Debit cards or credit cards - how to spend

By iTrust Financial Advisors (www.iTrust.in)

How do you decide whether to use your debit or credit card when you pay a bill at a retail shop, restaurant or any other establishment? Do you know what is the better thing to do? Here we give you some simple background to help you decide.

Debit cards are linked to your current or savings account. When you pay using your debit card, you are using your own money to pay. Credit cards, on the other hand, are a quick way you can get a loan from the card issuer to facilitate your purchase.

Rather than the amount being debited from your account immediately, you get a statement at the end of the month, and are expected to settle your outstanding balance within the specified deadline, failing which you are liable to pay very expensive fees and penalties.

Personally, we have a preference for debit cards because you know your spending limits and you are likely not to stretch yourself too far – you are forced to limit your spending to the amount of funds that you have in your account.

However, there might be times when you don’t have enough money in your account, and need the short-term funding to make a purchase before your paycheck. At such times, using a Credit card to pay is justified.

But you must understand that the outstanding amount must be paid in full and on time when your statement arrives. Just because you have spent on your credit card, does not mean that you don’t have to fund the payment. Somebody gave you a loan for it, and you must pay the loan back.

If you don’t or you get delayed, the lender will charge you rates of interest that can be close to >40% per annum. Compare that to a personal loan of around 18% or home loans at 10% and you know that spending on credit cards can be very expensive.

Credit cards occasionally come with attractive features like loyalty points for rupees spent on the card and soft benefits available to card holders. However, these are worth nothing if you are in default of your repayments.