As the economy continues to crumble, consumers are becoming increasingly mindful of their financial options. Understanding tools like credit cards and debit cards is smart money management. It can keep you out of debt and actually save you money.
Consumer debt has reached unprecedented levels, producing a situation so dire that consumers are finally embarking on a crash course in financial literacy. One financial topic that's worth learning is the difference between credit card and debit cards. Taking a close look at these two options may actually be the first step to take to reduce a mountain of consumer debt.
Tight budget? Choose the debit card
The key difference between the debit and credit card is speed. With a debit card, any purchase made is instantly deducted from your savings or account">checking account. With a credit card, you won't have to make a payment for 15 to 30 days after purchase, and even then, you don't have to pay the entire balance.
The debit card is simply a plastic substitute for cash or check. It only provides funds if you carry a large enough balance in your account. If you don't, the card won't work. There are some banks that allow you to exceed your balance and draw from an overdraft account, but you'll pay interest on any funds you tap.
Debit cards are ideal for someone prone to compulsive shopping. If you've had consumer debt problems in the past, it can help you keep your spending in check. The only negative is that you don't have access to the rewards programs and the security benefits offered by credit cards.
Benefits (and pitfalls) of credit cards
Credit cards offer a bevy of attractive benefits in comparison to debit cards. Most credit card companies offer rewards programs, which offer you points for every purchase you make. Points can eventually be redeemed for airline tickets, gifts, or even cash. You can tailor the rewards programs to your personal tastes.
When you use a credit card, you also have the luxury of being able to delay the payment on an item. This gives you added flexibility when you're making purchases; you only need to pay the card's minimum balance, so it can effectively act as a short-term loan.
The smartest option is to carry a credit card but treat it like a debit card: Pay off all your balances in full every month. It's the smart way to have your cake and eat it, too, as you'll have the flexibility of a credit card, but still be able to cash in on the rewards. The benefits of a credit card are lost, however, if you fail to make those minimum payments. Picking the right option is meaningless if you don't have the discipline to make it work.
