Do you know the benefit differences between debit cards And credit cards? More and more Americans are using credit cards over debit cards or even cash. There are a few reasons for this. People could feel like bad times are behind them, or they could simply be out of cash. But the comparison between debit cards and credit cards is changing and that may be the key reason why many people are turning to credit cards.
Most people don’t realize that the proper use of a credit card is like having access to an interest free loan every month. This is one of the key reasons to vigorously protect your credit score. This is also perhaps one of the reasons that credit card usage has been growing by nearly 10% per quarter. This is a complete reversal from three years ago at the bottom of the economic collapse when credit card usage was at an all time low. Following are a few reasons why you should be using a credit card instead of a debit card.
Credit Cards Provide an Interest Free Loan Every Month
One of the biggest differences between debit cards and credit cards is that If you properly use your credit card, you can have access to free capital every month. Who says there is no free lunch? If you pay off your balance during each grace period you pay nothing. Credit card companies are willing to do this for two reasons.
1. Credit card companies know that you won’t always pay off your balance. They charge an enormous interest rate on your balance so they are willing to give you free money on the months you pay it off and charge a huge fee for the months you don’t pay it off. Over the long run they are willing to bet that they will make a nice return.
2. Credit card companies make money every time you use your card. They charge the merchant around 2% of every transaction. This can vary depending on the type of merchant and type of product. Some online merchants are willing to pay up to 15% of the purchase price to a credit card company.
So don’t cry for the credit card companies. They are making plenty of money whether you help them or not. Visa made 3.6 Billion dollars in net income last year alone.
Credit Cards Provide Perks and Rewards
Credit card companies realize that one credit card is as good as another. That is, unless they can start offering perks and rewards to entice you to use their card over another card. Debit cards don’t do this. It’s a numbers game for the credit card companies. They realize that every customer is another chance to earn enormous interest rates and transaction fees.
Just as Easy to Get a Credit Card
Regardless of your credit rating there is some credit card for you. Even if you have to start with a pre paid card or a secured card, you can eventually graduate to a normal credit card. This will allow you to establish credit and have access to the free money we discussed above.
Debit Cards are Not What They Used to Be
Recent legislation has made debit cards much less attractive than they used to be. Banks used to be able to charge transaction fees on debit cards in the same way they did on credit cards. This has been eliminated by the Durbin Amendment. Banks relied on those fees for income, and are now scrambling for new ways to charge customers. As a result, banks have been exploring new ways to charge customers for using debit cards. You may have heard of Bank of Americas announcement that they were going to charge all customers $5 per month for the use of a debit card. That didn’t go over too well with customers so they discontinued the monthly fee. Still, banks are looking for ways to charge debit card users.
Conclusion
Knowing the differences between debit cards and credit cards is key to knowing which one is right for you. If you can manage your spending and your habits, you are much better off using a credit card over a debit card. As always check with us if you have any questions. We are always standing by to answer your credit questions.