Credit cards provide freedom to people to buy goods and services that they may not have the ready cash to buy. The credit they provide allows purchasers to buy now and pay later, which, for some, can be accommodated by their lifestyles and incomes. Some credit cardholders may even have the money to pay, but like to accumulate points for which they get rewards. Credit cards also mean not having to have the cash on you, when out shopping, and they are much safer than carrying large amounts of cash.
But there are serious drawbacks to the use of credit cards. You can get into serious debt, and if you are compulsive spender, or a “shopaholic” you can spend on your credit card to the limit, and many financial institutions are offering credit cards with limits that are too high for some people. This can result in the cardholder unable to pay the minimum monthly balance, and the financial institution is entitled to apply for bankruptcy due to default of the debt. This can mean your assets being seized and sold, your passport cancelled, and your credit history ruined, so that you are unable to borrow money.
Also, paying only the minimum monthly balance can make you pay much more in interest than the purchase price.
Debit cards may be better for those people having problems reigning in their credit. They are linked to bank accounts, and you can use them to purchase goods and services. No credit is involved – the money comes from your bank account. You do not have to pay any interest because you are not using credit. In fact you receive interest on the money in your account. There is obviously no risk to your credit history, and no chance of bankruptcy. Visa has a debit card, which means you can use it anywhere a credit card is accepted. You can apply for Visa debit cards at some financial institutions. There are also some MasterCard debit cards.
But debit cards do have some drawbacks. They carry some security risks. You could be liable for unauthorised EFT transactions. You should memorize your PIN or password and then destroy the written record of it, and immediately report a lost or stolen card. Debit cards can have large fees. Some overseas merchants and EFT terminal levy a surcharge for making EFT. After confirming the transaction you cannot dispute the surcharge.
You can use your debit card to convert Australian dollars into foreign currency while traveling overseas, but it can cost you. Visa International charges a conversion fee of 2% of the value of the transaction. Also transactions may not be processed to your linked account on the same day, with the risk of the exchange rate changing during this processing time.
Debit cards do not easily allow the cardholder to be traced, as transactions go through almost immediately, unlike a credit card which produces a monthly statement. Car rental companies, Hertz and Avis, have refused debit cards for renters. They consider the risk the same as for cash, for a vehicle that could cost $20,000, and require making an application several weeks in advance and leaving a substantial deposit.
Credit Cards – Benefits:
- Rewards programs
- Security of not carrying large amounts of cash
- Credit Cards – Costs and Risks:
- Default of credit repayments
- Possible bankruptcy
- Effects on credit rating.
- Cost of interest payments
- Debit Cards – Benefits:
- No credit risk
- Convenience the same as some credit cards
- No interest to pay
- Debit Cards – Costs and Risks:
- Risk of liability for unauthorised use
- Fees and charges can be high
- More difficult to trace people than for credit cards