Understanding Payment Cards
In 2015 digital payments for goods and services overtook cash for the first time – 48% of transactions were paid for in cash, the rest were almost all in the form of digital payments, with some still in the form of cheques. When you also consider the growth of online ordering and decline in the number of high street bank branches, it is more essential than ever to use some form of card or other digital method. Below, we have looked at how different types of payment card work and how you can stay secure when using them.
How Debit Cards Work
The most common form of card, nearly everyone with a current account will have a debit card they can use to make electronic payments. They are much like cash in the sense that you are spending the funds you have available (either from deposits or overdraft) and payments are deducted from your account straight away. In reality, it may sometimes take a day or two for payment to come out, while transactions are processed and sometimes this can lead to becoming unintentionally overdrawn if you have insufficient funds.
Debit cards typically don’t have transactions charges for withdrawing cash or for making purchases and can be used almost as widely as cash.
How Credit Cards Work
Although similar in terms of how they are used for purchases, credit cards are completely different from debit cards in that they give you access to a line of credit from a lender, rather than your own money. How much you are allowed to spend and how much you will be charged in terms of interest is decided by the lender based on your credit history and application.
The benefit of using a credit card is the availability of credit on an ongoing basis, expanding the funds you have available to make short-term purchases. Credit cards also offer protection under the Consumer Credit Act against breach of contract or misrepresentation on purchases over £100 up to a value of £30,000, for example, if you ordered something from a company that then went out of business.
Because credit cards involving borrowing, they will also involve paying back interest on purchases. If you do not pay off your full balance straight away, you will be charged interest on the debt that remains. To calculate how much you will have to pay back over the course of a year, you will need to consider the APR (Annual Percentage Rate).
This is a combination of the amount of interest you will be likely to pay plus any other fees that may be incurred, it can sometimes be difficult to understand as it will vary depending on circumstances. You will also not necessarily get an advertised APR, as this only has to be offered to 51% of successful applicants to qualify as the ‘representative APR’.
Credit cards can be bad thing if you are over-reliant on them or are making purchases that you will not necessarily be able to pay back. It can be easy to let your credit card balance get out of control, which is why it’s so important to remember that typically debit cards let you spend your own money, while credit cards let you spend someone else’s.
How Pre-Paid Cards Work
Pre-paid cards are an alternative to debit cards that allow you to ‘charge’ them with cash. This can usually be done over the phone, online, in shops or at cashpoints, much like you would top up a pay- as-you-go-phone. They tend to be more useful for tourists, young people who don’t have a bank account or people whose financial history makes it difficult to get a debit card.
An advantage of pre-paid cards is they prevent you from over-spending as you can only spend what is loaded on the card, they also offer many of the same features of debit cards in terms of their flexibility, without the need for a current account.
There are also distinct disadvantages to using pre-paid cards – usually there are fees associated with topping up or with using the card for certain transactions and there may be certain things you cannot use pre-paid cards to buy. They offer less protection against fraud or breach of contract and typically have a limit to how much you can carry on a card at any given time.
Staying Safe When Using Cards
In many ways using cards can be a lot safer than carrying around sums of cash, however, card fraud is also a huge criminal industry. There are certain steps you can take to protect yourself - some are more obvious, like never sharing your PIN code or not storing card details on your computer.
However, fraudsters may attempt to steal information by physically taking your card – either by hijacking a legitimate cashpoint machine or by ‘skimming’ your card details when you pay for a legitimate transaction. They will then use your card’s details to make fraudulent purchases, or more likely will sell the information online e.g. on the dark web.
Phishing is a way of getting personal details via email or telephone communications – you should be wary of anyone who asks you for financial details unless you are 100% sure they are your bank or card issuer. Lookout for unusual spelling or an unusual website domain and don’t assume an email is official just because it looks like it is.
If you are concerned about your financial information being stolen, the Equifax Identity Watch Pro product gives you personalised daily alerts, within 24 hours of a change on fraudulent activity that may harm your credit report. It is available for £9.95 a month.