5 different ways of paying with plastic

How many plastic cards do you have in your wallet? Do you know for which purpose you should use each? Or even if you need a different type of card? Here’s a quick check guide to help you out with paying cards.

The debit card

It’s the simplest of bank cards – the V PAY card here in Luxembourg (formerly Bancomat). The card debits the purchases in real time and only if there is enough balance on the account, hence the name. No balance, no payment, and you get an ugly look from the person standing in line behind you.

It’s the ideal card if you want to keep an eye on your budget as it doesn’t allow you to overspend. A debit card is appropriate for younger consumers (in Luxembourg available as of 12 years of age) as it combines the right amount of security: PIN code and no overdrafts. In some countries it’s combined with the student ID of the college, which I believe is a nice way to kick off the financial education of young minds.

If you have a regular income or other assets, your bank might offer you a credit line on your current account, and in this case your debit card adopts some features of the credit card that we discuss in the next paragraph.

The credit card

The queen of cards. There are many different types and they offer many possibilities other than cashless payment, from differed repayment to additional guarantees on purchases.

These cards represent a pre-approved consumer loan: you purchase and you pay later on. Depending on your conditions and your agreement with your bank, you can pay the balance all in one specific day of the month or you can pay in instalments. You can sometimes also opt for a credit card without credit line; in this case the two advantage versus a standard debit card is the acceptance of the “brand” of the credit card in certain establishments and the additional features (insurance and assistance linked to paying with your credit card).

Credit cards usually have yearly fees and even fees in case of renewal. And, of course, borrowing money costs money! Pay attention to the interest rate applied and the mechanism of deferred payments, as well as any penalties that might apply in case you miss a payment.

The charge card

I’ve never seen this card myself; it’s not so frequent in these parts of the Globe but you can read more about it here.

Often times confused with a credit card, the charge card is very similar except that it does not have a spending limit and it does not involve a credit facility: you purchase and you pay back your debt later in full. There is no interest in the debt you owe the financial institution, but late fees will apply if you don’t meet the deadline – and you risk your card being blocked.

The prepaid card

As the name indicates, this card needs to be topped up before it can be used. There is no necessary link with a bank account; it’s the alternative to carrying petty cash around. As such, they are often used for small payments like parking or transportation systems – remember Minicash? Some companies offer these cards to their employees to avoid handling of cash in the company restaurant and vending machines.

The main drawbacks of these systems are the location of charging stations (never one near you when you need it!) and their incompatibility with one another, forcing the consumer to carry around a myriad of cards. Also, our habits as consumers are rapidly changing and new versions of prepaid cards appear, like the cyber cards, which are oftentimes prepaid cards – but since they are purely digital, not plastic, we’ll discuss them in another post.

The customer/store card

Ever wondered what’s the difference between the credit card of a big retail chain and your bank’s? They don’t oblige you to change banks or open a new account, they offer you similar instalment payments and extended guarantees… and you get loyalty points!

The main difference (and drawback) of these customer cards lies with the interest rate they charge for the instalments. These credit interests can be as high as 24% per year, and are often shown on a monthly basis (so they only show 1,2% or 2% per month). This is not a bad thing in itself if the rewards you earn from using the store card, like discounts on purchases or additional guarantees (especially interesting with airlines and electric appliances) are sufficiently important to counteract the additional cost of the credit.

It’s important to know what you can do and what you should avoid with the different cards you own. Make sure you take the time to read the conditions and tariffs, and in case of doubt, ask your bank or your financial advisor!

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