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. 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). 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.
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 advantages 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 prepaid card
As the name indicates, this card needs to be topped up before it can be used. There is no (mandatory) link with a bank account; it’s the alternative to carrying petty cash around. Some companies offer these cards to their employees to avoid handling of cash in the company restaurant and vending machines.
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. 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.