Welcome back to #FinanceFriday
This presentation was specially requested.
Today we will determine if there is a difference between a debit and a credit card and look at some of their features, benefits and disadvantages.
While a debit card and a credit card can function in similar ways they are not the same. A debit card allows the user to access funds held in their account. It can be used at ATM machines or at merchants with a point of sale system. Whenever a purchase is made using a debit card, the funds on the user’s account is placed on hold until the funds are transferred to the merchant’s account. Only the funds available in your account can be used when making purchases.
A credit card is basically a line of credit/ loan which must be paid back by monthly installments. The lending institution indicates a minimum monthly payment. The rate of interest charged on credit cards are generally higher than other loans because they are basically unsecured loans. However, if managed properly, a credit card can operate as an interest free loan since there is generally a thirty day grace period before interest is charged on the amount used within that period.
Benefits of a debit card:
- It allows access only to the funds held in the account. This encourages discipline and leads to better financial management.
- It is convenient
- Relatively safe as you do not have to carry cash
Shortcomings of a debit card:
- Your card information can be stolen and used to make unauthorized purchases (though you can be refunded if a report is made promptly) to your financial institution. One means by which your information can be stolen is through card skimming at an ATM.
- When used at an ATM, you can incur fees.
Benefits of a credit card:
- It is convenient
- Allows for cash back/ travel rewards
- They can offer insurance on purchases
- A store credit card generally gives store discounts
Shortcomings of a credit card:
- Your card information can be stolen and used to make unauthorized purchases
- Interest charges are generally high.
- Unless you pay off the spent amount within the grace period you end up paying more in interest charges than you will save on transactions.
Until next time……. Gerlan