Knowing the different types of payment cards

If you’ve only got a minute:

• ATM cards and debit cards are linked to your bank account and payments are deducted directly from your account balances.
• Debit cards and credit cards are affiliated with payment networks such as Master, VISA or Amex which help facilitate ease of payments globally
• Unlike a debit card, a credit card’s source of funds is essentially a loan from the card issuing company, which has to be repaid in full in the next billing cycle to avoid interest charges.

In today’s world, plastic is a hugely popular (or sometimes, unpopular) topic for a variety of reasons, most commonly for the negative consequences of single-use plastics on our environment, the economy, and our health. While reducing plastic waste is one of the ways to living more sustainably, one ubiquitous form of plastic that is (still) a necessity to most of us are payment cards like our ATM cards, debit cards and credit cards.

These cards offer a range of conveniences, including cash withdrawals, funds transfers and online payments. You can also make contactless payments through NETS FlashPay or Visa payWave, which is a “must-have” for many.

Visually, a payment card would have at least your name, a card number, an expiry date, the issuing bank or organisation and a magnetic stripe, a smart chip or both. These visual similarities can at times, cause confusion.

While almost identical in size, shape, design and even some functions, there are distinct differences among them.

ATM card

In 1979, the first ATM was introduced in Singapore with the sole purpose of providing clients with easy cash withdrawals. With an ATM card and a Personal Identification Number (PIN), you could withdraw cash from your linked current or savings account using the ATM kiosk.

The primary function of an ATM hasn’t changed but today you can make cash deposits, bill payments, fund transfers, card services and investment services with them. While your ATM card gives access to most ATMs in Singapore – irrespective of bank and even certain partner banks overseas – you might incur extra processing fees if you are not an account holder of the same bank.

In 1985 when the Network for Electronic Transfers (NETS) was set up by leading banks in Singapore including DBS Bank and POSB Bank, it allowed ATM cards a wider range of functions.

With NETS, Point-Of-Sale (POS) transactions using ATM cards can easily be made at merchants who have NETS terminals. This means having to carry less physical cash around. NETS also provides other services like stored value cash cards for motoring (e.g. ERP and parking), self-service payment kiosks and online credit card payment systems. However, NETS is limited to local payment functions.

When cash withdrawals and/or NETS payments are made using your ATM card, funds are deducted from your linked bank account in real time.

Debit card

A debit card looks and feels like an ATM card, and similarly, is often offered as a complimentary facility by the bank. However, don’t be fooled as they are not the same.

When you set up a current or savings account, the bank is likely to offer you an ATM card linked with debit card functions. Given that this can be viewed as a “2-in-1” card, it is unsurprising that many get confused between the two.

To be eligible for a debit card, you must have a linked current or savings account and be at least 16 years old. With your debit card linked to your bank account, you can access ATM services and authorise NETS payments by keying in your PIN.

Debit cards can be used for overseas cash withdrawals and payments but usually at a nominal fee. For overseas transactions, you will need to authorise your card for overseas use prior to travelling. Do note that there are usually foreign exchange fees incurred for charges made overseas.

You can minimise or avoid incurring these fees by having a multi- currency account (MCA). If you have a DBS MCA like DBS Multiplier, it can be linked with debit cards like DBS VISA Debit Card or PAssion POSB Debit Card. DBS MCAs offer 12 currency pockets, allowing you to perform a currency exchange any time at favourable rates to get the best value.

To take advantage of this, remember to link your card to this specific account as your primary debiting account, and voilà – when you spend overseas the foreign currency will be deducted directly from the respective currency pocket without incurring foreign exchange conversion fees.

Debit cards share similar functionalities to credit cards in POS transactions, contactless payment options, and eligibility for promotions, cashback or rebate schemes. These are usually available only to credit card holders. They both also have a 16-digit card number and a Card Verification Value (CVV) number used as a security feature for transactions like online purchases.

In relation to POS transactions, authorisation of payments only requires a signature, instead of a PIN, which might not even be needed for transactions below a certain value. Do remember that any charged amounts are deducted directly from your bank account balances.

Though not always the case, there are sometimes fees charged for use and maintenance of debit cards like annual fees, overseas ATM withdrawal fees and replacement fees for lost cards.

Credit card

You might be surprised to find that credit cards predate ATM and debit cards, originating close to a century ago when companies in the US began issuing them to customers for purchases made at their outlets.

The key difference between a credit card and a debit card is the source of funds being utilised.

Transactions charged to your debit card are directly deducted from your available balance in the corresponding account it is linked to - meaning your spending is limited to your available balance.

On the other hand, credit cards are not linked to any bank account. When you use a credit card, you are borrowing money from the card issuing organisation or bank. These funds are available to you up to a predetermined limit decided by the card issuer.

At the end of each monthly billing period, a credit card bill is issued with a total payable amount. You can choose to pay the minimum sum stated or the full amount of the bill.

Given that interest charges can be hefty, it is possible to overspend and rack up credit card debts. To avoid this, ensure to monitor your card spending and pay your bill in full before each due date. As credit cards are a form of debt, they come with higher barriers to entry than debit cards.

There are broadly two types of credit cards – secured and unsecured credit cards.

Secured cards are backed by collateral. To apply for one, you must pledge a fixed deposit of S$10,000 or more with the card issuing bank. The credit limit for this card will be capped at the amount of your pledged deposit. This is a viable option for those who are currently not working (e.g. unemployed or retired).

Most of us are likely to have unsecured credit cards. To apply for this, you must be at least 21 years old, and be able to provide proof of income, net worth or financial holdings – these determine your approved credit limit.

That said, financial institutions are given discretion to impose higher income requirements for different credit cards. The card issuing organisation will take other factors like your personal credit rating into consideration, before making a final decision on whether to approve your application.

The credit limit granted is usually a function of your annual income. While MAS provides a regulatory credit limit guidance, the card issuer is may adjust the approved limit within these guidelines.

Most credit cards are subject to yearly fees which can be waived, depending on the bank.

Credit cards are useful but they come with caveats

With all these requirements and the risk of landing in debt due to irresponsible spending, why do people still decide to have credit cards?

Credit cards are tied to worldwide payment networks, like Mastercard, VISA or American Express (Amex). They are payment networks that ensure card transactions are processed smoothly for their respective networks.

This provides ease of spending while you are overseas without needing to carry too much cash around, or even online shopping with an overseas merchant from the comfort of your home. It is important to note that foreign currency transactions would usually incur additional foreign exchange and administrative fees.

Credit card holders are often eligible for promotions with partner merchants, rebates and/or rewards schemes. For example, the recently launched DBS yuu Card allows you to earn yuu points at over 1,000 partner outlets island-wide, which opens you to a wide range of rewards on the yuu App.

In the same vein, making payments for big-tickets item using credit cards is especially useful for chalking up rebates or rewards points. In fact, this is of the strategies used by people to.

This provides ease of spending while you are overseas without needing to carry too much cash around, or even online shopping with an overseas merchant from the comfort of your home. It is important to note that foreign currency transactions would usually incur additional foreign exchange and administrative fees.

Good practices

With conveniences, there are always accompanying risks. In the case of payment cards, there is a danger of others using your cards to withdraw cash from your account or make fraudulent purchases.

Here are some good practices to keep in mind.

In Summary

At the end of the day, what cards you choose to own and utilise differs in accordance with your spending habits and preferences. Given that online shopping and travel are now commonplace, most people would opt to have at least one debit or credit card on hand for ease of transacting in foreign currencies.

Now that we’ve shared some basics about the common types of plastics found in your wallet, let us leave you with a parting fun-fact.

While our payment cards are (still) a necessary plastic to most of us, the DBS Live Fresh card is made of 85.5% recycled plastic, making it Singapore’s first eco-friendly credit card. It offers up to 10% cashback, to encourage your Earth-friendly lifestyle when you spend at our eco-friendly partner merchants. This way, you can use your plastic payment card while really making it count.

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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.

All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.

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