Credit cards are a very convenient way to pay in shops and online. Together with debit cards and prepaid cards, they give the benefit of being able to spend money without carrying cash. Especially during the COVID-19 pandemic and the risks connected with touching cash without proper sanitization, paying with cards has been a popular way to stay safe and enjoy all the comfort this tool has to offer. Of course, there are some differences between credit cards and the other kinds of payment tools and they are showed in the following table.
|Credit Cards||Debit Cards||Prepaid Cards|
Way of working
You do not use your money: your bank pays on behalf of you.
You pay with your money, which is instantly deducted from your bank account balance.
You pay with a balance you have previously loaded on the specific card.
How do you pay
You pay at the end of the billing cycle (usually one month), with the eventual option to pay in installments some expenses (in this case an interest rate is applied).
You pay instantaneously.
You pay instantaneously.
How much you can pay
You can pay till you reach your credit card plafond, even if you do not have enough money on your bank account.
You can pay only the amount of money you have in your account balance.
You can pay only the amount of money you have loaded onto the prepaid card.
You can spend money even if you don’t have enough balance yet on your bank account (eg. you have paid some bills and your income is not arrived yet). Plus, you can benefit from rewards some credit cards issuers offer and you can also build good credit score if you regularly pay off your balance without delays.
You don’t risk to make excessive debt as you can only spend money you already have. Plus, debit cards are very easy to get from your bank, instead of credit cards that are issued only basing on your income and/or your credit score.
Like with debit cards, you don’t risk to make excessive debt. Plus, you can only spend what you have loaded on the prepaid balance, so that there is another layer of separation between it and the main bank account balance.
As you can see, debit cards offer generally less perks but give more safety, as no debt can be made by using them, while credit cards allow to benefit from some rewards and to spend more money than what is available in the bank account: this may be great in case of temporary unavailability (for example when you have to pay several bills and income is not arrived yet), when you want to keep your balance for other reasons (for example for short therm investments) and in general, when you prefer to pay for all your daily expenses in a single shot at the end of the month. Of course the credit card is a tool that may lead to over spending, as the only limit is set by the card plafond and not by the money available in the bank account: that’s the reason why credit cards may be a very dangerous tool if not properly managed. This article will give some advices in order to use credit cards wisely and maybe even make a little profit from them.
Manage Your Credit Card As If It Was A Debit Card
A common error when dealing with credit cards is to consider them something like a privilege: they are shining, often proposed with names like ‘Gold’, ‘Platinum’ or ‘Prestige’ and this maybe gives the idea that you can get whatever you want: the bank pays for you and you feel to touch the sky with a golden piece of plastic. Still, you should not forget that every single buck the bank is anticipating has to be paid off at the end of the month: you can also choose to pay in installments but this still means you are making debt on debt, with the addition of a high interest rate. The best way to deal with credit cards is to stop seeing them as a magic tool that opens all the opportunities the world has to offer and start to use them wisely and as if they were a debit card. This essentially means:
- Not spending more than what you can afford: it is okay to exceed a little your banking account balance if you know your income is arriving in time before the credit card bill, while it is not certainly okay to spend all your credit card plafond and then not having the money to pay it off;
- It is okay to pay in installments some expenses if you see a clear advantage in doing this even with the interest rate applied to them, while it is surely not good to make debt on debt until you get financially trapped by your credit card. Avoiding useless expenses if you cannot afford them is still a great practice, despite the color of your credit card.
Welcoming The Opportunities Of Credit
Using credit cards wisely does not only mean essentially managing them like if they are debit cards: in this case, where’s the deal in getting them? While the ability to purchase something even after having paid all your bills and waiting for your income is surely great (but something you can even not miss much if you have the good practice of keeping an emergency reserve of at least three months on your bank account), credit cards are often used also for three other great reasons:
- Getting a benefit from perks offered by the card issuer or its commercial partners (for example discounts on certain services or travel insurances included for free);
- Building good credit history by regularly paying off your balance each month, so that you can get better conditions in case in a future you need a mortgage, funds for starting a business or other important loans: a good credit history does not only improve the chances of getting a loan approved, but also may lead to benefits like lower interest rates;
- Keeping more balance on the bank account as an immediate reserve you can use for other activities: for example expert investors may find it great to always use credit cards while making short term investments with their money (this is still something I would not recommend to people without experience with investments, as there is still a level of risk in doing these activities).
If you follow these advices you won’t run significant risks by using your credit card and you will be ready to get all the best this tool has to offer. The most important thing is to understand that using it requires a good level of self-control: they are surely not good for someone who is always tempted to over spend. The key to use credit cards wisely is to manage them the way you would deal with a debit card (while enjoying also some perks) and to look at them not for the status symbol they may give or for the shining color they may have: this is only pure marketing. Credit cards are simply a banking tool like investments or loans: they have pros, cons, risks and they are something you pay for, not a gift of the bank.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2021 Alessio Ganci