Differences between debit card and credit card

This was originally published on Monday, August 14, 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

Credit cards can be a great tool to build credit, but they can also be financially dangerous. A credit card is nothing but a tool. Depending on the skills, knowledge, and self-control of the user, it can be helpful or harmful. Understanding your credit card and its terms is vital to using it properly.

Your credit and debit cards may look very similar, but they work very differently. Credit cards are a revolving line of credit, credit that is automatically renewed as debts are paid off. Your debit card is electronically linked to your checking account. Here are some other differences:

  • Spending limit. Your credit card limit is set based on your credit score — the better your score, the higher your credit limit is. Your debit card is limited to the funds you have in your checking account. Both can be assessed an over-the-limit fee if you go over available funds.
  • Interest rates. If you pay your credit card’s full balance off each month, you won’t have to pay interest. If you make a monthly payment, you will be charged an interest fee based on your balance. A debit card has no interest changed. If you keep funds in your account, you may be paid some interest.
  • Payments. You can pay your credit card balance based on how much money you have. You can pay the minimum required monthly payment up to the full balance of your credit card. With a debit card, your account is debited almost immediately when you make a purchase.
  • Fees. Most credit cards charge an annual fee, late payment fees and over-the-limit fees. If you try to make a purchase using a debit card and don’t have enough money to cover the charge in your account, you may incur an insufficient fund fee.
  • Receiving cash. You can use your credit card to get money from an ATM, called a cash advance. Most credit cards charge a different, higher interest rate for cash advances. If you use your an ATM of your debit card’s financial institution, or a point-of-sales machine at a store, you may not have to pay a fee. For both credit and debit cards, there are usually fees associated with using a different financial institution’s ATM.
  • Effect on your credit. Your credit card affects your credit history. To build a positive credit history, you should use your card regularly, pay off your monthly balance in full, make your payments on time, and not close your account unless you absolutely have to. Your debit card may affect your credit history if you constantly go over your account balance and are charged overdraft fees.

Secured vs. unsecured

There are two types of credit cards, secured and unsecured. A secured credit card limit is determined by the amount of cash deposited before being able to make a purchase. The cash deposited acts as collateral, something provided to a lender as a promise of payment/reimbursement.

Secured credit cards are a great opportunity to establish a good credit history. Unlike a prepaid credit card, your cash deposit doesn’t run out. You continue to make payments and will incur interest if you don’t pay off your balance in full. If you cancel your secured credit card or transition into an unsecured credit card, you will receive your deposit back if your balance is paid off.

Unsecured credit cards don’t require collateral, so issuers take more of a risk. Because of this risk, issuers rely heavily on your income level and credit history.

Most first-time credit card users don’t have a long enough credit history for issuers to approve a large amount of credit. Many times, a co-signer is needed.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Find right credit card for you

This was originally published on Monday, August 7, 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: I have never had a credit card and have always used cash. I am considering getting one to use in case of emergencies and for the trip I am planning next summer. I have considered several types but honestly, I find it all a bit confusing. Do you have any tips that could help me decide which credit card is a fit for a first-time owner?

Answer: There are many types of credit cards and looking for the right one can be perplexing and overwhelming. Taking the time to find one that fits your lifestyle and budget is essential.

When used responsibly, a credit card can help you build a good credit history. Good credit history can help you get loans with reasonable interest rates, insurance, cell phone plans and, in some cases, secure a good job.

Some cards reward you for using their cards and others can help you protect your purchases in case of theft or damage. In your case, you may need a credit card to secure your travel plans such as rental cars and hotels.

Before you decide, ask yourself three questions: Do you really need a credit card? How much of my budget can you commit to paying the credit card loan (because that is what a credit card is, a loan)? Can you save to purchase the item instead of using a credit card?

Answer these questions honestly. Knowing the answers to these questions will help you determine which card meets your needs. There are other aspects that you should understand before making a decision.

Short-term loan

A credit card is basically a short-term loan. Depending on the amount you pay monthly, you may or may not accrue interest. If you pay your entire credit card balance at the end of the billing cycle, you will not accrue interest. However, if you pay a partial amount of your balance, you will accrue interest on your average daily balance. The interest is a charge for borrowing the money.

 If you pay just the minimum balance each month, you could find yourself in a long-term cycle of debt. By law your credit card statement must show you the difference of paying off the minimum balance versus making a larger payment.

A normal billing cycle is usually 30 days. Most billing cycles will have a few days grace to pay on your loan. If you miss the cutoff date, a late fee will be assessed.

Credit cards use revolving credit that is automatically renewed as the balance is paid off and can be kept open indefinitely. Your credit limit, or line of credit, is the maximum amount you can borrow. If you have reached that limit, you must pay down the balance before you can borrow more. Some credit cards will assess charges that are beyond your limit and will charge you “over the limit” fees which can be a monthly or daily fee.

Why get a credit card?

There may be many personal reasons why you may need one, but from a financial point of view, a credit card is a method of building good credit. Your credit score is factored by your payment history, the amount you owe on your accounts, how long you have had the credit and the type of credit you use.

Another reason for owning a credit card may be the perks. Some cards offer cash, points or other bonuses. For example, if you travel a lot, consider getting a card that rewards you with airline miles or points for hotel stays. Some cards offer discounts at certain partnering stores or gas stations.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

 

Handling problems with your card

This was originally published on Monday, October 3 ,2016 in the Pacific Daily News.  Click here to subscribe to the PDN.

Q: I was at the store the other day and used my debit card to make a purchase. To my surprise my transaction was denied. I checked my account right away and noticed that there were several suspicious charges from a company I use frequently. I was embarrassed and because of these charges my account was overdrawn. I have several scheduled automatic payments that are not going to be paid. I’m scared my account has been compromised, what should I do?

A: It is a scary feeling to think you have enough money to cover your day-to-day expenses and then discover that your account has been compromised. So many questions form in your mind and you start to think of the worst.

In this day and age, we use our debit or credit cards to pay for almost anything, making us susceptible to fraudulent charges. Unauthorized debit card charges can happen for many reasons. Some of the more common reasons are accidentally being charged twice, being overcharged, a credit return failed or nondelivery of goods through the mail.

No matter the reason, the sooner the mistake is found, the better chance you have on disputing the charge.

  • Gather all information. Take time and look through all your receipts. If you share a joint account, ask the joint holder if they recently made the purchase. Be aware that some online stores use a third party to handle their purchases and the statement will list that third party’s name, not the online shop’s. If you are certain that the charge is fraudulent, contact your bank right away. Inform your bank that you have unauthorized charges on your statement and that you will be contacting the merchant. Your bank will then discuss several options with you including freezing your account until more information is provided.
  • Contact the merchant. If you have a phone number, call the merchant and discuss the charges. Ask if there is anything they can do to reverse the charges. Most merchants value your patronage and are usually willing to work with you, especially if the error is a mathematical mistake or a non-receipt of a product or service. If the merchant is not willing to correct the error, then contact your financial institution. By contacting the merchant first, you are showing a “good faith” effort to work out the situation.
  • Work with your bank. If the merchant refuses to rectify the mistake, you have 60 days from the time of the unauthorized purchase before being held accountable. Let your bank know that you contacted the merchant and they are unwilling to reverse the charges. The bank has 10 days to investigate an unauthorized charge. After the 10 days, your bank must contact you with their findings within three days. If the investigation is incomplete after the 10 days, your financial institution must credit your account for the full disputed amount, less $50, while continuing the investigation.

If the transaction was conducted within the United States, the financial institution has an additional 45 days to resolve the issue. If the transaction is made outside the United States, then your financial institution has 90 days to resolve the issue. If the bank finds that there is an error that has occurred, they must pay you within one business day of finding that error.

On the other hand, if the charges are legitimate, the financial institution must give you written notice before taking the money that was credited to you earlier. If you used your debit card as a credit card, you may fall under different guidelines which can be found at http://www.consumerfinance.gov.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at http://www.moneymattersguam.wordpress.com.

Tips for a first-time credit card owner

This was originally published on Monday, October 27, 2014, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: I was just approved for my first credit card. I’m excited that I’m now creditworthy, but numerous people have expressed to me that owning a credit card has put them in some financial troubles. Do you have any tips for a first-time credit card owner?

Answer: Congratulations on your first credit card! Yes, owning a credit card is opening a whole new world of financial responsibilities. It’s true that credit cards can lead some to financial hardship if spending goes out of control. But if used properly, it also can be a beneficial financial tool. Using a credit card wisely can improve your credit rating, which can qualify you for low interest rates when purchasing a car or a home, or it may help get a job. Here are some tips to keep you on the right financial path.

•  Know your monthly limit. Take some time to review your budget to see how much you can afford to spend monthly. Remember that the credit card company will charge you interest on the balance of your card.

• Never skip a payment. It’s best to pay the balance of your card off every month. Credit card companies make money not on what you owe but the interest it accrues. If you cannot pay the full amount, at least make the minimum payment. But do not get in the habit of paying just the minimum balance. Paying the minimum balance can take years to pay the balance off and in the end, you would have paid more in interest than the amount you originally owed. Read your contract carefully. There usually is a different interest rate for cash advances on your card. Missing a payment could result in a late payment fee and a negative hit on your credit score.

• Use it responsibly. A credit card should be used with caution. If you have cash on hand, it’s best to use the money first. Use the card for needs and not extravagant wants. Credit cards can be used in emergency situations. Try not to go over the monthly limit you set for yourself.

• Use your rewards. If your card has a reward system, take full advantage of it. Some may offer cash back that you can use toward your payments. Others may offer gifts and some may earn airline mileage. Most of the time, these rewards have a time limit of when you can claim them. Read your contract. You earned those rewards, so you should cash in on them.

• Remember 30 percent. Keep this number in the back of your mind. It’s the optimum percentage of your credit utilization ratio. This ratio is your total credit available to how much credit you are using. This ratio weighs heavily on your credit score. If the ratio is low, it positively affects your score. If it’s higher than 30 percent, it will bring your credit score down. For example, if your credit limit is $1,000, you should not carry a balance over 30 percent or $300. If later on in years you decide to get another credit card, the combined total of your cards and the balance you have should stay at 30 percent or lower. In other words, if you have a two cards that have a combined total of a $5,000 credit limit, your combined balance should not exceed $1,500.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Help! My high balance is hurting my credit score

This was originally published on Monday, October 20, 2014, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: My credit score is just above average. The reason for this is because of my high balance on my only credit card. I know I need to pay down the balance, but I have also heard there are other ways to improve my score such as closing my account or asking for a lower limit. Are there other ways to improve my score?

Answer: First, let me commend you on understanding what’s hurting your credit score. Many people don’t look at their credit score until they’re in dire straits. It seems that there’s a lot of advice floating around out there on the best ways to improve your credit score when it comes to credit cards. Some may help and others can be very detrimental. My best advice is good old-fashioned personal restraint from using it and paying off the balance. Here are some tips that I’ve heard and why they’re not feasible.

•  Closing a credit card. On your credit score, one of the most heavily weighed factors is your balance to credit limit ratio, or how much you owe. This category accounts for 30 percent of your score. Once you pay off a credit card and close it, the credit card issuer can decide if the history of the card remains on your credit score. If they decide to take the credit card off your report, you will lose the history that goes along with it. That would not help your score because credit history accounts for 15 percent of your credit score.

Since this is the only card you have, it might hurt you more than someone who has numerous credit cards. If the credit card issuer leaves the closed account on your report, the history will only stay for 10 years. An account that is open, even with little activity, can stay on your report as long as it stays open.

•  Requesting a lower credit limit. As I mentioned previously, one of the heaviest-weighed factors on your credit score is based on how much you owe. If you cannot pay down your debt but you lower your credit limit, you will increase your balance-to-credit-limit ratio. This would severely hurt your score.

• Opening new credit cards. Because your ratio of the amount you owe to the amount of available credit is so heavily weighed, you’d think that opening more cards to increase your limit would work. Yes, opening more cards will raise your credit limit, but opening more accounts all at once will hurt your score. Each time a credit card issuer opens an account for you, they will look at your credit score. These inquiries will actually lower your score. If you want to increase your credit limit by opening new cards, do so by spacing them out over a few years.

• Not using your card once you pay it off. Once again the ratio of indebtedness to credit limit plays a factor in this decision as well. You should use your card regularly, but in amounts that you can pay off the balance in full on the month it’s due. If there’s no activity within a certain period of time, your card issuer may close it.

• Checking your credit score regularly. When you check your credit score regularly, it won’t hurt your credit score. Inquiries from banks, loaning agencies and credit card issuers will. Credit lenders report to the credit bureaus every 30 days. It’s very smart to stay on top of your credit score.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

How to dispute charges on your credit card

This was originally published on Monday, July 28, 2014, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: While looking at my monthly credit card statement, I noticed an unfamiliar charge. How do I dispute the charge?

Answer: Great job on being alert and attentive. Many people don’t take time to look at their monthly statements. Mistakes do happen and more times than not, the charge is disputed in the favor of the card holder. The sooner the mistake is found, the better chance you have on disputing the charge.

Mistakes on credit card charges can happen for many reasons. The most common are being billed twice, being overcharged, a credit return failed, non-delivery of goods through the mail or an unauthorized purchase. When a dispute is made, the credit card companies will investigate.

The first step is to gather all information on that purchase; a receipt will definitely be an asset. If the charge is fraudulent, be sure to look through all your receipts. Sometimes online stores use a third party to handle their purchases and the statement will list that third party’s name, not the online shop.

Before contacting your bank, call the merchant to see if the charge can be disputed with them. If the error is a mathematical mistake or a non-receipt of a product or service, the merchant will usually correct the error. If the merchant is not willing to correct the error then contact your bank. By contacting the merchant first, you are showing a “good faith” effort to work out the situation.

Next, write a letter to the credit card company. The law gives you 60 days after the billing error appears to dispute it. Address the letter to the billing inquiries department and not the collections department that you send your payments to. The letter should include the name that appears on your card, your mailing address, account number and a brief description of the error (include the date of the charge). A copy of the receipt should be attached if you have it. Send the letter certified mail with a return receipt and keep a copy of the letter.

The law provides consumer protection rights when disputing a charge. By law the credit card company must acknowledge the complaint in writing within 30 days of receiving your letter. The credit card company then has 90 days to investigate the error and make a decision. You are not responsible to pay the amount being disputed, but the undisputed portion still has to be paid. The law also protects you by restricting the credit card company from reporting the disputed amount as a late payment to the credit bureaus.

During the investigative process the credit card company can keep the limit that you are disputing as a balance on your card. For example, if you are disputing a $500 charge and your credit limit or balance is $2,000, that would leave you with $1,500 of available credit.

If the investigation determines that the billing is correct, you will be responsible for paying all or a portion of the amount. The credit card company must explain to you in writing why they made that decision. If you disagree with the outcome, you have 10 days after being notified of the decision to write the credit card company and inform them that you are not paying the amount. Do note that the credit card company can then start the collection process, including contacting the credit report bureaus of your late payment. If they do report it to the credit bureaus, the report must state that you do not agree with the outstanding amount. The amount you are responsible for may also include any fees or late charges.

On the other hand, if the bank makes judgment in your favor and you are not responsible for the amount owed, they will credit your account the amount disputed and remove any fees or late charges associated with the amount in error.

If the credit card company does not follow any of the procedures or deadlines, they cannot collect the amount in question even if the amount is determined not to be an error.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Small changes go long way with credit cards

During your annual review of your credit cards, you can make small changes or request adjustments that will add up incrementally over the course of the next year. These changes can help you pursue your larger debt goals, or simply help keep your debt balances low and your finances in shape.

Add a specific amount or percentage to your minimum payments. If you’re on a tight budget, but resolved to pay down your debts, try adding 10% to your minimum payments. Or, you can add a specific amount, such as $10 or $20, to each payment.

Paying more than the minimum will help you shrink your debt, and those amounts will add up over the year. The small change will also help you acclimate your budget to your debt payment goals. You can increase this amount periodically to pay down debts.

Set a fixed automatic payment for the year. A minimum payment on a credit card adjusts every month, because it’s calculated as a percentage of your current balance. As long as you don’t add purchases to the card, and your APR doesn’t change, your balance and your minimum should shrink with every payment.

A fixed payment will help you pay down your balance more quickly. Resolve to stop using the card for the next year or six months, and choose an amount above the minimum payment. Automatic transfers will eliminate a bill payment chore, and the temptation to fall back to minimum payments.

Ask your credit card issuer for a lower interest rate. If you have a solid credit history, you can try negotiating with your issuer on your interest rate. The reduction of a percentage point, or even half a percentage point, can make a large difference if an emergency requires you to take on debt in the future.

Review your credit reports and credit card file thoroughly, and take note of any pre-approved offers that you have recently received. You can talk to your credit card issuer about your positive credit patterns, your long customer history with the company, and other comparable offers you have received.

Because a financial institution’s willingness to extend credit is determined in part by larger economic circumstances, keep this negotiation on your annual checklist. You may be unlucky one year, and lucky the next. Your credit history could also steadily improve, putting you in a stronger negotiating position for the following year.

Ask your credit card issuer to waive your annual fee. Not all credit cards charge an annual fee. If you have a card that charges this fee, compare it to other offers you receive or cards that you have that do not include the fee. How do interest rates and reward programs compare?

If you have a responsible credit record, a good history with the company, and you receive offers for similar credit cards that do not include annual fees, you can try asking your credit card issuer to waive the annual fee on your card. It doesn’t hurt to ask, and you can end up with substantial savings in fees for the year.

Use your rewards. Using your points can be a great way to reward yourself for completing your annual debt review or meeting your debt goals. Some reward programs have points that expire, which is all the more reason to use them now.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com