Wednesday, November 6, 2019

Debit vs Credit Cards: Which is Better to Use?

A debit card is issued by your financial institution, allowing you to make charges against your deposit. If you have a thousand dollars in your checking account, your debit card allows you to pay for goods and services up to the thousand dollars you have in deposits. Your bank or debit card issuer may allow you to spend more than the thousand dollars deposited and impose overdraft fees. Fortunately, overdraft charges are no longer automatic, individuals have to opt in as a legal requirement.

A credit card on the other hand is issued by lenders and allows the holder to pay for goods and services up to the limit determined by the lender; the credit limit. Credit cards are issued based on the basis of creditworthiness and in most cases have no relationship to the money the card holder has saved, with the exception of secured credit cards. Secured credit cards are issued against your savings in a bank and are issued to help the holder develop a credit history. With a secured credit card you are loaned and pay interest on your own money.

Both debit and credit cards have their advantages and disadvantages.  Different financial advisers may give opposing advice regarding the use of both. Comparing the two, debit cards represent income you own and use. Therefore, you pay no interest and incur no liability when you use a debit card, as the income you are using is yours. With credit cards from companies like Capital One, HSBC, or American Express, they are loans from these financial institutions to the card holder. The card holder has a liability to pay both the amount charged on the card and any monthly interest accruing on unpaid balances. These interests, commonly known as APR, may be very high in the cases of people with bad credit. Some credit card companies not only charge interest on the credit card loans, but users may pay annual fees many other associated fees. One typical example of a really bad credit card is the Continental Finance Mastercard which provides cards to people with bad credit. This card charges a $200.00 finance fee upfront, a $50.00 annual fee, a $12 monthly account fee and a $25.00 fee for credit line increases. Unfortunately, these are some of the options available to people with very bad credit.

So, which is better to use, a debit card or a credit card? As debit cards involve the use of money that is yours, some financial advisers encourage their use and discourage the use of credit cards. Credit card interests, they argue, enrich only the card issuers and the interest paid on these cards by borrowers could be used to invest in something else or saved for a rainy day. For people with poor financial discipline or little understanding of credit use, credit card use can impose huge financial burdens. Many individual bankruptcy filings are related to poor credit card use.

However, the case for debit cards may not be so clear cut and simple. The main disadvantage of debit cards is that they do not provide the user with a credit history. In America, having poor credit or no credit history is very expensive in the long run. People with poor or no credit history are considered high risk financial risks to investors and are typically charged high interest on mortgages, car loans and even insurance. Some employers will even reject applicants with poor credit. People with bad credit who face urgent financial need may have no option but to resort to predatory lenders who typically charge astronomical fees and interest rates.  Having no or poor credit history is expensive.

Some credit cards also have substantial rewards. Some credit cards may give users cash back on purchases, may have car rental discounts, air mile rewards, roadside assistance, car rental insurance, discounts at certain retail outlets, and so on. Some cards from companies like Chase and Capital One offer very attractive rewards. As long as users of these cards pay their outstanding balances on time and use the cards wisely, they can benefit from the rewards without paying much in interests.

Concluding, deciding to use a debit or credit card has no single answer for everybody. There is no on size fits all advice. Whether to use one or the other depends mainly on the individual card holder. For people who are cautious about their finances, pay their balances on time and do not carry huge balances month over month, a credit card may be their best option, as it allows them substantial advantages in rewards, while helping them build a solid credit history. For people who overlook bills, shop compulsively and do not understand the risks associated with credit card use, credit cards can be a debt trap that may cause immense financial and emotional strain. For the latter individuals, debit cards could be their better bet,  until they become more financially literate.

Sheku Sheriff

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