“I’m scared of all the reports I hear of shoppers being robbed and I want to reduce the risk of buying things with cash. I’m trying to decide between getting a debit card and credit card, but I’m not sure which one would suit my needs better . What advice can you give me?”
Using cash to make purchases can bring major security risks, especially at this time of year. Using cheques instead can be one option, but many merchants won’t accept them. Increasingly, many consumers seeking the convenience and safety missing from ‘paper’ money, are switching to ‘plastic’ money in the form of debit and credit cards.
Whose money is it?
Although they both provide consumers with a convenient payment method, debit and credit cards have big differences. The most important distinction between the two is whose money is being used to carry out the transaction.
A debit card is like an electronic connection straight to your own bank account. If you don’t have any money in your chequing or saving account, your debit card won’t be very useful.
However, the credit card facility is actually a loan from the bank. You can make purchases on your credit card up to the credit limit allowed by the bank, with the understanding that you’ll pay it back by the due date, or over time.
Transaction limits
Most debit cards come with security transaction limits that are agreed on by the bank and the customer. So you might be restricted from making a purchase that’s over your stated transaction limit.
The credit card doesn’t have that pre-determined limit, you can spend on one or several purchases up to your credit limit. Depending on your history with the bank, you may be allowed to charge above your limit, but with a penalty fee for over-limit spending.
Need to control your spending habits? CLICK HERE!
Credit history
One big benefit of owning a credit card is that it gives you the opportunity to establish a credit history that can be used if you need other loan facilities from a lending institution.
Demonstrating that you can use the credit limit and pay at least the minimum required each month can be a big plus in helping you to get a loan. Your debit card, as it simply draws funds directly from your account, won’t give you this advantage.
International transactions
Another advantage of the credit card is that you can use it for international payments. Local credit cards using the Mastercard and Visa logos can be used anywhere in the world, and also for online purchases. Your local debit card can only be used for local purchases.
However, Scotiabank debit cards using the Cirrus network will allow you to withdraw cash in the local currency of any country in the world from ABMs that are also on the same network.
Charges and costs
An important distinction between a credit and debit card is the charges attributable to each. Interest rates charged on credit cards can be very high due to their unsecured credit. However, a smart consumer can use credit cards as a short-term loan facility and pay off the balance on or before the due date. The only costs incurred would be the annual fee for using the card.
Debit card issuers have different policies regarding debit card charges. Some may give a certain amount of free transactions monthly that include debit card usage, others may have a special pricing bundle which can help to reduce costs. But, chances are, if you use your debit card frequently, you will have some bank charges to pay.
Card users are not the only ones who have to pay charges for using plastic money. Merchants have to pay the banks when goods are purchased with cards. Banks are actually charging more when customers use debit cards than credit cards.
Many merchants have instituted minimum purchase amounts for use of debit and credit cards, but more for debit. Some gas retailers have even stopped accepting credit cards for purchase of petrol.
More debt?
The biggest problem with credit cards is that it gives consumers unsecured credit to spend, spend, and spend some more. Unfortunately, many people find it difficult to repay their credit card bills, and they are left with high interest rate debt that takes years to go away.
If you have issues with debt, it would be best to stick with debit cards, to remove the temptation from spending money that you don’t have.
Safety concerns
Although plastic money provides convenience, security concerns are not removed with their use. Next week we will look at ways you can prevent misuse, and methods used by the card issuers to help protect consumers from card fraud.
Copyright © 2006 Cherryl Hanson Simpson. No reproduction without written consent.
DON’T MISS MY NEXT ARTICLE! CLICK BELOW TO RECEIVE IT IN YOUR EMAIL:
Subscribe to Financially S.M.A.R.T. by Email
Originally published in The Daily Observer, December 14, 2006
Cherryl is a financial columnist, consultant and coach. See more of her work at www.financiallyfreenetwork.com and www.financiallysmartonline.com. Contact Cherryl