can’t lend the funds held in your account to others, they need to charge fees to cover their costs plus more. So make sure you read the terms and conditions of the provider to enjoy the benefit of having a prepaid card.
In summary, what’s really the difference between a credit, debit, and prepaid card?
You can have all three types of cards in your wallet as they have different purposes.
A debit card is a digital form of cash and a must-have as part of a bank account. While many credit cards may offer rewards for paying with them, usually the annual savings amount to very little.
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