Credit And Debit Cards: What You Need To Know

Credit Cards

Credit cards sometimes get a bad reputation, but the truth is that they can be an important tool for building good credit and managing your finances.  Too many people think of credit cards as a way to buy things they cannot afford, and that is where the trouble starts.  However, if you know how credit works and you use it responsibly, you can use your good credit to help save money and build assets over time.

When it comes to the type of credit card, you don’t really need to worry about whether you have a Visa or MasterCard.  Those are just membership organizations.  The real issue to pay attention to is what bank or company issues your card.  These are the people that control the rates and fees that affect you.


One Critical Question to Ask Yourself Is: Will I be able to pay my credit card rates in full every month?  

  • If your answer is Yes, you may not need to worry as much about what your interest rate (APR) is.  Your priority is to find a card that does not charge an annual fee and offers a grace period in which you can pay off your balance without being charged interest.  Also, you may be interested in a special “reward” card that gives you frequent-flyer miles or other credits for every dollar you charge.
  • If your answer is No, or if you will run a balance on your credit card from month to month, you want to find the card with the lowest possible interest rate.  Before you sign up for the card, read the fine print in the “terms and fees” page to check for extra fees and to find out when you start getting charged interest.  You also need to pay attention to whether or not the low interest rate is permanent or temporary, and if it applies to new purchases or just transfers.  If it only lasts for six months, you should make sure only to choose it if you will have your debt paid off by then.


How to Avoid Credit Card Debt  

  • Avoid Late Fees: Make sure to make your credit card payments on time. Late fees can really add up.  Plus, every time you are late with a payment, the credit card company reports it to a record-keeping company who is responsible for compiling your credit report.  In a few years, a poor credit report can make it harder for you to buy a car or rent an apartment.
  • Don’t Just Pay the Minimum: Pay your entire bill each month.  If you can’t pay it all, pay as much as you can.  You will end up paying less interest, and your purchases will be paid off much sooner.
  • Find a Low-Rate Card: Introductory cards may charge you as little as 3% interest.  While it might only last for a few months, you can pay off your credit card balance at 3% compared to 20%.  Check out www.cardweb.com/cardtrak to find the lowest rates.  You will be able to see both introductory and non-introductory rates. 
  • Avoid Store Credit Cards: Because store credit cards tend to have higher interest rates than regular credit cards, you should avoid using one unless you can pay the full balance every month. It is also not good for your credit score to keep opening new credit card accounts.
  • Be Realistic: If you can’t afford to buy something, don’t buy it.  While credit cards can be very useful, they are not magic.  If you are careful with your budget, then you can avoid falling into the credit card debt trap.
  • Federal Law Protections: The Credit Card Act of 2009 made it mandatory for your credit card company to provide you with important estimates right on your statement, such as how much you would pay in the long run if you only paid the minimum on your bill, and how much you pay in interest.  This act also aims to protect young consumers by forbidding individuals under the age of 21 to get credit cards unless they have an adult co-signer or proof of a steady income for financial stability.
  • For More Information: see WISER’s Fact Sheet on Credit Card Basics or look at your latest credit card statement. 


*A Quick Note on American Express*

Many American Express cards are not like other credit cards.  American Express offers both charge cards and credit cards.  Charge cards differ from credit cards in that they must be paid in full every month.  It is important to know what you are getting, and which type of card you have so that you can avoid getting hit with excessive fees if you don’t act accordingly.

Debit Cards

Debit cards look a lot like credit cards, and even your ATM card can function as a debit card. You can use it to purchase items at most of the same places as credit cards, but it works slightly differently.

Advantages of Debit Cards

Unlike credit cards, debit cards withdraw money directly from your checking account.  If the price exceeds the balance in your account, the transaction is denied so there may be less temptation to spend what you don’t have.

  • Debit cards are easier to use when traveling. In many places, they are accepted more readily than checks.
  • They are easier to get than a credit card.  This is especially true for younger people who may not have the income or credit history to obtain a credit card.
  • With a debit card, you do not have to carry around cash or your checkbook.
  • If your debit card is lost or stolen and you report it to the financial institution within two days of discovery, generally you are liable for a maximum of $50.  That amount can increase to $500 if you don’t report it for up to 60 days.  Policies vary so check with your debit card company, and also ask how quickly they will restore the missing funds to your account.


Read the Fine Print

Debit cards sound simple, but make sure you understand the fees for different services. Find out what fees you will be charged for having and using a debit card. The Pros and Cons of Overdraft Protection

  • If your bank gives you overdraft protection, it will allow you to charge an amount of money you may not have in your account, but it will hit you with a fee every time you do so.  This can cause extra charges to add up fast.
  • Other debit cards entitle the holder to a line of credit, which is a pre-established amount of credit that you can draw against if you need it.  While this feature may protect the holder from overdraft fees, it may come with a very high interest rate.
  • New overdraft rules require you to opt into an overdraft protection plan if you want it.  If you do not have overdraft protection and you try to charge something you don’t have, your card will simply get declined.  For some people, this may be better than the temptation of making extra purchases and having to deal with fee charges later.  However, if you write a check for money you don’t have without overdraft protection, the check will bounce and hurt your credit score.  Make sure you know whether or not you have overdraft protection and act accordingly.  Because of the new rules, you must contact your bank if you want this protection.


Other Things to Watch Out for:

When you purchase something on your debit card where the total amount is unknown, the merchant puts a hold on your account for more than what you will typically spend. For example, when you fill your car with gas or reserve a hotel room, your account is being charged more money than you owe the merchant. While these charges will clear, they may take a while to do so.  In the meantime you can be charged for bouncing checks because although you have money in the account, the money is on hold.

Sources

  • Kobliner, Beth.  “Get a Financial Life: Personal Finance in your Twenties and Thirties,” New York: Simon & Schuster, Inc., 2009.

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