Although credit, charge, and debit cards may seem identical and share the same corner in your wallet, they each offer unique benefits and carry their own pitfalls. This article can help you decide which might suit your needs best.
Credit cards typically have a set spending limit, based on your credit history and income level. This limit can be as low as $500 or upwards of $25,000. You can carry a balance on these cards, month to month, with an obligation to pay interest on it. Credit card issuers could increase your spending limit as you keep up with regular payments and increase your spending. But, habitual late payments or missed ones could lead to a reduced limit, or worse, revocation of your credit privileges. It's imperative to shop wisely for your credit card. Alluring options like zero annual fees may come hand in hand with exorbitant interest rates, sometimes as high as 30%.
Charge cards are not as widespread as they once were. Still, companies like American Express and CapitalOne continue to offer them together with traditional credit cards. These cards are fundamentally different from credit cards in two ways: on the one hand, their balances typically need to be paid off in full every month, and on the other hand, they do not have a defined spending limit. Conditioned by your spending pattern, the card issuer adjusts this limit from time to time.
Debit cards are a bit like a digital version of checks. Any purchase with a debit card gets debited directly from your linked bank account. If the account runs low on funds, your card payment could be declined. The upshot is they can help curb excess spending. However, they have the downside of fewer protections against fraud and they don't contribute to building a credit history.
Credit, charge, and debit cards are all convenient alternatives to carrying cash, and if you leverage perks programs offered by credit and charge cards, you can accrue benefits like airline miles with every purchase.
On the flip side, credit cards can present a risk to your financial health. With high interest rates, minimal monthly payments can cause the final cost of a purchase to skyrocket over time, leading some consumers into a debt cycle.
To sidestep such pitfalls, it's essential you remain mindful of your spending habits. Keeping up with the minimum monthly payment doesn't indicate that the purchase is affordable. In reality, it signifies you'd be taking on a certain amount of debt with an increased total cost due to added interest. So, choose wisely!