AUBURN, Ala.- Young Millennials are hearty consumers. Everyday purchasing decisions surround our lives. With limited hard-cash assets and the growth in paperless payments, the economy is becoming more controlled by debit cards and credit cards.
Daily, U.S. consumers are faced with the challenge of budgeting such accounts properly. This task is not always easy.
Although they are similar in appearance, credit and debit cards have many differences, according to Theresa Jones, a certified financial educator and Alabama Extension regional agent.
“Any transaction made using a debit card will result in banks directly deducting money from the balance in an account,” Jones explained. “That being said, the debit card is limited to the actual amount of cash in the account.”
According to Jones, debit cards do not involve the borrowing of money or a payment of interest upon the principle purchase amount. Corporations do not require consumers to pay interest on a debit account, therefore a debit card is a much more feasible option for a variety of purchasing decisions.
Using a debit card will prevent individuals from falling into the “credit card trap,” according to Jones.
“When possible, use a debit card because it will prevent you from accidentally falling into the trap,” she said. “Credit cards are generally riskier transactions that involve the borrowing of money from a creditor, also known as the credit card company.”
Although a credit card “allows the consumer to purchase goods and services or withdraw cash, and pay back the money at a later date,” the negatives clearly outweigh the positives, Jones said.
Furthermore, credit card users must pay interest for borrowing that money. Not only must the consumer pay the principle amount, but they also pay a certain percentage of interest, said Jones.
“In other words, you are required to pay back the full amount borrowed plus more.” she said.
Purchasing on credit leaves consumers at a disadvantage, because credit companies require interest payments. Interest payments accumulate when consumers do not pay off debt in a timely fashion.
However, there are certain situations where the use of a credit card is more reasonable. Credit corporations report card transactions to the “credit bureau,” Jones said.
Through the use of a credit card, consumers build a credit score. This is determined by the duration of payments to the creditors.
Jones explains that all credit companies report all payment transactions, including data regarding percentage and timeliness of payment. “When a persons makes payments on time, a person builds credit. Late payments lower the credit score.
Both debit and credit cards give consumers the ability to purchasing items easily, Jones said. If the consumer is not careful, they may lose track of such transactions.
“It does not matter if you have a debit or credit card; it is important to record all purchases or transactions,” she said. “It is very easy to overspend on an account if one is not recording all purchases made.”