Confused about card types? Our simple guide will explain the differences between a credit card, debit card and charge card.
Credit Card
Most people will be familiar with the concept of a credit card. You can use it to make purchases and at the end of each month you must pay the bank a minimum amount. It's usually about 2.5% of the total balance, so if you've spent $1,000, you need to pay $25. You can, of course, choose to pay more and many people pay off their balance in full each month in order to avoid paying interest.
If your card doesn't have an interest free period, you'll begin accumulating interest as soon as you make a purchase or as soon as the bank sends your monthly invoice (depending on your bank). Usually, the bank calculates how much interest you owe each night, so it can compound quickly.
You can also use your credit card to get a cash advance by using your card in an ATM. Cash advances are not recommended as you begin accumulating interest on the amount immediately (even if your card has an interest free period). Also, the interest rate for cash advances is usually higher than the advertised interest rate for purchases.
Debit Card
There is some confusion around the term 'debit card'. It can mean your normal EFTPOS card linked to a savings account (to avoid confusion we'll refer to these as EFTPOS cards).
It can also be a type of credit card (like the Visa Debit Card). These cards are similar to credit cards - you still press the 'credit' button on the EFTPOS terminal, they have a Visa or MasterCard logo on them and they're accepted as widely as a credit card. The only difference is the money is yours. When you make a purchase, they money is deducted from your savings account, just like it would be if you used your normal EFTPOS card.
So why have one? A debit card gives you the acceptance of a credit card (so you can shop online or take the card overseas) without the risk of owing the bank money. The eligibility criteria are very lenient (because the bank doesn't have to lend you anything!) which makes it ideal for students.
Unlike a credit card, you don't pay any interest.
Some debit cards have an 'overdraft' feature. This is a small credit limit (usually only $500 or $1,000) which allows you to continue using your card if your savings account runs out of money. However, there is usually a fee and you will pay interest on any amount you owe.
Charge Card
Charge cards are uncommon in Australia and the term is sometimes used synonymously with 'credit card', however they are different. A charge card, unlike a credit card, requires you to pay the balance in full each month. You cannot make small incremental payments toward your balance (if you fail to pay the balance in full, you can receive a severe fee).
So why have one? Like a credit and debit card, a charge card gives you greater acceptance than a normal EFTPOS savings card. They also sometimes have a loyalty or rewards program.
Governments and large businesses favour charge cards as a way of tracking and managing the expenses of their employees, without accumulating interest or requiring their staff to use cash funds or be reimbursed.
American Express, Diners Club and Discover all offer a range of charge cards.
Some charge cards also have an 'extended payment' option, which allows you to make big purchases (usually over $250) on your charge card and pay them off slowly over time.
