Have you ever been at a cash in the grocery store with your wallet open and could not decide which card to use to pay for the items? Debit or Credit? Unfortunately, in a cashless society where paying with plastic is becoming a habit, choosing between the two options is taken for granted. For individuals that are trying to manage their money better or in the midst of starting a monthly budget, deciding which card to use in stores must be a smart and informed selection.
To make the right choice for your financial situation, here are 5 questions to ask yourself.
1. What are the differences between the two cards?
The major difference between the pieces of plastic is that a debit is directly linked to your bank accounts (chequing or saving) whereas a credit is not and is a loan that you are responsible to pay back. Although there are other differences, it is essential to be aware of the source of funds for each card. Remember, if you decide to use a credit card to pay for an item and cannot pay the charges in time, you will incur interest on the outstanding balance. (Golden Rule: Do not use your credit card unless you have the exact amount in the bank.)
2. What am I purchasing?
Depending on what you are purchasing should influence your choice of which card to use. If you are buying items on the internet such as a book or a DVD, you have no choice than to use your credit card. For everyday items such as food, hygiene products and some clothing, use a debit card because it is more convenient than having paper money and coins in your pocket.
3. Will I have steady cash coming in the future?
Often called “cash flow”, the ability to have a steady source of cash on hand should play a role in deciding to use a debt or credit card. If you have an inflow of money from a paycheque or pension, then you can afford to make a charge to your credit card knowing that you will have the money to pay the bill when it comes due. In the situation where you do not have a steady inflow of cash, you might want to reconsider if you really need the item or be prepared to use your debit card. Attempt to avoid using your source of credit if you cannot pay it back in a timely fashion.
4. Will I need credit in the future?
If you have plans to buy a car or a house in the future, you will probably need a source of credit. As a result, you will need to establish a good credit history by using your credit card wisely. Lenders will need to take a look at your ability to manage credit over a period of time. This means paying for items on credit without owing an outstanding balance. Purchases do not have to be large in terms of dollars and cents, you just have to have a manageable amount of money that will have to be paid back. If you do not have the ability to pay the charges, do not make the purchase regardless of your goal to establish a credit history. Remember late payments and debts will have a negative impact on your credit record.
5. Am I going to use my reward points?
Card credit companies offer reward points program as a way to get clients to use their cards more often. If you wish to participate in the program, you should be careful on what is being charged and the price of the item. You should not be spending money that you might not have in the attempt to accumulate points for an item.
Below is a table that summarizes what you should consider the next time you pay with plastic.
For more information on debit and credit card management, attend Connect with Financial Literacy 2013 on November 22nd, 2013 in Montreal, Quebec.