Each type of payment card has pros and cons—reasons to use the card, and reasons why another type of card, or cash, would be a better option. It’s a good idea to know each option’s advantages and disadvantages so that you can make smart choices about which card or cards to carry.
Credit cards are your only option if you want to finance your purchase over time. They also offer the strongest consumer protections in case of a dispute with a merchant, a billing error or an unauthorized charge. Many credit cards offer “cash back” or other types of rewards, plus benefits such as rental car insurance or extended warranty on purchases. Used responsibly, they can help you build a positive credit history.
Because credit cards allow you to carry a balance, they make it possible to spend more than you can afford and to accumulate debt. If you’re late with a payment or two, you will not only incur late fees, you could see your interest rate skyrocket and stay there for months, and your credit may be damaged. Even
if you’re able to manage the minimum monthly payments, the ongoing finance charges on a large revolving balance are detrimental to your financial health.
Charge cards don’t automatically allow you to carry a balance, which means you get the convenience and protection of a credit card without the risk of accumulating debt and having to pay finance charges. Charge cards have always been known for the exceptional rewards programs and benefits they offer,
especially for travelers. And they affect your credit score in the same way as credit cards—an advantage if you manage the card responsibly. A charge card generally is not an option if you don’t already have good credit.
Debit cards’ biggest advantage may be that they truly don’t let you carry a balance since the money for all your transactions comes directly out of your savings/checking account. They also extend some valuable consumer protections—limited liability for fraudulent transactions, for example—though they aren’t as strong as those offered by credit cards. For example, you don’t have the same rights to withhold payment in the case of a dispute with a merchant. And, while stolen money will be restored to your account in most cases, you could lose access to at least some of your funds temporarily.
Prepaid cards can be a solution for consumers who can’t get or don’t want a traditional credit card or debit card, and for anyone who wants to avoid any risk of accumulating debt. While prepaid cards are not required by law to offer all the same protections that credit cards automatically provide, many issuers extend similar protections voluntarily.
Because you’re not borrowing money, a prepaid card will not help you build a credit history, and it won’t help you through an emergency if you don’t have the needed amount of money already loaded onto the card. You may not be able to use your card to make airline, hotel and car rental reservations, though
you should be able to pay the final bill with your card. But the biggest drawback to prepaid cards may be their many possible fees, including activation, ATM access, monthly “maintenance” and “reload” fees. As competition has increased, the fees on many prepaid cards have become much more reasonable and
may be less than the cost of using a check-cashing service, particularly if you use direct deposit to “load” the card. But you still need to shop around and figure out the potential cost based on the way you plan to use the card.
Gift cards are more personal than giving a check (you can choose a card for the recipient’s favorite store or restaurant, and some allow personalization), while still allowing the recipient to choose exactly what he or she wants. They’re easy to send by email or mobile phone, and they’re also safer than cash if you register them with the issuer online.
There could also be a purchase fee, paid by the person who buys the card. Perhaps the biggest drawback to gift cards is the fact that many go unused. They also may not have adequate protections for fraud or theft. And if the issuing company files for bankruptcy, outstanding cards can become worthless.