When you obtain a new checking account you will most likely be asked if you would like a debit card complete with a VISA or MasterCard logo that is attached to your account. Of course with a debit card you can only spend as much as you have available in your account, so tracking purchases will be an important task to stay on top of.
After a divorce, you begin separating your life from your ex, including your finances. It is important to set up bank accounts of your own and credit in your name only as part of the starting over process.
A credit card which may look like you debit card, is a completely different animal. Credit cards have a credit limit and charge interest for the convenience of using the card.
Understanding how debit and credit cards work will help you use them smarter.
As you can imagine each of these types of cards has its own set of features and benefits. So how do you know which one is right for you? Or should you have both?
Debit Cards: Your money in a small plastic card
A debit card (also known as a check card) is linked directly to your checking or savings account. Money is withdrawn from your account when you make a purchase, so it’s more like writing a check than using a credit card.
- ATM withdrawals. Your debit card gives you access to any one of many ATM machines where you can withdraw cash from your account. It is important to note that many ATM’s will charge a fee to use them and your bank may also charge you a fee.
- A debit card can be used wherever VISA or MasterCard is accepted for either online or in-person purchases. Let’s say you would like to purchase gas from the gas station and use your debit card. You use it just like you would a credit card, except the money is withdrawn from your bank account and usually takes 2-3 days to process. While you are not required to use your pin number, you will need to sign the receipt like you would for a credit card transaction.
- Identity theft. This is a concern for many, as identity theft is on the rise and debit cards are one way thieves work their way into your bank account. If an identity thief steals your PIN number and makes online debit transactions, you can lose all the money in the account tied to that debit card. See the Consumer Action article about fraud protections for debit cards. If they try to use your debit card as a credit card your protection by law is a maximum liability of $50 of unauthorized charges.
Credit Cards: A Necessary Evil
I know many people that get by just fine living a cash only life, however establishing credit is important if you are looking to buy a home or take out any loans in the future.
A credit card is a means of buying goods and services on credit. Credit cards are issued to you based on your income and information on your credit report. When you use a credit card, you are borrowing money against a line of credit. You pay it back with interest each month if you haven’t paid the balance in full by the payment due date. If you do pay your balance in full before the grace period expires (usually about 25 days), you won’t be charged interest.
While this all sounds good, credit cards can get you into trouble if you are not careful.
- The Annual Percentage Rate (APR). This is the cost of credit (actual interest rate) expressed as a yearly rate. Comparing the APR of loans or credit cards is a quick way to determine which loan or card will likely cost you the most, excluding optional fees such as late payment fees, ATM fees, or obtaining a cash advance. Whether your interest is calculated daily, monthly, or yearly, the APR provides a standardized way of comparing the interest rates on different cards or loans.
- The Fees. The APR accounts for the interest you are charged for using your credit card but there are also fees to watch out for. Currently late payment and over the limit fees for credit cards are up to $39 per occurrence. Worse yet, the credit card company has the option of increasing your APR to the default rate if you are late or over the limit, even just one time.
- Cash advances. Need cash? No problem. You can obtain a cash advance on your credit card. Just remember that you will pay at the front and out the back. Frequently cash advance fees are 3 to 4% of the transaction amount. Unlike your debit card, your credit card company will sock you for taking out cash. Cash advance fees can vary: you must read the very tiny print in your card agreement to find out just how much.
- Minimum payments. Making only minimum payments on your credit card puts you in a very precarious position. By paying only the minimum payment each month you will ultimately pay several times the amount you spent because of the accumulated interest charges.
The key to responsible credit card use is to spend only what you can afford to pay back in full each month. Interest rates and fees on top of your purchases can add up to big debt. The convenience of using the credit card is usually not worth the price. If you do make a purchase on a credit card make sure you understand all of the terms and conditions attached to the card.
So which type of card is right for you? The answer will be different for everyone and maybe one of each is the best choice. A debit card gives you the convenience of a credit card but is less likely to put you in debt. A credit card offers consumer protections that debit cards do not.
If you find yourself in need of debt help don’t wait until you are in over your head; explore your options for debt relief as soon as possible. Ignoring the problem won’t help the situation.
What type of card did you go with post divorce? I chose a combination of both.
The Divorce Coach Says
I actually have three credit cards – two for my own use and one for expenses relating to the children. I use these almost exclusively but I also pay off the balances in full each and every month.I like to carry two credit cards for my own use since one is an American Express and that’s not accepted everywhere but it’s still a good back up in case there’s a problem with the other card. Neither of the cards have annual membership fees.
I do also have a debit card for my account and also for the children’s account but these are rarely used. I think my preference goes back to the days before you could get automated downloads of account activity. It was just easier to use the credit card than to remember to write down each debit transaction.
I’d think about switching but I am a creature of habit and this system has served me well for quite a number of years. And … all the credit cards offer some type of rewards which I wouldn’t get on the debit cards…
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