Prepaid, Debit or Credt Cards: Which One is Right for You?

There are three main forms of plastic payment cards: prepaid cards, debit cards and credit cards. Each caters to very different needs. Depending on what you are looking to accomplish, you will be able to decide on the best option for your financial situation.

Prepaid Cards

Prepaid cards allow you to place a sum down with a card issuer in exchange for a card in a given amount. There are activation fees associated with the process, so the card will always be issued in an amount slightly lower than what you paid. This option is helpful if you will be traveling and prefer to carry cards than cash. It is also a very good option for people who do not have the financial wherewithal to qualify for other cards. Prepaid cards allow anyone with cash to obtain a card in order to reserve hotels, flights and other items that require card payments.

Unfortunately, the benefits of these options stop there. They do not help build credit, and they do not allow you to make any purchases on borrowed money. In addition, the fees to reload and use the cards can make them much more expensive than simply paying cash would be.

Debit Cards

Debit cards are often called "check cards" because they are connected to a checking account. The limit on the debit card is the same as the total amount of funds in a checking account at any given time. Some banks may set lower daily limits to help avoid overcharging. The main benefit of a debit card is its flexibility. It can be run through any credit card machine and even appears like a credit card in the processing phase. Debit cards are accepted at every major retailer as a result.

The downside of debit cards is they are, once again, not a form of debt so they do not help your credit. You will also be spending personal money and not have the option of spending borrowed funds. Debit cards can lead to overdrafts if you are not very watchful of the spending and balance in your account.

Credit Cards

Credit cards are the riskiest form of plastic payment, but they also present the highest possible rewards. Credit cards allow you to spend money you do not have. Unlike other debt, credit cards give you the chance to decide when you will pay down your debt and when you would rather allow interest to accumulate instead. This gives you extreme flexibility in payments, and many people find they can increase their standard of living through using credit effectively.

Unfortunately, if those people are not responsible, they will end up with large and unmanageable debt in the long run. Credit cards have some of the highest interest rates of any loans on the market. In addition, missing even one payment can drop your credit score tens of points. Since credit cards usually have variable rates, missing payments can lead to even higher interest rates and higher financing fees in the long run. This option is only for people who are able to manage credit effectively.

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