FKIY
Financial Knowledge Institute for Youth
Credit or Debit?
It's the question you hear every time you purchase something at a cash register. Which one? The following information will help you to determine which card is more suited to you.
Credit Cards
Credit cards are a payment method that works sort of like a short-term loan: you buy an item, and at the end of the month you pay the credit card company the bill. But like any loan, this comes with interest. Interest will compound if you carry a balance from one billing cycle to the next, increasing your overall cost.
Paying a credit card on time does good things to your credit score. Sometimes you even improve how your credit is evalutated, if you pay bills on time, stay within your credit limit and pay more than the minimum balance on the card. This means you may qualify for lower interest rates on loans and credit cards.
You can also have grace periods where you are allowed to make purchases without interest (if long as your balance is paid in full each month).
Some people who already carry crdit cards don't realize the features they are missing. You can get travel insurance, or purchase protection for big ticket items that turn out to need refunding. A big company behind your back helping you get a refund is a nice feeling. Credit cards are also sometimes not liable for what someone buys in your name if you have your card stolen.
Credit cards are great for those moments when you are in an emergency and need cash. Just remember you still have to pay for it later. The money does not come directly from you bank account.
Debit Cards
Debit cards are a payment method that is directly linked to your bank account, so you don't have to worry about paying at the end of the month on time, and the right amount, etc. They are like a more convenient form of cash.
Debit cards are great for keeping track of what you spend: you can check your balance at an ATM, since the card is connected to your account. Or, if you are enrolled in online banking, you can check your spending right from your home.
Debit cards are usually combined with your ATM card, so if you have money in your account, you can get paper money if you need it from almost anywhere. To avoid ATM fees, it is always better to use your own bank's ATM. Most stores also allow you to take cash out at the register, if you use your PIN.
Your PIN will protect your card from fraud if you happen to drop it-this number is different for every person, and since you have to enter your PIN to use the card, no one can make a transaction if you should lose the card. If someone makes a purchase that doesn't require a PIN, like at a supermarket or drug store, most banks offer fraud protection policies that help you in this or similar situations.
Also, because you pay directly for the item, you don't pay interest!
The main idea is that you choose what works for you. Either option has served many people well, and they are perfectly financially sound. Whichever you choose, remember that there are downsides to both debit and credit cards:
Debit cards can be declined if you don't have enough money in your account to spend. This does protect you from spending money you don't have, but it is quite frustrating when you are just a couple of dollars away from a purchase. Some banks do allow customers to overdraw their accounts, but with a fee.
Credit cards can be hit with late fees if you miss a payment, and your annual percentage rate(APR) can rise. APR represents the actual yearly percentage rate of a loan, and as you probably guessed, its bad if it goes up. Going over yoru credit card's spending limit also results in fees. Overspending is another thing to look out for. This leads to unecessary debt, which can be hard to pay back.