Choose your weapon!
Feb 21 '00
If you want my advice, always use a credit card. The only reason to use debit cards for purchases instead of a credit card is if you won’t or can’t pay off the entire credit balance each month. I've mentioned this in other epinions, but it bears repeating here: "The single most important financial improvement you can make is PAYING OFF YOUR CREDIT CARDS EACH MONTH".
Here’s why (assuming you now pay off your credit card bill every month) you should always use credit cards over debit cards for new purchases:
1. Delayed Payment: A critical financial theory is crucial to understand here. "The Time Value of Money" suggests that because of inflation (erodes the value of money) and interest bearing accounts, a dollar you get or save today is worth more than a dollar you’d receive next month or next year. For some of you, the reason you use a debit card is because the cash is immediately withdrawn from you account. Given the time value of money, this is actually a very BAD thing! Do yourself a favor here, if you won’t be able to pay for it in 30 days, then don’t buy it today. Because credit cards don’t require a payment on new purchases for 30-45 days, your money continues to earn interest for you until you actually pay the bill. If you don’t have your money in an interest bearing account, get it in one immediately! Remember, always delay payments as long as you can without incurring any finance or interest charges.
2. The Credit: By deferring payment using your credit card, you are essentially receiving a free 30-45 day loan on your outstanding balance each month. If done within the rules of of your card member agreement (making regular payments, etc.), you will build your credit history. Everyone who ever uses a credit card, takes out a loan, or make a late payment on a bill, will have a credit history which will evolve and remain with you for the rest of your life. Using credit cards (properly) will help develop your credit history in a positive fashion. Using debit cards will not! I recently had some friends who got married. Both of them had only used debit cards from the time they first opened checking accounts as teenagers. When it came time to buy their first house, the mortgage lenders were very wary of doing business with them because neither one of them had any sort of credit history (good or bad). Using credit cards is good for your wallet and your credit history.
3. The Points: Whether it’s "cash back" or "frequent flyer miles", many credit cards offer great rebate/point programs. These point programs are used as enticements to get people to spend more (than they can afford) on the credit card. But now we know better than that, right? Usually debit cards don’t offer any of these bonus programs because of the great cost associated with administering them and paying out the rewards. By getting one of these cards and paying off your monthly balance each month, you can maximize your financial benefit. You'll defer payment, build a good credit history and earn some bonus points as well.
Important Note: Debit cards issued by your bank are ALWAYS the best choice to use for withdrawing cash (usually without fees). Credit cards are particularly nasty about this, charging you interest immediately from the time you withdrawal it. Use credit cards for purchases, and debit cards for cash.
No, it’s not easy to pay off your balance each month. It will take some discipline. But in the long run, you'll have a much tighter grasp of your financial security.
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