Debit cards

What are they & how do they work?

Debit cards are a form of payment that replace cash or cheques. Your bank issues you a debit card that is directly tied to your checking and/or savings account. Like credit cards, debit cards can be used to make purchases online or in stores. You can also use debit cards to withdraw money from ATMs. ATM transactions often come at no cost to you as long as the ATM belongs to your bank and you have not exceeded your monthly allowance.

Why are they safer than credit cards?

Unlike a credit card, where the money is loaned to you until you pay it back to the credit card issuer, you can only use debit cards to access your own money. Debit cards are directly linked to your bank account; so when you take out $100 to buy groceries, for example, that $100 is immediately withdrawn from your bank account. Though it’s possible to withdraw a little more than you have in your account, your bank will stop transactions beyond a certain overdraft limit. Though the overdraft limit and fee varies by bank and by account type, you certainly don’t have the same risk of overspending thousands of dollars that you don’t actually have as you would with a credit card.

Even though overdraft/insufficient fund fees can be costly (as much as $45 each time you go into overdraft—though some banks offer overdraft protection for a monthly or yearly fee) they are nowhere near the thousands—if not tens of thousands—of dollars you could end up paying over time in credit card interest. While some banks will charge interest on the amount you have in overdraft, your debt will rarely balloon out of control because your overdraft allowance is strictly limited.

Another way in which a debit card is financially safer than a credit card is that you can use a debit card to withdraw money from an ATM. You can withdraw money at little to no charge. If you use a credit card at an ATM to withdraw cash, you start paying interest on the amount immediately (even if you used an ATM affiliated with your credit card provider).

How is your credit score affected?

Because you can only access money from your own bank account and are not actually borrowing money, payments you make with debit cards do not affect your credit score.

Pros and cons of debit cards


  • Very difficult to get into too much financial trouble by using a debit card because, for the most part, you only spend your own money
  • Avoid the risk of ballooning debt because you can’t spend thousands of dollars you don’t have and then take years to pay it back as you can with a credit card
  • Easier to be in control of your finances and keep track of your spending because spending is directly tied to your bank account
  • Avoid high-interest cash advance interest rates
  • Readily accepted by most merchants, even small mom-and-pop shops that still don’t typically accept credit cards
  • Minimal usage fees, if any


  • Few debit cards in Canada offer rewards or cash back when you use them
  • No extra perks like insurance or rental car discounts that many credit cards feature
  • Can’t buy a big-ticket item unless you can immediately pay for it (this could be a pro or con depending on your financial situation)
  • Don’t have the same immediate fraud protection credit cards have because money immediately comes out of your account. Banks have more stringent guidelines to prove fraud than they do with credit cards

Prepaid cards

What are they & how do they work?

Prepaid cards are a bit like debit cards in that you use your own money to pay for things, and prepaid cards are widely accepted by merchants online and in person. Prepaid cards, however, are not linked to your checking account at your bank. Instead, you deposit as much as you want onto your prepaid card and that sets the max amount you can spend. You can keep using the card until the funds are depleted, after which you’ll have to reload it with more money.

Like the other alternatives mentioned in this article, most prepaid cards don’t offer many rewards or perks aside from serving as a credit-free means of payment. But some prepaid cards, like KOHO, allow you to earn cash back while you spend (and up to 5% cash back extra at eligible partners with their KOHO Easy free version), and are linked to an app that helps you track and budget your money more effectively. If you want to earn 2% on groceries, eating & drinking, and transportation, you can upgrade to the KOHO Extra card for an $84 (or $9/month) annual fee. The fee is generally a worthwhile investment, as you can earn enough cash back to cover the fee and then some if you spend around $4,500 annually in the 2% categories; plus the Extra card doesn’t charge foreign transaction fees, which is great for those who travel frequently.

Sign up and get a $20 instant cash bonus (once you load your account and make your no minimum first purchase within 30 days) right to your KOHO account.

Another similar option is the Mogo Visa* Platinum Prepaid Card. However, aside from offering users a mobile app for getting insights into your spending, it also has its gaze towards the future of the planet: For each transaction on the Mogo Visa* Platinum Prepaid Card a carbon-sucking tree will be planted—for free.

Why are they safer than credit cards?

As with debit cards, prepaid payment cards don’t carry the risk of credit card debt because you are depositing your own money onto the card to spend.

How is your credit score affected?

Since you are using your own money and are not borrowing, your card activity is not reported to credit bureaus. If you’re looking for something to improve your credit score, you might want to consider getting an secured card instead of a prepaid card or look at a KOHO card where you can build your credit.

Pros and cons of prepaid cards


  • Usually no annual fees, except for select premium prepaid cards
  • You are in control of how much money you put on the card


  • Limited (but growing) selection of prepaid cards in Canada
  • Fewer rewards and perks compared to credit cards

Charge cards

What are they & how do they work?

Canadians don’t really have a lot of familiarity with charge cards because there are very few available in the country. In fact, in Canada, only American Express issues charge cards.

Think of charge cards as credit cards that you have to pay back in full every month. Unlike with credit cards, charge cards don’t have a pre-set spending limit (though you may need to get pre-approval from the issuer for really big, out-of-the-ordinary purchases). Because of this they have much more purchasing power than a credit card, which have the strict pre-set spending limits.

The corollary of having the freedom of no set limit is that the card holder is responsible for paying back the full amount they charged to card each and every month—or risk paying very high interest and/or having their account terminated. Depending on which card you get, American Express charge cards also have rewards and perks like American Express Membership Rewards, airport lounge access, and a variety of insurance benefits.

Why are they safer than credit cards?

Charge cards aren’t designed to let you carry debt indefinitely and you’re expected to pay off your full balance monthly. Generally speaking, there is minimal risk that you’ll end up carrying massive credit card debt as long as you stick to the rules and pay off your entire balance each month.

There’s a very steep interest rate charged to any amount you don’t pay off, usually at least 30% or more. Your account will likely be closed if you miss a couple of payments. All these factors help keep debt to a minimum.

Since charge cards don’t have set credit limits, it’s difficult to get approved for a card unless you have a high income or an excellent credit history.

How is your credit score affected?

Charge card issuers report your payments to credit bureaus, so your payment history will affect your credit score. Since charge cards don’t have a pre-set spending limit, they don’t affect the credit utilization portion of your credit score (which can account for 30% of your score).

Pros and cons of charge cards


  • No spending limit
  • May feature great perks and welcome bonus
  • May feature accelerated earn categories so you can earn extra points/rewards


  • Must pay off balance each month
  • Very high interest rates and possible account termination if you don’t pay off your balance in full
  • Annual fees

Final words

Despite the earning power and rewards, credit cards aren’t a good match for all Canadians—especially those who might tend to accumulate debt. If you can do without those perks, and want to better control your spending, credit card alternatives like debit, prepaid and charge cards are a better choice. A better understanding of the pros and cons of those options means that you can make informed choices that better align with your financial habits and goals.

About the Author

Sandra MacGregor

Sandra MacGregor

Freelance Contributor

Sandra MacGregor has been writing about finance and travel for nearly a decade. Her work has appeared in a variety of publications like the New York Times, the UK Telegraph, the Washington Post, and the Toronto Star.

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