credit card stackIf you're like many of us, you have a deck of (plastic) cards inside your wallet - debit, credit, prepaid, etc. Or perhaps you're flooded with offers in the mail. In either case, the key question is: Which card is really best for your budget and your lifestyle? Here's the inside story.
IN A NUTSHELL Think of a debit card as an extension of your checkbook - it's linked to your checking account and debits it when you buy something, rather than giving you a line of credit. (The MasterCard or Visa logo you may see just tells you what company processes the transaction.)
BEST DEAL PerkStreet Financial Platinum Debit MasterCard (perkstreet.com). This card has no monthly activity fee and free checking and offers an unlimited 1% back on purchases (2% at certain retailers, such as Amazon; 5% on rotating categories), plus free transfers/direct deposit; it can be used at 42,000 free ATMs.
PROS Debit cards are all about reining in spending, because you're limited to the funds in your checking account.
CONS Several big ones. Debit cards don't build credit, meaning they can't be used to create a credit history and/or credit ratings or scores. Also, if you opt for overdraft protection (which allows you to swipe and pay even if you don't have the funds), you can dig a pricey hole if you overdraw your account - spending more than your account balance is akin to taking out a loan. Also, unlike a credit card, this kind of plastic offers little legally backed purchase protection or travel insurance. And each card and bank has its own policies on fraud and/or theft. For most debit cards, you're liable for only up to $50 worth of unauthorized charges if you inform the bank within two days; wait longer and that goes up to $500 or more.
BOTTOM LINE Debit cards are for day-to-day charges and for those who can't manage to budget with credit cards and/or will carry a balance on a credit card. They are limited by the amount of cash you have in your bank account (as long as you avoid pricey overdraft protection).
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IN A NUTSHELL These allow you to swipe and pay - with someone else's money. That's how credit cards work: by extending you a loan (with a limit) that you can pay off either with no interest before the payment due date or else with interest.
BEST DEAL If you carry a balance: Discover More Card (discover.com), offering 0% on balance transfers for 15 months; no annual fee; after 15 months, an APR of 10.99% to 20.99% (you need excellent credit for the lowest rate; higher rates may apply, based on your credit history). If you don't carry a balance: Citi Forward Card (citicards.com) with no annual fee, $100 gift card after signing up for paperless statements and spending $650 within first three months; five rewards points for every dollar spent on restaurants, books, movies, and music plus one point for every dollar spent on other purchases.
PROS If you pay off your balance within the payment period, a credit card can be free and offer perks such as rewards, cash back, purchase protection, and travel insurance. Thanks to the Fair Credit Billing Act, purchases made with this kind of plastic are protected from fraud, so you're liable for only up to $50 worth of unauthorized charges as long as you notify your card issuer. If you make on-time payments and don't go over your limit, they can be used to build good credit, helping you get lower interest rates when taking out a home or car loan.
CONS Even after the 2009 Credit CARD Act, which put caps on fees and restrictions on when penalty interest rates can be applied, credit cards can damage you financially if you carry a balance, especially if you don't pay on time. Say you're carrying a balance of $2,000 on a card with an APR of 15%. Paying $80 a month will cost you $413 in interest over the two years and seven months it will take to pay off the bill.
BOTTOM LINE Credit cards are a financial tool for the savvy - or those with money trouble. If you spend within limits and pay the bill off in full every month before interest is applied, avoiding fees, you can benefit from purchase protection, additional insurance, rewards, and points with little (if any) cost. If you can't stick to a budget, try to build credit carefully, using the card only to purchase one regular item - like gas - then paying it off every month.
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IN A NUTSHELL Secured cards are plastic for folks with bad or little credit. They allow you to open a bank account with cash held as a refundable security deposit. Then the card extends you a line of credit that can be increased if used responsibly. Say you open a card account with a $500 security deposit; you'll be extended a $500 line of credit. Then deposit more money and/or use the card well over time (paying the bill on time and not overdrawing the account), and you'll be extended more credit - the amount varies with the card issuer.
BEST DEAL Capital One Secured MasterCard (capitalone.com/creditcards). It automatically reports your card activity - balances, payments, etc. - to the three bureaus (TransUnion, Equifax, and Experian) that calculate your credit scores; credit lines start at $200 and go up to $3,000; annual fee, $29; variable purchase APR is 22.9%.
PROS If you've suffered a major credit setback, a secured card can be used to rebuild your credit rating, as long as the card reports activity to the three main credit bureaus. Some cards will extend credit beyond your security deposit as long as you pay on time and use the account responsibly.
CONS Some secured cards do not report to the credit bureaus, so they can't improve your credit rating - call customer service to check.
BOTTOM LINE A friend of mine texted me a photo of herself proudly holding a secured card - the only kind she could get - after she had to declare bankruptcy post-divorce. These cards can be great tools for getting back on your feet credit-wise.
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- by Carmen Wong Ulrich
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