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While payment cards and credit cards share many characteristics, they work differently when it comes to payments and credit reporting. Unlike traditional credit cards, payment cards do not allow users to roll over their balance from month to month. On the positive side, they often come with top-level rewards and benefits.
American Express is probably the most famous payment card issuer, but it actually offers a wide range of payment cards and credit cards. So how do you know what’s best for you?
The first step to deciding whether or not you should apply for a payment card is to understand how they work and how they differ from credit cards.
Key Differences Between Credit Cards and Payment Cards
Let’s look at some of the key differences between credit and debit cards so you can decide which one is best for you:
The main difference between a payment card and a credit card comes down to how you make payments. If you use a payment card, you must pay off the entire balance at the end of each billing cycle. However, if you use a credit card, you only need to pay the minimum balance in each billing cycle, and you have the option to roll over the balance of your balance from month to month (and thus increase interest).
Because you repay your balance each month, payment cards do not have a pre-set interest rate or pre-determined credit limit like credit cards do. Instead, each transaction is approved on an individual basis. This is intended to help cardholders not spend more than they can pay at the end of the month, but it usually doesn’t affect your ability to use the card for large purchases.
Since payment cards work a little differently than credit cards, they affect your credit score a little differently. In particular, payment cards do not take into account your credit utilization ratio (the amount of debt you divide by your total credit limit) because they do not have a credit limit.
However, your payment card issuer still reports your balance to the credit bureaus, so information about how much you spend is visible to creditors.
And because you have to pay your bills on time, payment cards can have a positive impact on your payment history, which is 35% of your FICO score. In addition, a payment card can positively impact the length of your credit history if it has been open for a significant period of time.
Responsible use of a credit card can help improve your credit score, but you can also harm it if you miss payments or increase your credit utilization rate.
Should I get a payment card or credit card?
Once you understand how a payment card works, you can decide if it is right for your needs. In addition to affecting your credit score, there are several factors to consider when deciding whether a payment card is better suited to your lifestyle than a credit card.
- Earn rewards: Payment cards often include generous rewards as well as top-notch benefits and travel protection. Credit cards also offer rewards to cardholders, so the two types of cards are similar in this area.
- Avoid debt: If you don’t want to accumulate credit card debt, a payment card will give you some peace of mind because you can’t keep a balance on it.
- Avoid paying interest: A debit card is better than a credit card if you want to avoid interest. If you do not take a cash advance on a payment card, you will only need to return what you take.
- Maintain a low credit utilization ratio: You can keep your credit usage low with a credit card until you have a balance. But with a payment card, you won’t increase your usage rate even if you use it for large purchases, because credit cards don’t have credit limits.
- Successful Qualification: Qualifying for a credit card can be more difficult than for a credit card as they often carry high rewards and the issuer’s risk is high.
- Don’t wear balance: You cannot transfer your balance from month to month with a payment card, but this limits your ability to use it for large purchases. You can save your balance with a credit card, but if you pay your purchases in full every month, you can avoid it entirely.
Using a payment card is a great way to avoid accumulating a large balance or significant interest payments. On the downside, it doesn’t benefit your credit utilization rate and qualifying can be a little more difficult. If you’re the type of cardholder who pays off your balance in full each month, the types of rewards and benefits you receive can be a deciding factor when choosing a debit or credit card.