When it comes to borrowing money both bank overdrafts and credit cards are seen as effective solutions in the short term. Both have inherent advantages such as flexibility and short-term cost effectiveness, but what are the disadvantages and how should you decide which is the best solution for your circumstances?
Credit Card Advantages
1. Should you borrow money and pay the amount off by the end of the month, most credit card providers will not charge a cent.
2. Should you complete a purchase with a credit card, and later find a problem with the item, then the credit card company will withhold payment from the retailer/provider until everything is resolved.
Credit Card Disadvantages
1. Long term interest rates are higher with a credit card than they are for a bank overdraft.
2. Credit card fraud is on the rise, and although the credit card companies are willing to burden most of the cost, people could still have to pay around $50 should this happen to them.
3. Should you intend to withdraw cash then your credit card company may charge you a per transaction or percentage rate.
Bank Overdraft Advantages
1. Should you have a bank overdraft then you can easily avoid fines in your bank account, because this will automatically be covered by your overdraft.
2. Bank overdrafts are often the most cost-effective way to borrow money over a period of several months. Your bank may be able to offer better interest rates than your credit card provider because they can earn money from customers in multiple ways, including mortgages, payment services and savings accounts.
Bank Overdraft Disadvantages
1. Bank overdrafts can be called in at any time by your bank. What does this mean? Although it is unlikely, your bank may ask that you repay your balance within a small amount of time or face legal action and closure of your bank account. Depending on state civil law they may also be allowed to use retention, meaning that if you do not pay your bank overdraft balance, they could remove this from your savings account for example.
2. Bank overdrafts will charge you based on an average of your ongoing balance rather than the ?amount at the end of the month?. This means that should you borrow for a short period of time, and pay the balance in full, you will still be charged for borrowing.
3. Unlike a credit card provider, your bank will not provide any security in terms of holding back payment from unscrupulous suppliers.
Should you intend to borrow money through credit card borrowing or indeed through a bank overdraft, then it is fundamental that you recognise the inherent problems that can occur if you have no obvious way of financing it. It is recommended, that unless your income will increase, or your expenditure will decrease in the coming months that you avoid borrowing money.
In today's fast-paced world, more and more people depend on credit and do not even bother setting a monthly budget. Why bother saving, they ask, when they have the luxury of a hassle-free alternative form of payment that makes buying anything, anytime, a breeze. Well, sure credit cards make shopping easier, but they certainly don't make it hassle-free.
Credit cards might seem like the pot at the end of the rainbow to small kids, but in reality, they are more like tiny bankers in our pockets. We are tapping into a loan with each purchase, and while that allows us to make impulse buys (not a good idea most of the time), it also makes it easy for the "banker" to charge us interest. The short-term benefits of having the credit have long term consequences of paying off the "loan" before compounding interest kicks in and starts hurting.
To obtain a credit card, you must first submit an application form that serves as an agreement between you, the credit card consumer, and the credit supplier. If you application is approved you will receive a credit card. The card enables you to make purchases or access cash, as if you are borrowing the money from the credit supplier. There is a pre-determined spending limit applied to your account, and the supplier may limit the amount you can spend on a monthly basis.
The flipside of the plastic card has a magnetic strip which is encrypted with coded security and demographic information. The information held in the strip is transferred during a transaction to the retailer's machine to allow it to communicate with the card supplier and authorize your payment. Millions of retailers accept credit cards. You can also use the card for purchases over the telephone or on the Internet, depending on the merchant's ability to accept payment of this kind. Finally, credit cards can also be used at ATM cash machines to withdraw cash from your credit card account.
There are seven main credit card organizations that operate in countries around the world. VISA, American Express, MasterCard, Citi, Diners Club, Discover and JCB. The most widely used and universally accepted cards are MasterCard and VISA. Some credit card suppliers will partner with particular retailers and organizations to issue credit cards on their behalf; for example, the HSBC VISA card.
When you make a purchase in a physical store, you are generally asked to "swipe" the card by sliding the magnetic strip through a card strip reader. When you purchase online, you will be asked to provide your credit card details on the web site itself. Be certain to check for the secure lock image in the bottom right corner of your browser before you purchase online, as there are some unscrupulous operators online, as in all parts of life. Once your puchase is approved, your credit card supplier will mail you a bill for your purchase. You can either make a partial payment, or preferably, pay the full amount of your purchases for the previous month. If you do pay the bill in full, on time, you will not be charged interest.
Some people choose to make only a partial payment, in other words, not paying off the full amount of their purchases made during the previous month. If you do that, you will be charged interest. And interest generally is applied retroactively to the day you made the purchase. If you make several purchases, or buy things that are expensive, the interest can add up surprisingly fast. This is how the card companies earn their revenues. They also sometimes charge late fees if you fail to pay some or all of your bill by the due date.
Credit cards are convenient and useful for today's shopping environment. However, the ease of use can seem pretty small compared to the huge pain of paying off debts owed on credit cards. Interest rates are usually very high. So try to pay your balance off in full every month. You will gain the convenience, without the pain. There is nothing wrong with using cash for most purchases, either, so don't feel that a credit card is mandatory.
Both Devin Gilliland & Robert Jonsonn are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.