I've always considered "adulting" and "money" as a package deal. Not gonna lie, one of the things I find most difficult about being an adult is becoming ~financially literate~. Like me, you've probably had all these questions about investing, opening a savings account, and more. As someone who likes to go shopping (online and IRL), I always try to make sure I spend my money wisely whenever I pay with debit and credit cards. But what exactly is the difference between the two, and how do you know which card is best for a certain transaction? In an email interview with Cosmopolitan Philippines, licensed finanial coach Yani Moya shared her thoughts.
What's the difference between a credit card and a debit card?
In simplest terms, coach Yani Moya describes a credit card as "money that is technically borrowed from a bank." Each credit card has different limits, and it all depends on the person's approved bank limit. "Borrowed money through credit card also means having to pay interest," she added. A debit card, on the other hand, is considered electronic cash (aka money you actually have in a savings account). When you save money in a debit card, you have the opportunity to earn minimal interest rates.
According to coach Yani, these are the three best times to use a credit card:
When doing *big* purchases to accumulate points
When the establishment you are in has freebies or special discounts for specific credit card companies
She explained that when traveling, some countries prefer payments to be made via card than cash. It can be more convenient to use credit than debit cards and it's much safer than carrying cash around especially when you go to different places. More importantly, you can easily track the transactions in the event that you fall into a fraud.
One thing to keep in mind is that when you use a credit card, you're technically given the freedom to spend on literally anything, as long as your credit limit allows it. But if you're the type of person who doesn't really like tracking expenses, then you might need to do a quick reevaluation. Minsan kasi, people get too carried away with spending and end up reaching their credit limit. When this happens, they'll need to pay a big amount on the next billing date. If not, the person will start accumulating interest (aka the cost you pay when borrowing money).
As a personal finance coach, Yani recommends "using [a] credit card only if you have the same amount of money you need in your savings account. If you're using [a] credit card to borrow money to buy something that is not available as cash, that only means you cannot afford it, therefore you shouldn't buy it. For example, you want to buy a new gadget using your credit card. Make sure you have the actual money available in your savings account before you buy the gadget. This is a good practice to not overspend and not end up in interest debt."
If you're using [a] credit card to borrow money to buy something that is not available as cash, that only means you cannot afford it, therefore you shouldn't buy it.
When is the best time to use a debit card?
Debit cards are great for when you want to go cashless both for physical and online purchases. "Using [a] debit card allows a person to see their available cash that they can spend and [this] can hold them from overspending," coach Yani mentioned.
Credit card: pros and cons
Pros of using a credit card:
- It's convenient and easy to use. You can use it almost everywhere!
- If you pay your bills on time, you get a high credit score that can give you good loan rates in the future.
- You accumulate points. Depending on the credit card company, these can be converted to cash back or rewards (Note: Not all credit companies have the same policy!)
- When you get into trouble of fraud or unauthorized charges, it's easier to dispute, resolve, and track. You basically don't lose money if this happens.
- It gives you the option to pay big purchases in installments.
- You get certain kinds of perks. These include discounts, freebies, and even access to airport lounges.
Cons of using a credit card:
- Because of its accessibility, it can be a *temptation* to buy anything that your credit card limit can afford.
- If you don't pay on time, you will experince credit card debt that has compounding interest charges.
- Credit cards are one of the most common targets of scammers and hackers.
- Bad credit history will make it difficult for you to secure loans or mortgages and will give higher interest rates.
- There can be high annual fees and charges. (Pro tip: Beware of the fine prints on your credit card companies!)
Debit card: pros and cons
Pros of using a debit card:
- You earn interest rates that ranges from 0.125 to five percent per annum. Digital banks usually have higher interest rates.
- You won't experience debt and you get to practice spending responsibly. Having a savings account gives you access to see your actual available money. This means you'll be more aware of the things you can't really afford. No overspending!
- There's more security in case your wallet gets stolen or lost. Having money in your debit card is safer because no one can access your card and your cash unless they have your personal pin. (Which btw, is something you should NEVER give away!)
- It's convenient for online shopping and other personal use. When you use a debit card, usually an OTP or one-time pin is sent to you before a merchant can successfully deduct from your account.
- You're going cashless! Now more than ever, it's wiser to go cashless during the pandemic to avoid physical contact of the virus.
Cons of using a debit card:
- Just like credit cards, there's the risk of potential fraud. The difference with debit cards is that one automatically loses money. "Real money" is being transacted which means, resolving frauds or wrong charges is much harder.
- There are ATM and online bank transaction fees. Use of another bank's ATM and online bank transfers have minimal charges. Sometimes, we don't recognize it because it seems small but when accumulated, it sums up to a big amount.
How do I know which card is right for me?
In case you didn't know, there are three types of behavior when it comes to spending your money. (Coach Yani talks about it in this TikTok video!) We're all in different stages of our lives which means our take on personal finance won't generally be the same, obvi.
If you're still a student and currently unemployed, coach Yani recommends a savings account in traditional or digital banks. "Having a savings account as young as possible empowers a student to start earning money so they can start saving money." For millennials who are currently employed, she encourages you to have multiple savings account with different purposes. "This empowers a person to have better financial management." She recommends having separate accounts for your payroll or income, emergency fund, expenses, and ~fun~ money. She also mentioned that she prefers digital banks than traditional banks because they have higher interest rates, which means money kept in the bank can easily give one to six percent in return. Plus, digital banks don't have minimum fees unlike traditional banks! And as a word of advice for those who are thinking of getting credit cards, coach Yani said, "I don't really recommend applying for one unless a person has already established good financial habits, is financially stable, or if there's a need for a business or other important matters that require one."
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