Debit vs Credit Card- Get the best of both!
In today’s world, plastic money as it is called has taken up great value in our lives. It allows us to make purchases without having to carry money around. It has made life simpler in many ways but has also given rise to greed and desire to buy that which we cannot afford. Each one of us owns a debit card and most of own a credit card but we often wonder which one is a better and safer tool to use? Is it just black vs white, i.e. credit vs debit or is there a grey area. Well, we at Fpguru.com believe it’s like comparing apples and oranges.
Debit Cards
A debit card is like carrying your bank account in your pocket. It provides immediate access to your own money. It can be used to withdraw at an ATM (automated teller machine) or swipe at a cashier at any shop, restaurant, etc. Either ways a debit card will not accrue any interest for the card holder. It gives the card holder an easy way to make purchases.
Apart from providing an alternative to carrying cash, a debit card ensures your money is constantly growing. Rs 5000/- kept at home is Rs 5000/- at the end of the day but Rs 5000/- kept in a simple savings account is growing at 4% per annum that is around 0.01% per day. Hence using a debit card provides a definite advantage over withdrawing money for use.
However, a debit card does have its drawbacks. Several times the card may get swiped twice at any establishment due to any reason, which means your hard earned money is being spent twice the amount than you intended. The money from the account gets debited immediately and hence it becomes an issue to the account holder to retrieve it back. Several times the card issuing company will refund the amount promptly, but it does mean that for those days, your money did not earn the interest it should have.
Many times, online payments also offer us the choice to use debit cards. But this can be very risky as it means exposing your account details. Though internet security has improved, the sophistication of hackers has also. There have been several such cases recently. Once they have your details, your hard earned money is for them to use at their discretion. With the advancement in technology fraudulent activities can be detected and refunds are made to the account holder however, it does expose you to the danger of losing your own money.
Credit cards
A credit card is like a bank overdraft in your pocket. It’s a much abused instrument which is used to buy things one cannot afford immediately. It leads to instant gratification. While using a credit card, as the name suggests you can purchase on credit, for which you can pay at a later date. Hence the money paid through a credit card is the company’s money unlike in a debit card.
Credit cards convey an image of easy money. But it’s very easy to fall into a debt trap when it comes to using one. Unknowingly we spend more money than we intended too and pay interest to top it up. Credit cards have hefty interest rate of nearly 24%- 36% but these expenses can be avoided by using the card judiciously.
Credit cards work best in case of emergencies as they provide a cushioning during bad times. They lend you money when you need it most. However it is important t have the means to repay it as things normalize.
In case of online transactions, credit cards are considered to be safer as it’s not the details of your bank account that are displayed to the hacker but the credit card companies. Thus your own money remains safe. The law provides zero liability to the card holder in case of fraudulent cases and hence all money will be refunded back to the company as soon as such acts have been noted. Nowadays all credit card companies immediately send you a message when a transaction occurs. If it is a suspicious transaction, you need to inform them & the transaction is reversed.
Credit cards can be used as a very good budgeting tool if discipline is maintained. Each credit card has an interest free period usually 30-40 days, during which time no interest will be charged for any payment made on credit. Thus you must ensure, you use your credit card for making payments at the start of this period & pay the outstanding balance at the due date or end of the period. This actually turns out to be a win-win situation for you as you use other’s money interest free for say 30 days while your money is earning interest in your savings bank account. However the problem with this is discipline. Most people just pay the minimum balance due & carry forward the outstanding balance. This results in huge interest burden creeping up on you.
Debit and credit cards both present us with several notable advantages but can also expose us to many horrors. We must use them both with caution so as to be able to grab the best of both worlds. Be smart in using them & more importantly be debt free. The key is knowledge & discipline in using them!!
The article has been written by Shalmali Kulkarni.
The writer is working as a para-planner with Fpguru.com
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