Debit Cards Vs Credit Cards Pros And Cons

debit cards vs credit cards

While they look the same, credit cards and debit cards trigger different mechanisms, some of which can cost you more money. While debit cards draw from your bank accounts, credit cards pull from a line of credit. As a result, credit card purchases can be more expensive under certain circumstances. 

However, that is just one consideration of debit cards vs. credit cards. Below we will discuss features of debit cards compared to credit cards, with the pros and cons of each payment method.

How Debit Cards Work 

When you make a purchase using your debit card, you are typically asked to verify your identity with a four-digit personal identification number (PIN). The card is usually linked directly to your checking account, from which the money to cover your purchases is deducted. Keep in mind that some checking or savings accounts may have balance minimums to avoid certain fees or restrictions, so paying with a debit card at times could put you at account fee risk. 

Because items are paid for right away, you will encounter no interest charges. However, some banks do charge a debit card fee of up to $2 when you use the card to make purchases. It is a good idea to read the card agreement to determine if this applies to you. 

Other fees associated with debit cards include monthly maintenance fees, out of network ATM fees, overdraft fees (if a purchase amount exceeds the balance in the account to which the card is linked) and the aforementioned transaction fees. 

How Credit Cards Work 

When you make a purchase using a credit card, you borrow against a line of credit. You can make purchases up to its maximum amount, at which point your transaction will be denied (and you will be charged a fee for trying to do so). This same transaction would likely be approved with a debit card — if the account from which you are drawing has overdraft protection. 

On the other hand, credit card transactions are interest-free, as long as the balance is paid in full each month before the grace period ends. With that said, interest rates on credit cards tend to be higher than any other form of borrowing. It is important to be in a position to pay off your purchases in full before interest is imposed upon the transactions. 

“If you are in a position where you find yourself just paying minimum payments every month, you may consider trying a debt payoff plan using the Snowball method, Savvy method or Avalanche method to help you get out of debt faster” says Dave Ramsey.

Like debit cards, a number of fees are associated with credit cards. Among these are annual cardholder fees, foreign transaction fees, cash advance fees, late payment fees, balance transfer fees and the over limit fees we mentioned above. 

These costs can mount rather quickly and are added to your outstanding balance — which is subject to finance charges. Thus, it is in fact possible to wind up owing interest on interest on a credit card bill. As a result, they can get out of hand rather quickly. 

Some people facing major credit card debt and struggling to keep up with monthly payments try to settle these debts for less through programs like Freedom Debt Relief. This process involves negotiating with creditors, trying to get them to accept a percentage of the original balance — the leverage being that there is otherwise a risk of the borrower defaulting on those debts. 

So Which Payment Option Is Best? 

When it comes to debit cards vs. credit cards, the latter can help you establish a financial history, plus they provide superior protection if the card is lost or stolen. Many credit cards also have rewards programs associated with them so you can get free flights, cash back and other incentives. Credit cards can get you extended warranties on certain consumer products and help you acquire something you need in a pinch, without compromising your financial liquidity too. 

On the other hand, you will only spend what you have with a debit card — which mitigates the risk of creating insurmountable debt. While the pluses of a credit card are undeniable, the downsides can be a crippled credit history, outrageous interest payments and never-ending debt. 

You will also encounter fewer fees with debit cards. And some locations like dispensaries will only accept debit cards (as ATM transactions) or cash, with no credit card options or a higher price being required.

Cards Conclusion

Bottom line, if you are good at paying your bills off every month, you will get a lot more benefits out of a credit card — but the risks are higher as well. Decide which paying option is right for your specific transaction or series of monthly transactions.

4 Short Term Investment Options Paying Off Long Term

short term investment options pay off long run roi

Can you imagine being a secret millionaire?

Living a quiet life as an auditor for the IRS, Anne Scheiber had a meager income. However, when she passed away at the age of 101, the truth came out about her personal finances.

Over the years, Anne made several wise investments and acquired a surprising $22 million in assets. In her will, she donated the entire multimillion-dollar fortune to Yeshiva University.

Anyone who wants to gain financial independence can learn a thing or two from Anne’s story. When you know how to choose the right short term investment options, you can slowly and safely grow your money over years and decades.

Are you ready to make your money work for you? Read on to learn about 4 different investment opportunities that pay off in the long run.

Choosing Short Term Investment Options

Before you start learning about the different short term investment options, it's important to remember that risk is relative. Take into account your financial situation, to assess what a low risk and high-risk opportunity would look like for you. We also suggest looking into tactical asset allocation.

Here are a few questions you can ask to determine how risks will affect you

  • How many income sources do you have?
  • How much of your income is expendable each month?
  • What do your current investments look like?

When it comes to determining your risk, you have to be able to quantify the amounts. In other words, get specific about what low risk, medium risk and high-risk means to you.

Now that you have a better idea of what risk means in the financial world to you personally, we can dive into the different investment ideas.

1. High Yield Savings Accounts

Let's start by discussing how high-yield savings can help you build your financial portfolio. Banking institutions that offer high-yield savings or checking accounts like SCCU checking account, are great ways to slowly grow your money. A penny saved is a penny earned after all! Every little bit counts in today's tricky economy. 

Research shows that a standard savings account typically offers less than a 1% return on your money. That means you end up actually losing money to inflation each year, which has been rising rapidly recently.

However, high-yield savings accounts, offer return amounts between 1.8% and 2%, or more. The percentage of your return will vary depending on what institution you go with, and how the markets are doing at the time.

Remember, when it comes to finances, risk and other factors are all relative. While a 2% return, it may not seem like a lot of money, it is when you compare it to what the standard savings accounts are offering.

2. Short Term Bonds

Moving on, short-term bonds are another safe way to invest your money. There are a few different ways you can go about getting different types of short-term bonds.

First, you can buy individual short-term bonds. Corporate bonds and government bonds offer short-term opportunities.

You can also choose to buy mutual bonds, short-term bond funds, or short-term bonds ETF's. If you're going to use short-term bonds, plan to have your money invested for about 3 to 5 years.

Typically, you can expect to see returns starting at 2.5% and up. The return rates on short-term bonds are higher than high-yield savings accounts, and so are the risk factors.

If interest rates go up, you could see a small dip in your principles. However, as long as you're willing to wait for interest rates to stabilize again, you can earn a profit.

3. Treasury Inflation Protection Securities

The third way you can safely invest your money is with TIPS. Treasury inflation-protected securities, or tips, are a long-term investment opportunity.

There are a few different ways you can get TIPs. First, you can find reputable companies that offer you the opportunity to buy them online. When you go to buy TIPS online, it's common to see the securities for sale listed in different yearly installments.

For example, you'll have options to buy 5, 10, 15, up to 30-year investment opportunities. We suggest you steer clear of choosing anything more than the 10-year option.

While TIPS are a safe way to invest your money, they aren't going to offer you incredibly high returns. Having your money tied up for 30 years isn't as wise as diversifying with multiple investment opportunities.

You can also choose to buy ETF's, or mutual funds, which are also TIPS. At the moment, the interest rate on TIPS is comparable to a high-yield savings account.

A typical return would be 1.5 to 2% depending on how long you're investing.

One great thing about TIPS is that they work to keep up with inflation. You'll also have the added in a fit of knowing the government is backing your investment.

4. Dividend-Paying Stocks

So far, we've been discussing investment opportunities that have minimal risk. Keeping in mind that risk is relative to your financial situation, next will be discussing a slightly riskier opportunity.

Dividend-paying stocks mean you will be investing in the stock market directly. However, dividend stocks are different than regular stocks. A dividend stop occurs when a company reaches a point where they are a cash solvent.

When this happens, shareholders get the reward of being able to pay in the form of a dividend. In the stock market, there are two ways to make money. First, you can make money with appreciation, where the value of a stock grows for more than what you paid for it.

The second way to make money is with the dividend. Energy and utilities sector stocks typically have dividend options. Let's say for example that you buy a dividend stock and it doesn't appreciate at all.
You buy the stock for $10 and at the end of the year, it is still worth $10. While you aren't making any money on the appreciation and, you still get paid in the form of a dividend.

You should look for stocks that have a history of not only paying a dividend but also increasing the number of dividends your paid overtime. These can be your smartest options for investing.

Achieve Financial Freedom

It is empowering to learn about the different short term investment options that are out there. We hope that you'll take your newfound power to start making wise investments today.

When you know where you stand financially, and you know where you want to go, you can achieve all of your money goals. For more ways to reach financial freedom, check out the rest of the site. Visit the Frugal Finance and Investing sections of our blog right now!

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