You get to the counter and pull out your wallet to pay for your groceries. Like most people, you might use your credit card instead of your debit card to make the payment. But, should you? Well, credit cards have many benefits that debit cards don’t. For instance, credit cards offer reward points when you make your everyday purchases. These reward points can be used to offset your future purchases.
They Look the Same, but They Are Very Different
Debit cards and credit cards look identical, with both having expiration dates, PIN codes, and 16-digit numbers. That is, however, where the similarities end. While debit cards let you withdraw money that you have deposited in the bank, credit cards let you borrow cash from the bank up to a certain limit set by the card provider.
A credit card gives you access to short-term loans. When you pay for something using a credit card, the bank pays on your behalf. The amount will not be deducted from any of your bank accounts. Generally, many banks allow you to spend up to four times your monthly salary. This amount has to be repaid either fully or in the form of minimum payments every month. However, you will incur an interest rate of around 25% p.a. on your outstanding balances.
On the other hand, debit cards are like plastic cheques. When you swipe your card at any outlet, the amount will be debited from your account immediately. There is no interest rate charged for this, and you will not get a bill at the end of every month. Debit cards can also be used as ATM cards, allowing you to withdraw funds from your bank account.
Let us illustrate:
Let’s say you want to purchase flight tickets that cost S$1,500 and you only have S$1,000 in your savings account. Buying the tickets with a debit card is not possible since you do not have enough money. But, you can buy them using your credit card and still have S$1,000 in your account. In 31 days, you must pay at least the minimum amount of the S$1,500 you used to purchase the tickets.
At BankBazaar Singapore, we suggest you pay the entire amount and not the minimum amount every month. The reason is that you will incur interest rates on the unsettled balance. Check out worst credit card mistakes to know about the importance of paying your bill in full.
When Should You Use Credit Cards?
- To earn rewards: A credit card can reduce your expenses if you use it as a mode of payment. This is because most credit cards reward you with reward points, cashback or cash rebates, and air miles for each S$1 charged to the card. These cards may also offer discounts at dining outlets and retail stores when you use them to make purchases. You will save money if you do not have a debt.
- To build a credit score: Using a credit card and paying the bill on time will help you build your credit score. In this way, banks will know that you are trustworthy and a responsible borrower. It will be easier for you, in the future, to take out a major loan like a home loan, a car loan, or a personal loan if you maintain a good credit score. Conversely, if you have a thin credit file, banks will be unwilling to lend you when you need a loan.
- To access cash during an emergency: A credit card can be used for emergency purposes when you are abroad. This is a cheaper option than to have someone send you cash via Western Union in case you run out of money. To do this, you will have to activate your card for overseas use. It is highly recommended to not withdraw cash from your credit card account in Singapore as you will incur high interest rates. A personal loan would be a better option for emergencies since their interest rates are comparatively lower.
- To make online purchases: Use credit cards to make online purchases. Most banks and online websites offer attractive deals like reward points, rebates, and discounts if you use the right card for online shopping.
- To use the concierge service: Most credit cards provide concierge services, where you can get a dedicated staff member to help you make travel plans or book hotels. You can also get exclusive access to concerts and other events that usually have limited seats.
When Should You Use Debit Cards?
- To pay off debts: In case you have a debt, you should avoid using your credit card till you have repaid it. Refrain from leaving an outstanding balance on your credit card – the interest rate will defeat the purpose of earning any benefits or rewards on your card.
- To not give a student a credit card: Do not give your child a credit card unless it is a student card with a credit limit of S$500 or you are very confident that your child will not overspend. Can you imagine the amount of debt you have to repay if our child comes home with an iPad, an Xbox or S$3,000 worth of clothes and shoes?
- To control your spending habit: If you are a person who spends like there’s no tomorrow, then a credit card would be a terrible option for you. Use a debit card as it will keep your expenses in check and you will learn to balance a budget. If you still want a credit card, inquire at the bank if you can get the lowest credit limit possible so that you will not go overboard with your spending.
- To avoid paying annual fees and interest rates: Most credit cards will charge an annual fee every year, with each bank charging a different rate. Debit cards do not have such fees. However, you might get a waiver on these fees if you meet certain criteria. When you use a credit card and pay only the minimum amount each month, you will attract high interest rates on your unpaid balances. This makes credit cards expensive as these rates will overpower any reward points you may earn.
At times, it can be dangerous to use debit cards for online purchases as the risk of falling prey to cybercrime is high. If you lose your debit card, the money in your account might vanish even before you can block your card. If you lose a credit card, you will have to report to the bank and pay a liability amount required by it.
Those who say that debit card can help you prevent overspending, probably haven’t used a credit card ever, or haven’t learnt to use one properly. Trying to regulate your spending by wiping out your savings is a horrible practice. Instead, you can learn to plan your expenses, adopt good savings habits, and continue to enjoy the benefits that come with using a credit card.