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 :-)

Credit Companies, School System or Individuals - who is to blame for credit debt?

There was a documentary on New Zealand's 60 minutes last night about a girl who had racked up $70,000 in credit debt on a $35,000 salary. While driving to work this morning listening to the radio, the presenters were taking calls on this topic and specifically referring to this documentary, and discussing how easy it is to obtain credit in this country, and the problem we face with ‘Generation Y’, that is fast becoming ‘Generation Debt’!

My question is – whose fault is this?

The credit companies for practically giving away credit and just making it too tempting, with 24 month interest free deals & 12 month deferred payments?

The school system for not educating kids on how to save and spend their money?

The parents of the Individual racking up the debt?

Or

The individual who racks up the debt?

I want to explore each a little....

Credit Companies
Why the HELL should the credit companies be at fault? Isn’t it their business intention to lure people in and sign them up on these deals so they can grow their business books? So in that case; my hats off to them, as they are obviously doing a good job! It is not their problem that people over extend themselves! However in saying this, I do agree (albeit after a bit of a debate); that the credit companies could have a bit more of a tighter criteria on who they lend to and how much they lend - perhaps a more stringent way of working out borrowing capacity.

School System
God knows I didn’t last at school myself and happily bailed out at the end of 6th form; but I honestly think a little bit of the responsibility does lie within the schools. In my opinion, perhaps a little less on the pointless poems & algebra, and a little more on budgeting, banking, realistic expected salaries and actual case studies on general living & expenditure, wouldn’t go astray!

The Parents
Ok, some of the responsibility lies here also of course. Are parents teaching their kids about money? Who knows, but surely NZ kids are learning the value of a dollar – it’s not rocket science after all.

The Individual
I was shocked while listening to the radio, that everyone ringing in and also the presenters, were blaming everyone (mainly the credit companies) but themselves. Is it just me or does that seem ridiculous!? Aren’t we all adults? Do people not understand that if you tick something up – you eventually have to pay for it?

So, in my opinion, whilst there is a little bit of blame on the school system & perhaps the parents; if you as the individual have excessive credit debt – isn’t this nobody’s fault but your own? The credit companies are just doing what they do best – lending money – it is not, I repeat, NOT their fault your credit debt has got out of hand.

I am not saying I’m perfect, I have credit debt myself – but I only have myself to blame for that.