Choosing Between Credit and Debit Cards

By ccflyers on March 5, 2009

Knowing the principle differences between credit and debit cards can help you make wiser financial decisions, thus saving you money. Unfortunately, too many consumers seem to mix up these two types of payment tools, especially when it comes to using credit cards and meeting payment obligations on them. Both, credit and debit cards have their advantages and drawbacks. If you want to avoid common pitfalls and stay away from financial troubles that strip most vulnerable Americans of their homes and happiness, it is time to get some education.

Trying to understand what you really need, a credit or a debit card, you should look into your priorities, spending habits and special needs. The basic and crucial difference between the two lies in the”working mechanism”. For example, when you pay with a debit card, it is the same as if you were paying with your own hard cash. Except that the cash is in the form of a small plastic and is actually kept in a special checking account with your bank.

How do you get the money in your checking account? There are several ways you can do it. You can make direct cash deposits, arrange transfers from other bank accounts or have your employer transfer your paycheck to the account. You can load the account any time and each time you need more funds available. Remember, using a debit card, you spend your own money without owing anything like interest to your bank. There are some fees though associated with debit card servicing but they are not significant.

A credit card works as a loan. You don’t own the money on the card – you borrow it from a bank. Hence, there come all these APRs (the price for using a credit line), fees and other charges that cover card service, as well as your borrowing risk. As it is kind of a loan, you do not have to pay the purchase price back immediately. Usually, you have up to 30 days before your first minimum payment is due. At this point cardholders begin to abuse the basic credit card rule –  the rule to pay each monthly bill before the due date with more than the minimum required.

The different “working mechanisms” of credit and debit cards determine their pricing and risk. Those who do not make timely payments on credit cards are likely to dig a hole of debt that’s impossible to get out of. And people do make late payments and even miss them. When default APRs and penalty fees apply to already great balances, your financial wellbeing becomes dependent on external factors such as consumer debt counseling services and various debt management programs.

With all this, the advantages of credit cards are evident. You can easily purchase an item or a service which you were not able to afford before. Plus, you can benefit from various kinds of reward programs which accumulate with each card purchase and build up into a value redeemable for brand name merchandize and free services.

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