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Credit, debit,
pre-funded - it can be hard to keep track of all the different
cards available today. It's easier, though, when you know how
different types of cards work.
Think credit cards, think loan
When you use a credit card, you take a loan from the company
or bank that issued the card. Your purchases are totaled on a
monthly bill. In most cases, if you pay that bill in full and
on time, you'll owe no interest. Pay the minimum, though, and
you'll get socked for interest - plus late fees if you pay
after the bill is due - on the money you've borrowed. Visa,
MasterCard and Discover are all examples of credit cards. It's
important to remember many, if not all, credit card issuers
won't issue cards to people who don't meet the issuer's
minimum age requirement.
Debit cards take money directly
from your account.
Debit cards, sometimes called ATM cards, look and are used
like credit cards - but they aren't. Instead of drawing on a
line of credit, they act like a check, moving the amount of
your purchase from your checking or savings account to the
merchant. Generally you can't use a debit card to spend more
money than you have in your account. That's bad if you want a
loan, but great if you're concerned about avoiding
overspending or interest and late fees. Debit cards are
typically available from your bank or credit union. Different
issuers may have different age restrictions, a situation which
is also true for credit cards.
Pre-funded cards have preset
limits.
Overspending is no problem at all when you use pre-funded
cards. These cards are linked to an account funded with a
certain amount of money. When you use the card, some of that
money is moved from your account to a merchant. When you run
out of money, you or your parents can replenish the account
with more cash, allowing you to make more purchases.
Pre-funded cards can be a good way to learn about using a
credit card - but keep in mind that they do nothing to help
you establish a credit history. A variety of banks and credit
issuers offer pre-funded cards.
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