A Brief Guide to Credit Cards, Debit Cards, Pre-Paid Cards, Gift Cards and Secured Cards

They're all the same size and shape. Seemingly magically, you can hand one of them to the cashier and you don't have to give her any paper money. But these five types of cards work very differently, and can have very different effects on your budget.

1. Credit Cards. These cards serve two types of people, those who pay their balances in full every month, and those who carry a balance. If you're the first type, your credit card issuer is losing money on you (unless you're paying a hefty annual fee) and hoping you become the second type. A credit card is a convenient way to but an airline ticket or rent a car, although you can do both of these with a debit card if you do it right. The high interest rates that most cards carry (and your card probably has the right to switch to "at any time, for any reason") make them a horrible way to borrow money.

2. Debit Cards. The fact that your debit card is linked to your checking account means using it is basically just like writing a check. The fact that it has a VISA or Mastercard logo means it's accepted anywhere a regular VISA or MC credit card is accepted. (This is a rare case where the credit card companies have negotiated a deal that benefits you directly.) Use your debit card anywhere you used to use a credit card. In fact, to save the mom and pop you're shopping at a few bucks, tell them to run the card as "credit" -- the only difference for you is you'll sign instead of entering your PIN and won't be able to get cash back; they'll pay significantly lower transaction fees that come out of their margin.

3. Pre-paid Cards. A credit card sends you statements (and bills) every month; a debit card requires a checking account. The only thing you need to get a pre-paid card is ... cash. Turn five hundred paper dollars into a five hundred dollar piece of plastic if you like this option, but beware: a pre-paid card has no more theft protection than cash. You won't be able to cancel the card and be refunded its value if it's lost or stolen.

4. Gift Cards. These are pre-paid cards that must be spent at one or a handful of locations. They are almost always purchased as gifts, as the name suggests -- why would you buy yourself the ability to spend a hundred bucks at Target for a hundred bucks? The only time (besides gifts) that these cards are worth considering is when you have a chance to buy one at a discount -- see websites like plasticjungle.com for some good deals.

5. Secured Credit Cards. This is a strange chimera of the plastic world: you "pay" for the card up front, like a pre-paid card. You get monthly bills, like a credit card. Most importantly, your payment history gets reported to the credit reporting agencies, just like a regular credit card. (None of the other choices listed here carry this feature.) This is the card for you if you have severely damaged credit and can't get a regular credit card. Just make sure you pay it off on time, every month, and this can be a valuable tool for repairing your credit and ultimately becoming the person who invests instead of borrows.