Knowing What’s Out There – And What To Choose
The World of finance can be a tricky game for both the seasoned veteran and the novice borrower. Banks can – by accident or design – make even the most simple information seem complicated and through this unwittingly (or not) induce their customers to go for products that might not be best suited to their needs.
Credit, charge, ATM and debit cards are not all alike. Although you might think that they are basically the same thing – a way of making payment for purchases or means of getting cash – they are actually quite different. So as to use these cards wisely, you should know what each one is and how it differs from the others. Here’s some information to help you choose wisely.
Credit Cards
Credit cards can be a great way of paying for a purchase. They are easy to apply for, easy to use, and flexible in their repayment options. However, if you carry a balance, credit cards can be like very expensive loans.
A credit card works like this: the credit card company supplies you with a card; you use that card to pay for items and services up to a certain total amount — your credit ‘limit.’ The store or service provider then collects what you owe from the card issuer, whom you repay. You’re then allowed to pay off as much or almost as little as you like off the balance each month, so long as you pay a minimum amount each time (usually 2.5 per cent).
On the outstanding balance you’re charged interest (which can be as high as 25% or more each year) at the end of each monthly period, unless you pay the full balance each time your bill arrives.
Credit cards are immensely profitable for issuers for a variety of reasons. The high rate of interest yields issuing banks and companies vast profits – in some cases the bulk of an institution’s earnings. In addition to the interest, many companies charge an annual membership fee for a credit card, as well as a plethora of other charges, including late fees, over-the-limit fees and other miscellaneous charges. Companies also profit by charging stores a fee each time a customer uses a credit card in their establishment.
There are three different types of credit card available:
Unsecured Credit Cards
These cards are commonly made available to those with good credit history and credit score. These cards require no bank deposit amounts to secure and usually have no annual fees and low rate of interest.
Higher Risk Credit Cards
These cards are usually given to people who have a lower paying job, and/or poor credit history and credit score. Often these cards charge an activation fee, and also usually charge an annual fee of up to $80.
Secured Credit Cards
These cards are given to people who have a lower paying job, and/or a very poor credit history and credit score. Often these cards require a deposit to be made to the lender, sometimes as much as near or equal to the amount of credit available on the card. If the borrower can prove their credit worthiness over time, that credit limit is then upped. These cards also attract a high annual fee of up to $100 and charge high rates of interest.
Charge Cards
Charge cards (also known as travel and entertainment cards) are slightly from credit cards. The most famous charge cards, such as American Express and Diners Club, have an unlimited credit limit. Normally you can charge as much as you like, but you are required to pay off your balance in full when your bill arrives.
There’s one exception to this: If you charge air fare, cruise fees or hotel charges booked through a travel agent on an American Express card, you have an option to pay off your balance over 36 months. There’s a sting in the tail, however: you’ll be charged around 20 per cent interest and will have to make minimum monthly payments of $20.
The way charge card companies like American Express make their profits is by charging very high annual fees – up to $100 – and by hitting merchants with relatively high charges each time a customer pays using their card.
If you don’t pay your charge card bill in full (unless the charges are travel expenses on an American Express card), you’ll get a one-month period of grace, when no interest is charged. Beyond that, however, you’ll be charged interest, which weighs in at about 18 per cent. After about three months, if your account is still not settled, your account will be closed and your bill sent to the collections department.
Cash Advances
Some people use their credit or charge cards to obtain cash advances. This can be an expensive way of accessing cash. Most banks charge a transaction fee that can be as much as 4% for taking a cash advance. Interest is also charged from the date the cash advance is posted, even if it’s paid back in full when your bill arrives. Moreover, the interest rate is usually higher on cash advances than on ordinary credit card charges.
ATM & Debit Cards
ATM and debit cards offer most of the same functions as credit and charge cards, but the crucial difference is that the money comes out of your bank account straight away. If you don’t have the money, you can’t buy the product.
For some people this is a preferable option: they like to keep track of their outgoings, to keep tabs on what they’ve spent, to avoid any sort of debt – no matter how brief.
There are disadvantages to using debit cards. It doesn’t give you the option of up to a month to settle your statement. You also don’t have the right to withhold payment with a debit card (the money is immediately removed from the account) in the event of a dispute with the merchant over the goods or services paid for. Some banks and merchants also charge transaction fees for the use of debit cards.
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