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.

 

A deceased loved one’s debt: Who pays what?

This was originally published on Monday, July 24, 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: My sister passed away unexpectedly. She left behind a few loans, including a mortgage, a new car loan and a student loan. Some of the loans she took out were done by her, but a few were co-signed by family members. She passed with good credit and was up to date on her loan payments. Our family would like to get a better understanding of what we are responsible for and what happens to the loans she had acquired by herself.

Answer: Condolences to you and your family. Losing a family member is certainly emotional. Once the ceremony of the funeral and burial are done, the stress of finalizing your loved one’s estate can be overwhelming.

Generally, creditors get paid first from the estate and assets left behind; the beneficiaries receive whatever remains. The person who is legally appointed to be the executor will use the assets to pay off the debt. This can be done by using money left in a bank account or even selling off property or stocks.

If there are not enough assets to pay off the debt, creditors may get part of what is left and the family members may not be responsible to pay off the debt.

Sometimes it is not that straightforward. The type of debt may also play a factor as to who is responsible for paying off the debt.

  • Mortgage. If the mortgage has a joint homeowner, he or she will inherit the house and the mortgage. Federal law prohibits lenders from forcing a joint homeowner to pay off the mortgage immediately after the death of the co-owner. If the mortgage doesn’t have a joint homeowner the executor can continue to pay the mortgage from the estate. If the estate doesn’t have enough money, the person(s) who inherit the house can take over the mortgage payments.
  • Home equity loan. If someone inherits the house, they will also inherit the loan. A lender can request the inheritor to repay the home equity loan immediately. If the inheritor doesn’t have the money, the lender may require selling the house. Lenders do have the option to work with the inheritor to take over payments.
  • Credit cards. If the credit card has a joint account holder, he or she will be responsible for the unpaid bills. Authorized users listed on the account are not responsible to pay off the remaining balance. If the estate doesn’t have enough to pay off the credit card balance, the credit card companies absorb the debt. Credit card debt, unlike a car loan or mortgage, is considered an unsecured loan because the loan is issued on the borrower’s creditworthiness.
  • Car loan. If the car loan has a co-signer, the co-signer is responsible for continuing the payments or paying off the loan. If the deceased is the sole owner of the loan, the executor can pay the loan from the estate. If the payments stop, the lender can repossess the car. If the estate can’t pay off the loan, the inheritor of the car can continue making payments.

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.

Tips to handle financial challenges

This was originally published on Monday, April 10, 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

Most of us have some financial uncertainties. Some may be beyond our control, such as unemployment or health reasons. Others may be from overspending or taking on too much debt. Financial challenges arise and it happens to everyone.

  • Overspending. There are many reasons for overspending. It can be because of the holidays, the lack of willpower, or even emotions. I am sure a few of us are guilty of having a bad day at work and bringing home a shiny new object which temporarily lifts our spirits. Overspending usually leads to using credit, which can lead to a dangerous spiral.

Get to know what your spending triggers are. It could be your mood, your friends, certain environments, even the time of day. Keep track of your spending. You will be surprised how something as routine as a daily cup of coffee can add up. Carry cash.

  • Don’t rely on cards. You can see your cash being spent, but using your credit or debit card is a very out-of-sight, out-of-mind behavior. Proactively decide where your money should go and put it aside. Whatever you have left over then can be used to spend on yourself.
  • Save in advance. Do you have a car that needs to be replaced? Are you planning on purchasing a home in the near future? Many of your large expenses are known usually well in advance. Many of us rely on taking on huge amounts of debt instead of saving for it because it is the easier way out.

Even if you take on debt to help pay for the purchase, you still should pay down as much debt as you can. If you save $10,000 for a $100,000 home, the amount you save on interest alone will be doubled after paying off the debt.

  • Too much debt. According to NerdWallet.com, the average U.S. household has about $16,748 in credit card debt. The average household pays a total of $1,292 in credit card interest per year.

If credit card debt is a major problem, the first step is to stop using the card. Many Americans now depend on their credit cards to pay off other debts. It is a cycle that is hard to break. To stop depending on your card, you must decide where you can cut spending. Decide what expenses you can live without.

Create extra income that can be used solely for paying down debt. Pay off the credit card with the smallest amount and carry that payment amount over to the next card and so forth. Once your credit card is paid off avoid the temptation to use it.

  • Credit score. The 2010 National Foundation for Credit Counseling Financial Literacy Survey states “about two-thirds of adults (65 percent) have not ordered a copy of their credit report within the past year and nearly one in three (31 percent) do not know their credit score.” Your credit score is important because it is the first point of reference that lenders use to judge your trustworthiness with money.

Take advantage of your three annual free credit scores. There are also credit monitoring companies that charge minimal fees.

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

Tips for saving money in 2017

This was originally published on Monday, January 9, 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

Q: I want to start saving more in 2017, but I always find myself barely making it to the next payday. Living payday to payday is difficult and saving money on a tight budget seems almost impossible. Do you have any tips that you can share to help me find money to start saving?

I commend you for wanting to start saving. You are not alone. Many people find it hard to save money, especially with the cost of living. I’m not going to sugarcoat it — saving may mean having to give up certain luxuries and reprogramming the way you think about spending money.

If you stick to it, you will find that once you get going and see your progress, you will continue to save and eventually it will become automatic and not so tedious. Some of the tips I have may not fit your lifestyle. Pick the tips that best suit you. If it doesn’t work, try something else. The important thing is to keep saving a little at a time.

  • Record your spending. Most people think they know exactly where their money goes. The truth is you will be surprised to learn how much you spend on nonessential items. Save the receipts of all your purchases and expenses. At the end of the month, make two categories: essential and nonessential. In the essential category, include your rent/mortgage, insurance, groceries, loan/debt payments, fuel and any other payments you must make. Under the nonessential category, include your impulse and entertainment expenses such as coffee, eating out, game or music downloads, cigarettes and other items you don’t necessarily need to survive.
  • Credit cards. Credit cards are a great way to build credit, but using credit cards to pay daily expenses can really be draining your savings potential. Most credit cards have high interest rates. Unless you pay your card off at the end of the month, you will be paying hundreds of dollars on a cup of coffee by the year’s end. Use your credit card sparingly and you can save hundreds, even thousands, of dollars.
  • Tax time. Be sure that you are getting all the exemptions for which you are eligible. It may cost a little, but see a financial adviser or tax preparer. You may be eligible for some tax breaks that you didn’t know existed. Use the tax savings to pay down some debt or put it in a savings account.
  • Compare prices. Many people overlook this tip because it does take a bit of time to do your research. Before going grocery shopping, compare store circulars and sales. A little research can save you a few hundred dollars a month. Compare prices for expensive items as well. Home and auto insurance is another expense for which you can compare prices and save.
  • Earn extra money. You don’t have to get another job, but you can use your free time to earn money. Ask your family, friends, or neighbors if they have any jobs around the house that they need done. Baby-sitting, car washing, house painting, yard work, house cleaning and other jobs can bring some additional cash. Put some of the extra money earned in a savings account and use some of it to pay off debt.
  • Think before you spend. It is nice to treat yourself every now and then, but evaluate before purchasing. If you want to purchase a $60 dress and you make $10 an hour, is that dress really worth six hours of work? Sometimes reminding yourself of just how much you work to earn your income can put how you spend your money into perspective.
  • Use cash only. It’s hard to know what you are spending when you use your debit or credit card. If you use cash, you can literally see the cash depleting from your wallet. This can help you break the cycle of overspending.

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

Evaluate your spending habits

This was originally published on Monday, December 5 ,2016 in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: With the new year approaching quickly, I have been reflecting on my current financial habits. I know that there are certainly some habits that I can change. I want to start thinking about my New Year’s financial resolution for 2017 and how I can improve my financial position. What are some of the most common money mistakes you encounter that lead to bad financial habits and how do you go about avoiding them?

Kudos for taking the time to evaluate your spending habits. There are several habits or patterns that often lead people to major hardship. Fortunately, many of them are preventable. Some may require a different way of thinking and others may include overhauling how money is spent. Realize what mistakes have happened and resolve.

  • Frivolous spending. This is the most common error. It is the most undetected, but easiest to fix. Unless you are very honest with your budget and become aware of your spending patterns, this habit is literally letting money slip through your fingers. How many of us stop off at a coffee shop or gas station for a coffee in the morning? While $5 doesn’t seem like much at the time of purchase, if you multiply that by five times a week that equals to $25 a week. For the year, 52 weeks, that equals to $1,300 on coffee alone! Now think about how many other little purchases you make? All these nonessential expenses add up. That $1,300 can be better spent on lowering your credit card balance or making an extra mortgage payment on your house.
  • Living off credit cards. Unfortunately, this behavior is becoming more of the norm.  Many purchase gasoline, groceries and other essentials, and even advance cash, with high-interest-rate credit cards. Credit card interest rates can double, sometimes triple, the amount of the original purchase.
  • Purchasing a new car. Many of us cannot afford to pay for a car in cash. On Guam, a car is an essential item to get around. However, many don’t take into consideration that a car is a depreciating asset. A depreciating asset loses value due to its age, wear and tear, or market conditions. For a vehicle, once you start adding mileage to the car, the value of resale decreases. This magnifies the difference of how much you owe versus how much the car is worth. Many people trade in their car every two or three years and lose money. Evaluate what type of car you really need. If you have a large family, a vehicle that comfortably fits everyone may be needed. But is a gas-guzzling SUV with all the upgrades needed? Those extras add up and create the need for a larger loan. Don’t forget to factor the high price of insurance and fuel costs. Assess what type of car you need, not want, and use the money you saved for other purposes.

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.