Editor’s note: This article was first published in March 2011; the Spanish bank card products, credit limits and maintenance fees it describes are those of that year, and terms and fees have changed since.
We’ll start by looking at all the types of credit cards and ranking them from least to most dangerous. I won’t go into much detail about the dangers of credit cards, since you can read about them in our previous article to get an idea: Credit cards: the saver’s worst enemy.
Let’s start with the types of credit cards
0. Prepaid bank cards
As with mobile phones, most banks now offer this kind of card, which you can top up at any ATM with whatever amount you like; the amount is taken from the account linked to the card. It’s an excellent way to keep track of what you spend, and if the card is stolen, the thieves can only use the balance available.
1. Debit card
This kind of card is healthy, since it is a form of “cash payment” without having to carry money around. As soon as you pay in a shop, the amount is charged to the linked account, so you don’t carry any kind of debt. It is not a credit card, and the maintenance fees are minimal; depending on the bank and on what kind of customer you are, you can even negotiate to have no fees at all.
2. Debit card with deferred payment
These are just like ordinary debit cards, except that the amount isn’t charged to your account until a chosen day. There are weekly, fortnightly and monthly versions. Let’s say that everything you pay with your card during a whole month is charged on the first day of the following month, with no interest. This kind of card is very useful to get you out of a tight spot at a given moment without adding more debt to your personal finances.
3. Debit cards charged to credit
These are the same as deferred-payment cards, except that you have the option of splitting the amount you pay over up to 3 months. If you pay €150 in a shop, the payment is automatically split into 3 monthly instalments of €50. The cost of that operation is usually minimal, partly because this kind of card only lets you defer small amounts. The maximum credit is usually around €300.
4. Credit cards
As we discussed in our previous article, this credit card is literally a personal loan: you have a line of credit that you use either all at once or little by little. As you use more of the credit, interest is calculated on the total debt. It’s the “never-ending payment” card. Once you start using it, you’ll probably notice your finances taking a bigger hit month after month, unless you choose the option of paying the full amount the following month.
5. Revolving cards
By far the most dangerous, without a doubt. It has every ingredient to trap you in endless debt. This card lets you use all or part of your credit, pay, and spread the debt over months or years by paying a small minimum instalment each month, and, as with the previous card, interest is calculated on the total debt. As you pay the instalments, your available credit is replenished, so people tend to pay each instalment with the credit freed up by the previous one. Not only do the payments never end, but a single missed payment can easily push your debt even higher.
Outside this ranking of cards, there are others designed for shopping safely online, which work like a prepaid card or disposable cards. These cards, let’s call them “PayPal” cards although there are other names, are ideal when you decide to buy something on a website but don’t want to give your account number or card number. Let’s say you make a practically anonymous purchase, and your bank details stay safe, just as when you send or receive a payment through PayPal.
Further reading
Featured image: Anselm Schüler, CC BY-SA 4.0, via Wikimedia Commons.
