Debit v’s Credit Cards

Well I have crawled out from under my not-so-cosy rock and am back into my blog, so you can expect honest, truthful and unorthodox blogposts going forward from me – apologies for the lack of contact!

I was watching TV the other day (a rare occasion with all of my dance practice lately), and an advert came on for sorted.co.nz. There was a woman going on about her credit card and how much interest she was charged “for using her own money in advance”. My initial thought was ‘durh’ are you kidding me, what, you think you get to use that cash for free? Moreover, the advert didn’t make a huge amount of sense as generally you are only charged interest if you haven’t repaid the card in full within your interest free period (usually between 30 – 45 days), and if the lady in the advert was using “her own money in advance” then she would have (in theory) be repaying the credit card in full each month and not being charged interest, obviously she wasn’t and there lies the problem.

Most of us will probably have a credit card, or at least know what one is, and most of us with them probably don’t pay it off every month like we are supposed to and quite possible push the boundaries with them by buying those shoes we didn’t really need, or that holiday that we just had to have now. This got me thinking. Now that there is Debit Visa cards like the ones Westpac have recently put out to the market; why do we, the average Joe Bloggs, need a Credit Card anymore? And are they just accidents waiting to happen for people without great financial discipline?

For those of you who need a brief explanation on the difference between Debit & Credit, here it is; a Credit Card is your standard Master Card, Visa American Express and is basically a line of credit you can draw on with the intention of paying it back at some point. You are charged quite a high interest rate (anywhere between 14%-22%) on the balance and if you “max out” your card there is a minimum payment that you generally have to make on the card per month; so really, it becomes like any other standard monthly expense you have if you max it out and can’t repay it. This minimum payment figure varies from 3%-5% of the balance – varies from lender to lender. So, for example if you have a $4,000 maxed limit and your lender has a 3% minimum payment, your monthly payment will be $120.

The Debit Card, although still a Visa card that allows you all the ‘good’ benefits of a standard credit card, enables you to use your own money already in your bank account; so this eliminates the need to repay the bank back as you are not using their money, you are using yours. So, there is no risk of maxing out a credit card and having yet another expense to pay at the end of the month.

I thought I’d go over some of the pros & cons of Debit Cards v’s Credit Cards:

Debit Card – Good Idea

Credit Card – Bad Idea, unless you can repay it each and every month without fail, hassle or most importantly, leaving you short of cash. Also, as far as obtaining mortgage finance goes; if you owe money on your credit card the bank will take into consideration the limit, not the amount you owe as to what they calculate to be your credit card expense. For example (same as above); If you have a $4,000 limit and you owe $1,000; the bank will take 3% (varies from lender to lender) of the $4,000 (limit); not 3% of the $1,000 (what you owe). So, My advice; either get rid of your credit card altogether, reduce your limit right down or repay your credit card every month.

I agree that Credit Cards are good for those “emergencies”, no argument from me there; if I had a friend in need and I needed to get to London or somewhere to see them then a credit card might come in handy. But then this is where a-whole-nother blog could be written on ‘Financial Planning’ as to what you should at least always have in savings; just briefly, an intro to a basic financial plan is that you should have at least three months of your expenses in a savings account for emergencies, such as, losing your job (quite a possibility in the world today) or emergency trip overseas for a friend/family member in need.

Comments are welcome....

Jod :-)