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Pick Your Plastic: Choosing the Right Card Isn’t Easy

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If you’ve never carried plastic and are thinking now’s a good time to start, the number of card choices might surprise you. Choosing the right kind of plastic isn’t easy. You’re about to enter a world with such product offerings as credit cards, charge cards, retail cards, petroleum cards, secured cards, debit cards, and prepaid debit cards. They’re all different and they all have pros and cons. Before you decide on which card is right for you, here’s what you should know about each of your options:

Credit Cards

A credit card is an extension of credit by a bank or other financial institution. You’re given a card under the condition that you agree to pay back any monies owed, plus fees and interest if applicable. The amount of money that you can “charge” on a credit card is called a credit limit. The limit defines the maximum amount you can spend on the account—it’s your spending capacity. For example, you might apply for a credit card and get approved for a $10,000 credit limit. Your maximum spending capacity would be $10,000.

Pro: Credit card usage is generally reported to the credit reporting agencies. If managed responsibly, credit cards can be a smart, inexpensive way to build and maintain solid credit and credit scores.

Con: If not managed properly, credit cards can lead to overwhelming credit card debt. Missing payments, paying your bill late and getting into excessive debt can hurt your credit and lead to lower credit scores. However, if you pay your bill on time and stay out of debt, a credit card can actually be a great way to help your credit scores.

Charge Cards

Charge cards are exactly the same as a credit card except for one important difference.  A charge card must be paid in full, each month. Credit cards, on the other hand, allow you to make a small minimum payment and then “revolve” the rest of the balance to the next month.

This is one of the reasons why a charge card may be a better option when choosing your plastic.  With a charge card you can’t get into credit card debt because every 30 days you pay the balance in full, which is one of the reasons why a charge card may be a better option when choosing your plastic. These cards make money primarily on annual fees and they are reported to the credit reporting agencies.

Pros: Because you are not able to “revolve” a balance from month to month, a charge card may be a better option when choosing your plastic. With a charge card you can’t get into credit card debt because you pay your balance in full every 30 days. Charge cards are also reported to the credit reporting agencies and can be a great way to build or maintain solid credit scores if managed responsibly.

Cons: Charge cards primarily make money on annual fees, so you can expect to pay an annual fee if you choose to go with a charge card. Just like credit cards, missing payments, making late payments, or not being able to pay your bill in full at the end of the month, etc., can hurt your credit and lower your credit scores.

Retail Cards and Gas Cards

Many people consider retail and gas cards to be the same thing. Retail cards are issued by a financial institution and are branded with the logo of a retail store or chain. The card can only be used at that chain of stores. Like retail cards, gas cards are also issued by a financial institution and are usually only usable at certain gas stations. The lure of these cards is usually the in store savings or gas rewards.

Pros: The activity on these types of cards is reported to the credit reporting agencies and can be used to build your credit reports and credit scores—as long as you manage them responsibly, of course.

Cons: Interest rates on these cards are normally much higher than traditional credit card interest rates. If you don’t pay your balance in full each month you could end up paying more than the savings or rewards that attracted you to the card to begin with.

Secured Cards

A secured credit card is issued by a bank, but only after you’ve made a deposit with that bank. The card is then issued with a credit limit equal to your deposit. So, if you deposit $500 into a bank account the bank would issue you a credit card in return with a $500 credit limit.

The deposit acts as security for the bank.  Any purchases you make on the card are essentially already paid for in advance by your deposit. This might give the impression that a secured card isn’t a true credit card product, but that’s not the case. When you use a secured card the payment for your purchases does not come out of your deposit. You will receive a statement at the end of the month with a payment due and a payment due date, just like a regular credit card. The security deposit is only applied to your balance if you default on your payments.

Pros: Secured cards can be a great way to establish and build credit for the first time, as long as the account is reported to the credit reporting agencies. Because you secure the card with a cash deposit, secured cards are fairly easy to qualify for.

Cons: Secured cards require a cash deposit so you need to come up with the cash up front to get the card. Another downside to secured credit cards the low credit limits, which are tied to the total amount of your deposit and generally range from $200 to $1,000, making them easy to “max out” with only a few charges. If you’re using a secured card to build or establish credit, you should limit your spending to keep your revolving utilization percentage – the proportion of your balance in relation to the credit limit – as low as possible to avoid lowering your credit scores. Shoot for below 10%.

Debit Cards

The best way to think of a debit card is to view it as a plastic check. The debit card is issued by a bank or financial institution where you have a checking or savings account. A debit card works like a credit card but purchases are funded by the money in your checking account instead of by a line of credit extended to you by the bank..

Pros: With a debit card you can only spend up to the amount of money in your checking account, which means you can’t get into debt and you won’t pay interest.

Cons: A debit card is not a true extension of credit. As such, your debit card usage is not reported to any of the credit reporting agencies and cannot be used to establish, maintain or rebuild credit reports or credit scores.

Prepaid Cards

Prepaid cards are simply a variation of debit cards. The primary difference is that the money used to cover your purchases on a prepaid debit card is actually loaded on the card itself. This is why prepaid cards are often called “stored value” cards. To get a prepaid card you would actually go and buy it and then load money onto it. You would not have to apply for it because it’s not an extension of credit by a lender that would require them to make a decision about your credit risk.

Pros: You can then use the card like you’d use a credit card but you’d never incur interest and you’d never get into debt.

Cons: The downside to these cards is that they do not help you to build or maintain a credit report or credit score and the list of fees is usually fairly extensive, especially to access your own money.

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