Debit Cards and Prepaid Cards
Debit cards look a lot like credit cards, but they're really banking cards masquerading as plastic. You can use debit cards to withdraw money from your account or to pay for purchases online or at stores. They may not look as fancy as credit cards, but they have some definite advantages:
- The money gets taken directly out of your bank account right away.
- Since you're using your own money from your own bank account, there's no interest. After all, you're not borrowing anything.
- You can't spend like crazy; whatever you have in your account is what you can spend.
So with all these advantages, why isn't everyone using debit cards only and giving MasterCard and Visa the one finger salute?
Sure, you can't go into debt with a debit card, but that doesn't mean you can't get into trouble.
- Since it's so easy to swipe a card, you may overspend and leave nothing in your account to pay for rent, food, and other essentials.
- If you find yourself in a financial jam—like needing a $100 textbook when you only have $50 in the bank—a debit card won't come through for you.
- Debit cards also won't tend to improve your credit rating the way credit cards can.
- Debit cards can be less secure than credit cards. Since debit cards are live wired directly to your bank account, they can potentially let someone access your money. Your credit card may give you back your money if your card falls into the shady hands of identity thief, but with debit cards, you may have to work a little harder with your bank to get your money back.
And, of course, debit and credit cards aren't the only kids on the block.
Prepaid cards are similar to debit cards, but you frontload them with money. They kind of work like a gift card: you pre-deposit the money you want to spend on your prepaid card and you can spend up to that amount—and that's it. Parents who have teenagers sometimes hand over prepaid cards to let them spend money without having to resort to cash or real credit cards.