Almost everyone has at least one credit card that they use from time to time. While this is not an issue in itself, using credit cards too often or borrowing too much money through them can drive individuals into serious debt. It can also cut their access to future loans by lowering their credit rating as a result of a high credit utilisation ratio.
Generally speaking, having a credit card is always a good idea, provided that you use it sparingly and always pay it off as soon as possible (preferably before the end of the month).
This having been said, as popular as credit cards maybe, more and more individuals have started using debit ones in their stead. These can be used just as easily, but they come with a few extremely important advantages that can help individuals have a healthier financial life.
What’s the Problem with Using Credit Cards?
Credit cards are similar to a line of credit. When approved to get one, the borrower gets access to a borrowing account that has a certain limit. As he pays for products and services using that card, he essentially borrows money from the credit account. Furthermore, he only pays interest for the money that he withdraws, not for the amount that is accessible to him.
This may seem appealing to some, but the interest rates attached to credit cards makes this type of debt prohibitively expensive. If the borrower returns the money by the end of the month, he usually does not have to pay interest, but many are unable to do this. In most cases, borrowers end up rolling their debt from one month to another and continue to spend money.
How Are Debit Cards Different from Credit Cards?
Debit cards do not allow you to borrow money, but to tap into an account that you have opened and deposited money into. There is no interest rate attached to it because there is no debt. Furthermore, individuals who deposit and withdraw certain amounts of money using their debit cards are usually not even required to pay administration fees. In other words, having and using a debit card is free.
However, one of the biggest advantages of debit cards is the fact that they help individuals save money. A large number of lenders allow individuals to open savings accounts and attach debit cards to them. This means that they will receive interest for the money that they deposit into their savings account, and they can access the entire amount using the card.
At a glance, this may not seem useful to individuals who are using credit cards because they have a hard time paying all of their monthly expenses, but in the long run, they can be great tools. Credit cards almost always lead to considerable debt if overused, and having more than one will affect an individual’s credit score.
On the other hand, having and using debit cards will show lenders that you can properly manage your finances to save money, and your credit rating will go up.
They Cannot Lower Your Credit Rating
Having several credit cards, even if you do not use them, will lower your credit score. This is because lenders will consider that you already have a large amount of credit available to you and may not approve future loans. Furthermore, using the credit cards will affect your credit utilisation ratio, which will again lower your credit rating.
Debit cards do not have these issues. Any individual may have as many debit cards as he wishes, and his credit score will not be affected.