A2 Card Payments
Debit Cards
Debit cards are payment cards that link directly to a person’ bank account. The user can withdraw cash from an ATM (cash machine) or make payments to businesses using a card machine or online. When the transaction is made, the money is deducted from the payer’s bank account. If the payer does not have enough money in their bank account to make the purchase and they haven’t arranged an overdraft, the payment will be declined.
Benefits of paying with debit cards include;
Easy to use (tap, swipe or chip and pin)
Easy to obtain (usually upon opening a bank account)
Widely accepted as a payment method.
Safer than carrying cash.
Avoids debt as payments will be decline if no money is available
Drawbacks of paying with debit cards include;
Less fraud protection than credit cards.
Spending is limited to the amount in the bank account
Can result in overdraft fees.
Spending does not add to credit score
Credit Cards
Credit cards are payment cards that can be used to pay merchants for goods and services. Every time the user makes a payment, they are borrowing money from the card issuer. When the card is used to make a transaction, the card issuer transfers the money to the merchant and adds that amount to the card user’s account balance. The card user must pay off some of the balance each cycle and can choose any amount between the minimum payment and the full balance. The card issuer will charge interest on the amount due.
Benefits of paying with credit cards include;
Easy to use (tap, swipe or chip and pin)
Widely accepted as a payment method.
Safer than carrying cash.
Improvement in credit rating
Rewards such as air miles, discounts and vouchers.
Drawbacks of paying with credit cards include;
Interest payments
Charges for late payments
Ease of overspending
Can lead to debt that is difficult to get out of.
Prepaid Cards
Pre-paid cards are payment card that can be used to transfer money to merchants for good and services. The user can add value to their account and use the card to make payments until their balance is spent. They are not linked to a bank account and you cannot borrow using them. Money spent using the card must be added in advance of the transaction.
Benefits of pre paid cards include;
Safer than carrying cash.
No need for credit checks or setting up a bank account.
Card issuers provide methods to track spending.
Does not lead to debt.
No interest charges or overdraft fees.
Drawbacks of pre-paid cards include;
Possible fees for opening account and adding value.
No interest accrued on the money stored
Not as widely accepted as debit and credit cards.
Does not build credit score
No rewards such as air miles
Limited payment protection.
Contactless Cards
Contactless cards are types of payment cards that contain a radio frequency identification (RFID) tag. Payments can be made to merchants by holding or tapping the card on the merchant’s card reader. Each payment generates a unique one-time code or password to enhance security. Many card issuers set a contactless limit over which the card holder may be asked to enter their PIN for added security. In the UK, this is £100.
Credit cards, debit cards, prepaid cards, charge cards and store cards can all be contactless.
Benefits of contactless cards include;
Can be linked to smartphones for added convenience
Reduces transaction time.
More secure than carrying cash (cards can be cancelled).
Transaction limits reduce fraud.
Security of data exchanged in transaction.
Widely accepted.
Drawbacks of contactless cards include;
Vulnerable to fraud - fraudsters can use RFID readers in close proximity to take money.
Some people lack trust in security despite it being a secure method.
If a card is stolen, the thief can make multiple transactions of £100 without a PIN until the card is cancelled.
For purchases over the transaction limit, a PIN or signature is required slowing down the process.
Charge Cards
Charge cards are similar to credit cards in that they can be used to make payments using borrowed money. Each payment adds to the balance owed to the card issuer. However, unlike a credit card, the entire balance must be paid each month. The card issuer will adapt spending limits depending on the user’s spending and repayment history.
Benefits of charge card include;
Encouraging good spending behaviour by paying the full balance each month.
No interest is charged on balance.
Generous perks.
High credit limits compared to other card types.
Drawbacks of charge cards include;
High annual fees.
No spending limits can be an issue for those without financial discipline.
Not widely accepted by merchants.
No option to carry a balance to the following month.
Store Cards
Store cards are a type of credit card that can be used in certain stores or groups of stores. Retailers partner with banks to offer credit to consumers for items purchased. Store credit is revolving so can be carried over to the next month. Credit scores generally do not need to be as high for store cards as other types of borrowing so are easier to get approved.
Benefits of store cards include;
Discounts are often offered when using a store card.
Store specific rewards such as freebies.
Helps build a credit score.
Easier to get approval that other cards.
No annual fees.
Interest free for set periods of time.
Drawbacks of store cards include;
Higher APRs than other cards
Low credit limits.
Can encourage overspending.
Limits consumer choice as only available in certain retailers.
Low minimum payments encourage debt.
