Using Cards Wisely

Credit Cards, Debit Cards, Gift Cards and What You Need to Know About Using Them

Credit Card
Credit cards give you access to a revolving line of credit, the amount of which is capped by the card issuer. When you use a card to make a purchase, you are borrowing money from the company that issues the card. You sign the card on the back and when you make a purchase, you sign a receipt. The two signatures are then compared to make sure they match. When you buy something by mail, phone or Internet, you provide the card's expiration date and a security code found on the card. Every card comes with a customer agreement. It's important for you to know the terms of that agreement. Simply put: You agree to repay a minimum amount once every billing period and you receive a monthly statement detailing your charges, any interest that may have accrued on an unpaid balance and the minimum payment you must make.

The Positives:

• A credit card can help you establish a positive credit history if it is used responsibly.
• With a credit card you have access to more money than can be safely carried around in cash.
• Credit cards can provide an extra source of money for unexpected expenses.
• Some airline tickets, rental cars and hotel rooms, can only be secured using a credit card.
• If your card is lost or stolen and used without your permission you are not held responsible for unauthorized charges above $50 as long as you report the card missing.
• When you use the card to make purchases, you will have a record of that spending.
• Most credit cards offer warranties against product defects, bankrupt airlines, etc. You may also receive extended warranties and protection from theft and damage for purchases you make with that card.
• Some credit cards let you earn points or offer discounts or rebates on certain types of purchases.
• Stop payments on purchases are possible with credit cards.

The Negatives:

• You may buy more with a credit card than you normally would spend in cash. Credit cards can be used too often and for unnecessary items and debt can add up quickly.
• You pay a finance charge or interest if you do not pay the full amount every month by the due date and sometimes you pay a yearly fee.
• Credit card debt can be compounded by finance charges, a raised interest rate and other fees if payments are missed or late.
• Problems with a credit card can show up on your credit report and hurt your credit history.
• If you get a cash advance on a credit card there are cash advance fees, interest accrues from day one and there is no grace period. The interest rates are also higher for cash advances than for credit purchases.
• Credit cards that offer incentives, like airline miles or other goods and services, often place restrictions on the goods or services or offer services that you don't really need or are unable to use.

Guaranteed Credit Card: A Scam for Sure!
There is no such thing as a guaranteed credit card. Never pay anyone in advance for a so-called guaranteed credit card. If the entity making the offer doesn't steal your "advance payment" outright, what you may end up with is a card that can only be used to purchase certain goods from a particular company. No one can guarantee in advance that you will be approved for a credit card by a legitimate credit card company - you have to apply and be evaluated.

Debit Card
A debit card (also known as a check card or ATM card) is a card that is used to access money in a checking or savings account. Debit cards look like credit cards but operate like cash or personal checks. When you use a debit card, you are subtracting your money directly from your bank account and you can spend only up to the amount in that account. Debit cards can be used at Automated Teller Machines (ATMs) and some types are also accepted at many grocery stores, retail stores, gas stations, and restaurants.

There are different types of debit cards:

• Online cards use transactions called Electronic Funds Transfers or EFTs. There is an immediate transfer of money from your bank account to the merchant's account. To access your account, you enter your personal identification number (PIN) in a keypad, as you would at an ATM. The system checks your account and transfers enough money to cover the transaction. The merchant may charge a fee for this transaction.
• Off-line - These cards are known as check cards, and are linked to your checking account. They are available through your bank and carry a credit card logo (such as Visa or MasterCard). The transaction, while it debits your account directly, resembles a credit card transaction, in that you sign receipt, as you would with a credit card. For a consumer, there is no noticeable difference between using these cards and ATM cards - they were created for merchants who don't or can't process EFTs.
• A debit-check card works both as a check card and as a debit card, allowing you to shop at places that take only credit cards, and also to get cash from an ATM.

The Positives

• Getting a debit card is easier than getting a credit card and will often be issued with a checking account.
• You do not have to carry large amounts of cash or a checkbook and can visit an ATM when you run out of money. This may help you avoid the need for traveler's checks or carrying a lot of cash when traveling.
• You will not build up debt using your debit card.
• Debit cards may be more readily accepted by merchants than checks.
• Government regulations require debit card issuers to hold you responsible for a maximum loss of $50 if the debit card is reported lost or stolen within two days of discovery. Liability increases to $500 if the lost or stolen debit card is reported within 60 days. (After 60 days you will not be able to get any of your money back!)
• There are debit cards that can be pre-paid by a parent for a child. These cards can be used as a financial education tool. The parent "loads" the card with money and carefully monitors the use of the card.

The Negatives:

• The money is immediately withdrawn from your account.
• You are charged a fee for a transaction when you use your PIN.
• Using a debit card may mean you have less protection than with a credit card purchase for items which are never delivered, are defective, or were misrepresented. Returning goods or canceling services purchased with a debit card is usually treated as if the purchase were made with cash or a check; you may be limited to a store credit or have to wait for a refund in the mail.
• If you don't report your card as lost or stolen within 60 days your account can be emptied.

Stored-Value Card
A stored-value card (also known as a pre-paid card) has an embedded computer chip or magnetic strip that contains the value of the card. The money can be accessed by "swiping" the card, using a password, or entering a code number printed on the card into a telephone or other keypad. The issuer keeps track of your balance until all of the money is used up, then the card can be discarded or refilled. These cards are sometimes used as alternatives to checking accounts. There are two types of Stored Value Cards:

• Single-purpose, or "closed-loop," cards - such as a gift card - can only be used to purchase goods at a particular retailer, or for a particular purpose, such as a prepaid telephone card that can only be used to make phone calls.
• Multipurpose, or "open-loop" cards, can be used to make debit transactions at retail locations, as well as receive direct deposits and withdraw cash from ATMs. Some multipurpose cards are branded by credit card companies such as Visa or MasterCard and can be used wherever those cards are accepted.

Stored Value Cards can be obtained in a number of ways. You may get a payroll card from an employer, an electronic benefit card from a government agency, or a phone card or gift card from a retail store. Multipurpose prepaid debit cards are usually obtained by telephone, online, or at check-cashing outlets and money transfer company locations.

The Positives:

• Reloadable multipurpose Stored Value Cards may provide a banking alternative to people who do not have access to a bank account.
• You will not create new credit debt by using a Stored Value Card. You are spending your own money.
• You can book hotel rooms, purchase airline tickets, rent cars, buy concert tickets, shop online and pay bills by phone or the Internet without a credit card.
• Transit system fare cards are Stored Value Cards. They are useful for charging different fares for different services and can automatically discount fares for seniors and persons with disabilities. In some cases they can even be replaced if they are lost, stolen, or damaged.

The Negatives:

• A Stored Value Card does not have your name on it and generally no refund is available if it is lost or stolen.
•  Stored Value Cards do not report spending and payment habits to a credit reporting agency, so having one and using it responsibly won't help build credit or repair damaged credit.
• There can be fees associated with pre-paid cards that can lower its value. Some of those fees include:
  • Entrance/Activation fees
  • Maintenance fees
  • Monthly fees
  • Annual fees
  • Point of Sale fees (using the card in a retail store)
  • ATM transaction fees
  • Out-of-network and/or International ATM transaction fees
  • Transaction limit fees
  • Bill payment fees
  • Phone or online transaction fees
  • Money transfer fees
  • Inactivity fees
  • Dispute fees
  • Reload fees charged by third parties to put more money on the card.

Secured Credit Card
A secured credit card is a card that has been secured by money, provided by you. The money is placed in a bank account by the issuer of the card, and acts as collateral, or a "guarantee" that you will use the card responsibly. The card looks and acts like an unsecured credit card, but if you default on paying the amount due on the secured credit card, the issuer can apply your security deposit to the outstanding balance.

The Positives:

• Secured credit card accounts are reported to the three major credit reporting agencies (CRAs).
• The accounts can be used by consumers who don't qualify for regular credit cards due to having no credit history. They can also be used to repair a poor credit history.
• Some companies will provide an unsecured credit line after a certain period of timely payments.
• Most banks or card issuers will pay interest on your security deposit.

The Negatives:

• Every secured credit card charges an annual fee and those fees can vary dramatically.
• Secured credit cards charge higher interest rates than regular credit cards.
• Some cards will charge an application fee or require that you purchase an insurance policy for a fee.
• Some issuers will report the account to the CRAs as a secured card which may affect your credit report.
• Using a secured card will not necessarily guarantee future approval for an unsecured credit card.
• Once you close the account the issuer may keep your deposit for a few billing cycles.
• Some issuers will charge other fees including fees for cash advances, late payments, charging over the limit, insufficient funds, and for accessing account information.
• Some issuers may limit the number of transactions in a given time period to protect against overdrafts.

Store Charge Card
Store charge cards are credit cards that can only be used at the store that issued them. They often charge a high interest rate: familiarize yourself with the terms of the agreement.

Travel & Entertainment Card
Travel & Entertainment cards are charge cards that function like credit cards but require that you pay off all of your charges in full each month. These cards include cards such as American Express or Diner's Club.

Credit Card Terms and Fees

The Consumer Financial Protection Bureau (CFPB) is the federal agency charged with protecting consumers in the U.S. market for financial products and services. The CFPB's Know Before You Owe: Credit Cards page offers important information about credit cards.

The CFPB takes a survey twice a year of the terms of credit card plans offered by some of the largest credit card issuers in the country. In addition, the CFPB's database of credit card complaints and complaint responses informs the public about complaints. Its database of credit card agreements, from more than 300 card issuers, features general credit card terms and conditions, pricing, and fee information.

Although the credit terms and agreements provided by the CFPB are subject to change and you should contact issuers for current rates, fee, and other types of plans, the CFPB complaint database, credit card plan survey and agreement database are good places to start if you are shopping for a credit card.

• Visit the CFPB website to learn more at www.consumerfinance.gov/credit-cards.

If you have questions about the information on this website contact the Department of Financial Services. If you have questions or concerns about the information offered on the CFPB website, contact the CFPB directly.