Credit, debit, and prepaid cards might all look the same, but they’re very different. Whichever payment card you choose, you should make sure you understand how it works and whether there are any fees, other costs, and limitations. Here are some things to consider before choosing one of these cards to use while you're at college.
If you’re a college-bound student or nearing the end of high school, you may have thought about getting a credit or debit card to help you along the journey through college. Payment cards are convenient and can be very useful in emergency situations. Why should college students have credit cards? In addition to being used to make payments, credit cards, if used wisely and responsibly, can also help to build a credit history.
Choosing a payment card can be difficult because there are various types of cards with different terms, conditions, interest rates and fees. This article is focused on three common types of payment cards - credit cards, debit cards, and prepaid cards.
1. The Fundamental Difference
Credit, debit, and prepaid cards each work differently.
A credit card allows you to pay 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. Some issuers also charge interest on a cash advance from the time you get the advance until you pay it back. With a credit card, you have access to a specified amount of credit set by the card issuer (referred to as your credit limit).
A debit card allows you to pay for things with money in a linked checking account. With a debit card, you can generally only spend up to the amount you have in your checking account. Unless a debit card has overdraft protection (which allows you to spend more than you have in your linked account, up to a specified limit), a debit card can give you stricter control over your spending.
A prepaid card is like paying with cash. It is not linked to a checking account and does not involve borrowing money. With a prepaid card, you can generally only spend what you have added or loaded on to it. The benefit of using a prepaid card over cash is the protection it provides if your card is lost or stolen. There are a variety of prepaid cards — general purpose reloadable cards, loyalty cards, gift cards, payroll cards, employee benefit cards, and government benefit cards — and each type of card may have different eligibility requirements and account terms and conditions.
2. Eligibility Requirements
- Credit cards require an independent ability to make minimum payments. To be eligible for a credit card, consumers who are under 21 must have an independent ability to make the required minimum periodic payments under the terms of the account based on their income or assets and current obligations.
- Debit cards require a bank account. When you open a checking account, you can request 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 can get a prepaid card at retail locations (such as grocery stores and drug stores), online, over the phone, or from some banks and credit unions. If you get a card online, you may be issued a virtual card or receive a physical card in the mail at a later time.
3. Fees between the lines
The types and amounts of prepaid, debit, and credit card fees vary from card to card and from issuer to issuer.
- Common credit card fees include interest charges, annual fees, late payment fees, returned payment fees, card replacement fees, and foreign transaction fees.
- Common debit card fees include ATM withdrawal fees.
- Common prepaid card fees include monthly fees, transactions fee, ATM withdrawal fees, balance inquiry fees, cash reload fees, paper statement fees, decline fees, inactivity fees, card-to-card transfer fees, card replacement fees, additional card fees, foreign transaction fees, and card cancellation fees.
For any card you choose and plan to use, make sure you understand what fees may be charged. Do not hesitate to ask your bank representative questions about the availability and cost of overdraft protection, and special rates or allowances for students.
4. Your credit history
A credit card, unlike a debit or prepaid card, can help you build a good history if you use it wisely and responsibly.
Having a good credit score can have many advantages, including access to lower interest rates, better terms and availability on loans; credit cards with the lowest interest rates and best rewards; lower premiums on car insurance; availability of more housing options and lower security deposits; and security deposit waivers on utility services.
Making timely payments on a credit card account and otherwise using a credit card responsibly may help you establish and maintain a good credit history. The sooner you start building credit, the sooner you can enjoy the benefits of having a good credit score. But don’t just take it from us – hear from the experts at Experian on Why Establishing Credit Young is Important.
5. No card will save you from yourself
Credit cards can create financial trouble if you’re not careful using them. While most student credit cards have low credit limits, it's still easy to buy 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. However, even debit and prepaid cards may offer overdraft protection which allows you to make purchases exceeding your account balance. Not only does overdraft protection remove the expected spending limit on debit and prepaid cards, it usually comes at a hefty fee. Since no card can stop you from spending if you truly want to – that restraint, whenever required, must come from you.
A credit card can still be a wise choice if you're careful to spend only what you can afford to pay for. That way, the card can help you stick to a budget and build a good credit history.