The Basics: An Overview of Card Types

The process of writing checks has been replaced with the use of debit cards and most retailers offer gift cards these days (the plastic equivalent to the paper gift certificate).  Paying at the pump has brought 24/7 refueling without the need for gas attendants.  Phone cards allow you to call across the country and international, even if you don’t have long distance enabled.  Even food stamp coupons have been transformed into cards.  It seems everywhere you look today, there’s a card for it.  In this installment of The Basics, we’ll look at the different payment card types and explore the similarities and differences between them.

Credit Cards allow a cardholder to make purchases and carry a balance up to a certain credit limit.  The cardholder can pay their balance in full each month, or they can choose to make partial payments over time.  This is known as a “revolving” balance and a finance charge is applied to the outstanding balance each month.  A minimum payment is required by a specified due date to avoid late-payment penalties on credit cards.  Credit cards are generally safer to use online than debit cards since they come with better fraud protections and don’t tie directly to a cardholder’s bank account.

  • Rewards Cards, just as the name suggests, are credit cards that earn rewards from purchases made using the card.  Rewards typically come in three varieties: points, cashback and travel.  Points are usually redeemed for merchandise, cash, or giftcards.  Cashback rewards generally apply as credits on a cardholder’s next bill or deposits into a bank account held with the issuer.  Travel rewards often come in the form of miles, that can be redeemed for airline tickets, car rentals, hotel stays and other travel expenses.  Rewards cards are very popular with consumers who can earn rewards on purchases they would make anyway.  The cost of these rewards are commonly covered with a combination of annual fees, high interest rates, higher processing costs to merchants that accept them and by the issuers themselves who hope to entice cardholders to use the card for more purchases, thereby increasing the issuer’s interchange income.
  • Business Cards provide business owners an easy way to separate their personal transactions and business transactions.  Various rewards and perks can accompany business cards and they can be credit or charge accounts.
  • Student Cards are designed specifically for college students as a way for these young adults with little or no credit history to get their first credit card.  Generally, it is easier to get approved for a student credit card than another type of credit card.  Occasionally, additional perks like rewards may come with student cards, but these may have caps that other rewards cards don’t.
  • Secured Cards require a security deposit to be placed on the card and will typically have a credit limit equal to the deposit made on the card.  The secured credit card is an option for consumers who don’t have credit history or who have damaged credit.  A cardholder is still expected to make monthly payments on the balances incurred, so this provides a way to build or repair credit.
  • Limited Purpose Cards are like credit cards that can only be used at specific locations.  Gas and store credit cards are examples of limited purpose cards.  These are also known as closed-loop credit accounts.

Charge Cards are non-revolving credit cards that do not typically have a preset spending limit.  At the end of the monthly statement period, the cardholder is responsible to pay in full for all charges incurred during that month.  Basically, the balance is the monthly minimum.  Late payments with these cards are subject to a fee, restrictions on charges, or even card cancellation depending on the agreement.  Government and corporate purchase cards are examples of charge cards.

Debit Cards link to a cardholder’s bank account instead of drawing from a line of credit, which allows instant access to cash from ATMs around the world and at numerous retail point-of-sale locations.  These effectively combine the functions of an ATM card and checks.

  • PIN Debit cards use a Personal Identification Number or PIN, to authorize transactions.  These transactions run through ATM or PIN debit networks which are similar to credit card networks, but have meaningful differences in terms of the governing rules and interchange fees that apply to it.
  • Signature Debit cards are many times the exact same card as PIN debit cards, using the same Primary Account Number (PAN).  The difference is the routing of the transaction through the credit card networks, using a signature instead of the PIN for authorization.  These debit cards will have a card association’s logo on it and the card can be used anywhere that card brand is accepted.

Prepaid Cards are similar to debit cards but aren’t tied to a checking account, but an account typically held by the issuer.  The cardholder ,or someone acting on behalf of the cardholder (for instance, the purchaser of a gift card), must load funds onto the card before it can be used.  Also known as stored-value cards, purchases are withdrawn from the loaded “value”, and the spending limit is dependent on the current funds loaded onto the card.  Finance charges and minimum payments do not apply to prepaid cards since the balance is withdrawn from the deposited funds.

  • Closed-Loop or single-purpose cards are limited to use with the merchant that issued the card.  Store-branded gift cards and prepaid phone cards are examples of closed-loop prepaid cards.
  • Open-Loop or multipurpose cards are accepted at more than one merchant.  The most common are prepaid gift cards branded with one of the major card associations.  Consumers can use these prepaid cards at any location that accept credit or debit cards bearing the card associations’ logo because they operate over the card associations’ network.  Health savings and dependent care accounts, payroll cards, Electronic Benefits Transfer (EBT) cards are other examples of open-loop prepaid cards.


Card Summary

Credit Card Charge Card ATM/Debit Card Prepaid Card
Fund Source Line of credit extended to the cardholder by the card issuer. Line of credit extened to the cardholder by the card issuer. Tied directly to the cardholder’s checking account. Funds have been pre-“loaded” by the cardholder or someone else.
Credit Limit Limit established by Issuer May or may not have a limit. Limited to available checking balance. Limited to the current stored “value”.
Network Card Association Networks Card Association Networks ATM/PIN Debit Networks (PIN) or Card Networks (Signature) Card Networks or Open/Closed-Loop Networks
Examples Visa, Mastercard, Discover, American Express Corporate Purchase Card, Government Purchase Card Bank Card Payroll Card, Gift Card, Phone Card, EBT