Credit, debit, and prepaid cards—what’s the difference?
You use them every day but what is the difference, actually? Let’s get to the heart of the matter so you can decide what’s best for you.
7 min read
Around the world, people often misuse the term “credit card”—and it’s pretty easy to see why. While credit, debit, and prepaid cards have a lot of things in common (like expiration dates, payment providers like Mastercard and Visa, and actual card numbers) they are all pretty different.
Here’s a quick rundown on what separates them and how to choose what’s best for you.
Debit cards: the safe bet
Cards linked to your current/checking account
Debit cards allow you to carry out transactions with the money available in your account. Most of these cards are either Visa or Mastercard, and they are accepted worldwide.
These cards are linked to your current or checking account. All your payments or withdrawals are debited directly from your bank account. So there’s no risk of spending more money than you have. All N26 Mastercards are debit cards.
If you have this type of card, it’s recommended that you regularly check changes in your account balance so that nothing goes awry. With Mastercard and the N26 account, you receive real-time notifications on your mobile phone so that you’re informed about everything that’s happening with your account. That helps you monitor your budget, which makes it easy to check in real-time in the N26 app if you have enough money to go out to a restaurant—so your payment isn’t declined.
Some banks offer an authorized overdraft if you qualify. These overdrafts are always limited in the amount you can spend. And they also charge high interest rates based on the amount and time your account balance stays negative. So an overdraft is never free and can be pretty expensive.
Instant debit cards are the cheapest on the market and the most popular. They are perfect for daily use at home or abroad, regardless of your budget.
Services: premium or standard?
The benefits that come with your debit card depend, of course, on your account. If you get a premium card, it normally comes with benefits like warranties for your purchases, insurance coverage for your trips, and so on.
All these benefits depend on your bank.
You’ve likely already heard about gold or platinum cards. At N26, we offer two cards with exclusive benefits: N26 You and N26 Metal.
These accounts have very stylish Mastercards. The card for N26 You comes in a choice of 5 colors—Ocean, Sand, Rhubarb, Aqua or Slate. The N26 Metal card is constructed out of stainless steel. They’re sleek and minimalist, with the card number and expiry date on the back of the card. They’re also flat, without the raised numbers of most cards. The embossed characters on most cards are leftover from the days when card numbers had to stand out from the card so that special card reader machines could read them. Nowadays, card readers are all electronic and read the information directly from the card chip. So there’s no need for old-fashioned, bumpy cards.
Credit cards: the Anglo-Saxon model
The advance principle
Credit cards, which first appeared in Anglo-Saxon countries, are very different from debit cards. Instead of having your bank transactions debited from your account, your bank pays the sum directly and then grants you a credit. Once a month, you have to pay your bill or invoice, at least in part. In other words, you wait until the end of the month before paying what you’ve already spent. In continental Europe, generally you have to pay it all back at the beginning of the next month. In the US and the UK, you can pay back just a part (generally with higher interest rates).
In this way, the money you spend is actually loaned to you by your bank or the payment institution that issued the card to you.
This is why these cards are called credit cards. You also sign a credit agreement when you apply for the card. You, along with the card-issuing institution, choose the ceiling for your revolving credit. It’s advisable to choose a reasonable limit, and one that takes your income into account. With these cards, you can make payments and bank transactions, just like with a debit card.
Since 2016, deferred debit cards have been regarded as credit cards. With a deferred debit card, your account balance remains intact until the day your total monthly spending is deducted. Rather than having revolving credit, your card is connected directly to your account. Your total spending gets deducted all at once at the end of each month. Withdrawals, however, are deducted immediately.
Credit cards can have nasty surprises
If you choose a credit card, just remember you have to be a bit careful. While you’re allowed to spend as you’d like, you can also spend more than what you have in your bank account.
A new pair of sneakers, a backpack for the gym, and a round-trip flight to Barcelona, all in two weeks? It can be tempting to spend extravagantly, but then you’ll find yourself unable to pay the bill at the end of the month. Credit cards carry a high risk of getting you into debt. And if that happens, the interest rates can be almost as high as the original bill.
On top of that, credit cards often come with yearly management fees, which can be costly. So it’s best to keep an eye on how much you’re spending so you don’t wind up unable to pay it.
Prepaid cards: the newcomers
The new payment method without a bank
Like credit cards, prepaid cards showed up in Anglo-Saxon countries, long before they were marketed across the Eurozone. That only came after the SEPA law was ratified in 2009. Since then, the supply of prepaid bank cards has exploded.
What is a prepaid bank card? These cards let you spend money without having it linked to a bank account.
On top of that, you can generally do all the usual banking transactions you can with an account: withdrawals, transfers, card payments, etc. You just have to put money on the card first. Once the money is spent, you can’t spend anymore until you reload it.
With prepaid cards, you don’t necessarily have to open a separate account. The payment provider will set up an electronic wallet with an online account (also known as a bankless account). For many transactions, these institutions don’t need to go through a bank.
Prepaid cards can be anonymous—if you don’t load over €1,000—and they can be non-transferable. Some payment institutions also provide slips with your banking details. They can be in your name or in the name of the issuer. In the latter case, your card reference must be named when receiving a transfer.
Prepaid cards have limited services
The biggest drawback of most prepaid cards is that they often impose limits on withdrawals, loading, or annual payments. Annual payments vary by issuer. If they are too low, they may become an obstacle to using a prepaid card on a daily basis.
Plus, many payment institutions don’t have a banking license. Which can be risky because it means that your money isn’t insured by a deposit guarantee fund. Therefore, you’d likely lose your money if the issuer went bankrupt.
How can you choose?
To better find what you need, here are four things to consider before you choose.
Check where your card is accepted. Can you use it everywhere you go? What about in your home country or abroad?
Find out about the proposed rates and the fees that you may be charged (for overseas withdrawals, foreign currency payments, international transfers, etc.)
Be sure that the account or card meets your financial needs (premium services, insurance, or guarantees for your purchases, etc.)
Verify that your money will be insured (fraud protection, banking license, guaranteed deposit amount, etc.)
N26 offers debit accounts and Mastercard debit cards that are accepted worldwide. Depending on your needs, you may go with a free account or a premium membership plan, either for personal use or your freelance business. There are no income or deposit requirements. Plus, you can enjoy all the features of the N26 app. Customer service is also available English.
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