Debit Cards and Credit Cards Pros and Cons

by Monica Kowollik on January 31, 2013

debit cards pros and cons

Debit Cards and Credit Cards – Pros and Cons

Lately the use of debit cards has surpassed the usage of credit cards. According to something called the Nilson Report, consumers are more cash strapped than prior years and that and the age of the consumers has led to a more broad use of debit cards. The younger consumer is more used to having a debit card in his or her wallet. They use the debit card as consumers once used checks from their check book. They whip it out for small purchases and use the credit card to spread a larger purchase out over time. Which is best?  Most financial advisors say neither; it is best to use cash. They also advise that the consumer pick the card that fits his/her need. So, how do you determine that? 

Always remembering that cash has no hidden fees or interest, you can be certain that you have read the fine print on your credit card account or even your debit card account. The first thing is to know the cost of using either one to make your purchases. Does your credit card have any hidden charges that you need to be aware of? What about your debit card? Let’s look at the two below.

Debit cards

Most banks offer a debit card when you sign up for an account. Before you decide that you want one and start carrying it around in your pocket, find out what the charges are.  Suppose you use your debit card at the movies and are unaware that you will be going into overdraft. What is going to be the cost for those movie tickets after the overdraft fees are added and how long is it going to be before you have made up that loss?

Does your debit card charge for each transaction? Oh, you say, it’s only 50 cents per transaction. Well, it only takes two of those transactions to be a dollar and dollars have a way of disappearing quickly.

With a debit card the merchant may put an account block on the amount it is charging until your money has been put into their account. Hotels and gas companies often block out a set amount even before allowing you to make a charge. This could prevent you from using all of the money in your account.

Are you using a prepaid debit/gift card? You may be surprised to discover that there are fees attached. These cards aren’t regulated like bank debit cards and often have ATM fees, transaction fees, and something called “non-use” fees.

A debit card is easier to get than a credit card.

With a debit card it is easier to get cash.

Debit cards do not improve your credit score because they depend on the amount you have in the bank and not on a “credit” basis.

The worst thing about a debit card is that if it is stolen your bank account can be emptied quicker than you can call 911.

Credit cards

Rewards: credit card rewards can help you purchase things from different merchants based on the total amount of spending the consumer has done.

Credit cards can make it easier for you to buy things you cannot afford or really don’t need.

Credit cards may not be accepted. If you have late payments or unpaid bills, your card company may not allow you to charge on it.

You may be able to use your credit card to borrow money.

If you don’t pay your balance at the end of the month there are fees added to your balance and interest charged on the total. This means that a $3.00 item can end up costing a lot more.

If someone steals your credit card you are usually covered for anything over $50 that is fraudulently charged to it.

In General

Convenience: having a card in your pocket can allow you to pay for something you need in an emergency. The difference between the debit and the credit card is that the debit card charge depends on how much money you have in the bank and your relationship with that bank.

It takes less time to complete a transaction with a debit card than a check and even than a credit card.

Learn all the facts and then decide which type of card is best for you in your situation.

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Overdraft fees and How They Add Up

by Monica Kowollik on January 30, 2013

overdraft fee how to avoid them

Overdraft Fees and How They Stack Up

Just what is an overdraft fee anyway? These are fees charged you by your bank because you have written a check for more money than you have in your account and the bank has lent you the money to cover the excess amount. For instance, if you wrote a check for $20 more than your bank balance, that $20 is in overdraft.  The bank lends you the money to cover that $20 but it also charges you a fee (say, $36) for doing so. This is called an “overdraft fee”. It keeps your check from “bouncing” and, thus, protects your credit rating. If you have written more than just the one check, you will incur an overdraft fee for each check written that was over your bank balance. Some banks offer “overdraft protection”. This is a line of credit (for instance, $1000.00) that protects your account against overdrafts. You borrow this money at a % rate of return or a flat fee when you write a check that is more than you have in your account. The amount you pay depends on your agreement with the bank when you took out the insurance credit amount.

You can go into overdraft by writing checks for more than your balance or for using your debit card (which deducts cash immediately from your account) and then having a check pay that is more than the balance left.  To understand this, you need to know that banks don’t always deduct your checks by date or order that they are written. They are often deducted by amount with the higher amount being deducted from the account balance first. Sometimes you are able to cover the overdraft amount during the same posting period and avoid any fees. This will only happen if you have an excellent relationship with your bank and your bank calls you to alert you to the problem.  You should always review the bank’s overdraft policy prior to opening an account. NSF and overdraft fees show up on your credit report.

There is a set fee for an overdraft ($36)(each bank differs). This is charged on each check that is returned (or should be returned) when the account has no money or less than needed. If you don’t pay your overdraft and fee within 5 business days there is an additional $10 fee charged to your account (now you owe $46 in addition to the amount of each check). If you have not paid that amount within five more days, you will be charged an additional $10. This will make the total owed $56 in addition to the check amount. This is the policy of one Delaware bank. There are additional fees for additional circumstances but it is easy to see how the amount of these fees can begin to stack up, especially if you have multiple overdrafts.

You should know how much money is in your bank account at all times. Don’t guess. If you go out on the town and use your debit card to buy Broadway tickets and to pay for dinner after the show, a taxi to the train station and for the train ticket home, you may spend $400.00. If you take this amount out of your bank account by debit card when it says on the screen that the balance is $550.00, and a $300.00 check pays the next day or right after that transaction, you will be overdrawn and the overdraft fee will be charged. Each successive check will be charged in overdraft because your account is in a negative balance. You can accrue as many fees as you have checks to pay prior to making a deposit and paying the overdraft fees.

You need to balance your checkbook every day so that you can avoid overdraft and overdraft fees. You can help prevent accruing overdraft fees by keeping a “phantom” balance ($50-$100) in your account that you do not include in your checkbook balance. Credit Unions have lower fees so put your checking account there.

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