1

I'm sorry if this question seems a duplicate of another (likely this), but my situation is actually a little different.

My situation is that, I have a debit card from a bank I find convenient but seeing the popularity of credit cards these days, I'm wondering if I should really get a credit card.

  • Debit card has a chip and a magnetic strip. Can be used in both types of POS machines.
  • Bank gives me a 5% interest rate per year, regardless of the number of purchases and withdrawals I make.
  • Online banking facilities, instant online statements, and SMS alerts are offered for an annual fee, which is the same if I got a credit card.
  • I can withdraw money overseas for a small fee, and foreign POS transactions are free.

The credit cards, however, come with some offers and interest-free payment schemes. - There is an annual fee, and the interest rate (after the grace period) is extremely high. - Stamp duty, money withdrawal fees, etc are applied too.

Is there any reason to go for a credit card anyway? I'm sure I can pay off the debt before the due date, but annual cost is just an added expense. Is it really worth it to get a credit card? Are there any benefits I'm missing?

  • No bank has ever given 5% APY on a checking account (the account debited by a debit card). You may mean .05%. Also, to add to what has been written, it is difficult to build credit history (required for everything from postpaid phone plans to mortgages) without a credit card. – jmabs Jan 20 '15 at 19:29
  • @jferr actually a savings account. Please. (Here)[sampath.lk/en/interest-rates-local]. We can't make a profit of this interest because proces of almost everything will be 110% the next year. – Ayesh K Jan 20 '15 at 19:33
  • Well that would explain it, your system is a bit different over there and rates are much different! My apologies. – jmabs Jan 20 '15 at 19:42
5

Debit cards can be riskier than credit cards. That's why I personally avoid debit cards unless I have a very good reason to go that direction (e.g. HSA accounts).

To explain the risk, consider what happens if someone steals the card or number and starts using it:

Credit card: You get a big bill, which you dispute and eventually get dismissed.

Debit card: Your bank account balance drops, you don't have access to cash, and your checks start bouncing and you rack up bounced check charges with your bank and stores where you write checks. Eventually, you convince the bank it was fraud and they refund the money to your account.

The big difference is that while it is going on you are out the money with a debit card, and with a credit card the BANK is out the money. The above scenario happened to my brother and it wasn't pretty. He was having to borrow money to pay his rent and groceries while the bank sorted it out.

  • Thanks for the answer! What if I use two cards, one with a decent amount compared to a credit card, and leave the rest of my money in a separate account? Could your brother get the refund without much paperwork or time? – Ayesh K Jan 11 '15 at 17:51
  • I'd suggest the strategy of keeping a smallish amount in accounts with debit cards. Also, avoid writing checks on debit card accounts. The whole thing seems like more hassle than it is worth to me. My brother got the refund in less than a week, but depending on the timing, having a $0 bank balance can be painful even for short stretches. – JohnFx Jan 11 '15 at 17:55
  • I would disagree with the statement that debit cards are riskier than credit cards. Both carry the same protections - that Mastercard or Visa symbol on the debit card proclaims those companies are handling the fraud protection, not your bank, be it Bank of America or Little Bank in My Town. Contrary, I would say credit cards are riskier. There is no chance of getting slammed with a fee for failing to pay a balance on a debit card. That money is already yours. – rocketman Jul 31 '17 at 4:03
  • Did you see my comments on debit cards in my answer? They are definitely riskier. My brother wound up in exactly the situation described above. While it is true that you will eventually get your money back either way, with a debit card you may be without access to your funds until they sort it out. – JohnFx Aug 2 '17 at 15:13
3

I gather from your mention of "stamp duty" that you're in Britain? I'm only familiar with US cards, but for them I can't see that there is any reason (other than a lack of self-discipline) not to use a credit card wherever possible, especially these days.

1) There are plenty of cards with no annual fee.

2) You get anywhere from 1-5% discount/cash back on purchases.

3) Many will give you sign-up bonuses, and a year or more of zero interest. (So you put that money in your investment account, and odds are you make a profit on it.)

4) Even after the introductory 0% interest period, you get on average about a month of 0% interest between purchase and due date, during which period the money can be earning interest for you.

I've made a good many thousands of dollars over the years doing this. Again, the only drawback I can see is that you may not have the self-discipline to pay off the accounts before they start charging interest.

  • Sorry did you mean you saved money or earned money? I'm from Sri Lanka, which has a similar scheme as British banks. Thanks for your answer. The cash backs do seem like a strong reason to use a credit card – Ayesh K Jan 11 '15 at 18:54
  • 2
    To that I would add that they help your credit score, and most protect you against fraudulent activity while debit cards don't. – AxiomaticNexus Jan 11 '15 at 22:58
  • @Ayesh K: Earned money, on the cash backs, plus having invested money that I spent during the introductory 0% interest period. At one point (shortly after the '08 financial crash) I had close to $10K rolling through several cards' 0% periods. The money instead went into index funds, which appreciated over 25%, leaving me $2500 profit. Of course this depends on having both the ability and the discipline to pay cards off before the 0% period expires. – jamesqf Jan 12 '15 at 5:57
  • In response to point 4, I believe that on average you are only getting a half month of 0% interest – Bishop Jan 20 '15 at 17:28
  • @Bishop: I think it's longer. There's a monthly billing cycle, and you can make purchases any time during the cycle, so average of 2 weeks. Then I have about another 2 weeks from the end of the billing cycle until the payment is actually due. Actually it can be even longer than that: for the card I'm currently using for most things (Barclay), this billing cycle closed 1/15, and payment is due 2/13, so that's about 6 weeks. – jamesqf Jan 20 '15 at 18:30
2

What makes a credit card risky is that it requires discipline. It is very easy to buy things that you cannot afford with a credit card. Credit cards usually require a minimum payment every month if you owe them money, but if you pay only the minimum amount, your debt will grow quickly. And since the interest rates are usually very high, you can easily get into a state where you are overwhelmed by your debt. The correct way to use a credit card is to pay the complete bill every month. If you can't afford to pay the complete bill because you spent too much, cut up your credit card.

On the positive side, there are many situations where paying by credit card will give you protection if you don't get the goods that you paid for, because the credit card company is fully responsible for those goods, just like the seller. So if you pay for a $5,000 holiday with a credit card and the company you paid to goes bankrupt, the credit card company will refund your money.

Do not ever look at cash back on purchases. You only get cash back if you spend money. Getting $50 cash back is of no use if you had to get $2,500 deeper in debt to get that cash back. (Some people might contradict this. But if you ask for advice on money.stackexchange then this is the correct advice for you that you should follow).

  • Getting $50 off $2500 spending is of considerable use, if you had to spend that $2500 anyway. Again, it all depends on self-discipline: if you can't stop yourself from spending money you don't have, then you shouldn't have a credit card. But for those of us who don't have that problem, they are basically free money. – jamesqf Jan 20 '15 at 21:58
  • there is no such thing as "free" money. Do you think a sophisticated credit card company, that is in the business of making money loaning others money, would give "free" money away? They have run the numbers. They make far more than the cash-back in delinquent payment fees and interest. Even if you're disciplined, mistakes happen, a payment is lost, your kid is sick and you forget to pay on time, or the supposed "automatic" payment doesn't happen. – rocketman Jul 31 '17 at 4:07
1

There are quite a few advantages to credit cards in the uk. But don't borrow on them past the grace period. Set up a direct debit to pay amount in full.

  • Grace period: you don't pay interest for a month. That helps cashflow and earns you a tiny bit of interest
  • Cash Back: some cards give you cash back on purchases
  • Builds your credit rating: helpful if you need a loan or mortgage on the future.
  • Consumer credit act protection: you get extra protection against faulty goods and services if bought on credit card, even if only a part of the payment is on the card. For example if your ebay parcel doesn't arrive you can't be charged, if your new bathroom is poorly fitted etc etc...
  • Emergency funds: if desperate you have immediate access to extra funds

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .