Cards, cards, cards – they all have the same shape and size, they all have a mag stripe on back, similar numbers and date and your name on the front. How different can they be?
I admit, they all have this in common: you can use them to get stuff. Instead of cash. That’s a lot to have in common! But the next level deeper, they can be so different, it’s amazing.
One of the biggest differences is when you pay for the stuff you get with the card. All cards fall into one of three buckets in terms of the “when do I pay” question. The buckets are:
- Pay before. Put money onto the card. Then you can spend it. No money on card, no stuff.
- Pay now. Use the card. Is there money in your account? You get your stuff. The money will be pulled within a day.
- Pay later. Use the card, if you haven’t used it “too much” recently. You’ll eventually have to pay, with interest if you take your time.
Pay before
In the industry, this is usually called a prepaid debit card. There are two categories of these.
The first kind is usually called a gift card. You can see these hanging on racks near the check-out counters of stores.
As you can see, each is worth a certain amount of money at a given retail store.
Some retailers have gotten pretty creative about their card designs, like this one that is supposed to be for millennials:
What if you just want to give money? Now you can do that. For example:
The second kind of pay-before card is usually called a prepaid debit card, but the key thing about it is that it’s rechargeable, which means you can put more money onto any time and use it for any purpose.
Prepaid debit cards normally have substantial fees associated with using them, because it’s the only way the companies doing the processing can make money. They’re not associated with a bank account, so they’re perfect for people who don’t have one.
Of course, technology being what it is, companies have evolved these categories -- some gift cards are now rechargeable.
The key thing to understand is that pre-paid debit cards are “debit cards” for technical purposes – but they’re NOT associated with a bank account. That’s what makes them easy to buy. Whether they have a bank account or not, people can use pre-paid debit cards anyplace cards are accepted.
Pay now
The industry calls this a debit card. It’s tied to a bank account. When you use the card, you debit the account, which is normally a checking account.
Depending on how you use the card, the actions and underlying technology can be quite different. If you just tell the system it’s a card, it will usually be treated as an off-line debit card, and the charge will be made to your account overnight. If you admit it’s a debit card, you’ll be asked to enter the PIN, just as though you were at an ATM. This is usually called PIN debit. The money is immediately removed from your account.
Pay later
Finally we get to the credit card. It’s a credit card because when you use it, someone is giving you credit for the amount you charge, and will expect you to pay the money back. You are welcome (sometimes encouraged) not to pay on time, because then you have to pay interest on the loan you’ve taken out. Unlike a home mortgage, which is “fixed” credit, the credit card is “revolving” credit, because the money going in and out is like going through a revolving door.
When you swipe a debit card, your bank account is checked to see if there’s enough money to cover the charge or the cash. When you swipe a credit card, your revolving credit line is checked to see if there’s enough credit to loan you enough money to cover the proposed purchase.
Summary
Using a card always involves money. But whether the money is already out of your pocket, comes out when you use the card, or whether it’s a bill you’ll eventually have to pay makes a large difference to you, which is reflected in a large difference in what happens behind the scenes.
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