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Credit or Debit Card: How To Be A Smart User

Once upon a time... Cash was (the only) King.

Early 90s saw the emergence of a worthy competitor... Credit Card.

And, around 10-12 years back, the third alternative made a debut... Debit Card.

Cash, naturally, everyone understands. The card-based payment mechanisms, however, offer different... yet significant... advantages.

But before we get to the crux of this article, let's understand the "basic" functioning of the two.

Debit Card: This is as good as paying in cash. Both Cash and Debit Card involve immediate payment.

The only difference is that in Cash payment there is a physical exchange of money.

Whereas, with Debit Card your bank account is debited electronically (and the seller receives an electronic credit in his bank account for the same amount).

Credit Card: This is nothing but a loan. When you swipe your Credit Card, the issuing bank undertakes to make the payment to the seller on your behalf, and creates a "loan" in your name. You have to repay this "short-term" loan at the end of the month, as per the billing cycle.

IMPORTANT: As long as you pay off this bill before the due date, this loan to you is "totally interest-free".

However, if you don't have the means to clear your bill by the due date, you can roll it over to the next month. But, now you would be charged interest on this loan.

BEWARE! You should NEVER rollover your outstanding amount. Because the interest costs are exorbitantly high. In case you don't know, Catastrophic Minimum Amount Due in Credit Cards would be an eye-opener.

In short, Debit Card means immediate outflow of cash and Credit Card means deferred outflow (with or without interest).

These differences
(a) in the "timing" of cash outflow and
(b) the possibility of an "interest" cost
create the opportunities when, sometimes swiping your Credit Card is more beneficial than using your Debit Card; and vice versa on other occasions.

Relax... No more confusion on whether to use your Credit Card or Debit Card!

So, when should you present your Debit Card for payment?

...when you wish to avoid overspending
Invariably, the bank balance for most people is limited. Therefore, the maximum expenses possible, are limited by the amount in the account. Thus, Debit Card works as an excellent tool to stop people from going overboard with their shopping spree. You have to perforce buy only the necessities, and skip the extravagances.

...when you are careless with your paperwork / bills
Some people are not up-to-date with their paperwork or have the tendency to misplace their bills. In such cases, it is best to avoid adding one more bill to be tracked and managed. So let your Credit Card lie in your pocket and make the payment through your Debit Card. It's a bill-free transaction.

...when you wish to avoid paying enormous interest charges
As mentioned earlier, if you do not make timely payments on your Credit Card, you will end up with a huge interest burden. To avoid becoming a victim of such killer charges, it is best not to create such a liability. Stick to your Debit Card and your finances will be safe and secure.

...when you have to withdraw cash at the ATM
For purchases you get an "interest-free" period on your Credit Card. But for cash, the interest meter starts the moment the cash is dispensed by the ATM machine. Plus, there are transaction costs and service tax to be paid. Hence, NEVER use your Credit Card to withdraw cash at the ATM. Debit Card... only debit card... should be used for such purposes.

And, when should you swipe your Credit Card?

...when you don't have sufficient balance in your account
This, naturally, needs no explanation. If your bank balance is near zero levels, you have to take recourse to your Credit Card. But, restrict yourself to using it for emergency requirements ONLY. Don't splurge the "non-existent" money on the "non-essentials". Also, as repeatedly warned, make the full payment before the due date. Else, you could invite financial doom and disaster.

...when you are sure that you will pay off the bill before the due date
Since your Credit Card offers interest-free period on purchases, you must use it as often as you can... PROVIDED you are 100% certain of making your payment by the due date. You might as well earn some interest on your bank balance till the bill is due, instead of making immediate payments.

...when you have to build a good credit score
Credit Score is gaining importance. A good score helps in securing loans faster and at lower interest rates. Using your Credit Card "judiciously" and making "timely" payments every month, is a great way to build and improve your Credit Score for your future home loans, education loans etc.

...when you shop online (preferably using your virtual credit card)
Most banks allow you to create a Virtual Credit Card (VCC) out of the limit sanctioned on your physical Credit Card. Since, the risks of hacking at quite high in online shopping, it is best to create a VCC (which may be for one-time use or for a small part of your total limit). This protects the sensitive data on your main card from being hacked and misused.

In some cases, either of the Cards would be perfectly fine

...when you want to have a detailed record of your expenses
Both Credit and Debit Card create a detailed item-wise record of your purchases, as compared to using cash. This data could be quite useful in preparing your future household budgets.

...when you get reward points that can be redeemed for free gifts
Both Credit and Debit Card offer reward points on usage. Once you accumulate sufficient reward points, you can exchange them for a wide variety of free gifts.

...when carrying large amount of cash is not safe
Both Credit and Debit Card offer physical safety, as carrying large amount of cash can be a serious threat to your money... and your life too.

Before you move on, do spend a few minutes to check out my 'Shocking advice! Use credit cards more often than you use your debit cards'.

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