There are many different payment methods out there: cash, debit cards, credit cards, ATM cards, and much more. All of these cards are different methods of payment, but some help you build your credit history and others do not. We all use some form of card to pay for things. Find out how which cards help you build your credit history at the same time.
Cards That Build Credit: Credit Cards and Charge Cards
A credit card allows you to make purchases with borrowed money, known as credit. As you spend and make purchases on your credit card, you will begin to build up a balance that needs to be repaid at the end of every month.
Over time, using your card and paying your bill on time will help build a positive credit history. Having a positive credit history will save you money for future loans and purchases. The more immediate benefits of having a credit card are extra purchasing power and flexibility. Most businesses accept credit cards, and some services, including Uber and car rental agencies, only take payment from a credit card.
Secured vs. Unsecured Credit Cards
There are two types of credit cards: secured and unsecured. Do not be confused by the word “secured.” It simply means that the credit card is secured by a down payment. Some credit card companies make exceptions for international students, by offering a secured card. While secured cards can help you build a credit history, the big drawback is that you are borrowing against your own money to do it. In other words, you are paying fees to use your own money. On the other hand, unsecured credit cards allow you to borrow the bank’s money without a deposit. By borrowing against your line of credit and paying it off in a timely fashion each month, your bank will be willing to increase your credit line and allow you to borrow more money through your credit card.
Charge cards offers as large, often unlimited, credit limits for cardholders. The main difference between a charge card and credit card is that any charges made with a charge card must be paid in full by the end of every month. There is no minimum balance. Not paying your full balance on a charge card will result in fees and penalties. A charge card will build your credit history, however, a strong credit score is typically needed to be approved for a charge card.
Cards That Do Not Build Credit: Debit Cards, Prepaid Cards
When you first open a checking account with a bank, you will most likely be asked to deposit money into this account. A debit card and your bank account are directly connected. Using a debit card will automatically deplete your bank account’s funds. Most debit cards will have a credit network like VISA or Mastercard logo on them. Having these credit networks printed on them means that the debit card is accepted as a form of payment in many places. Despite this, using a debit card will not build your credit history.
On a side note, a debit card can also be used to withdraw or deposit cash from an ATM. There are also cards specifically designed for this purpose called an ATM card.
Prepaid cards can be bought at department stores. When you purchase a prepaid card, you are loading money into it. After using all of your funds in your prepaid card, you can then reload it with additional money. A prepaid card eliminates the need for carrying cash but does not help build your credit history.
When making any purchases, you are given a number of payment options. People most often use their cash, debit or credit card for purchases. Using a debit card or cash, however, will not build your credit history. When used responsibly, a credit card can do more good than harm.
In the next lesson, learn more about the Benefits of Having a Credit Card.