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.

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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.

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

Tips for improving your credit score

Last week, we talked about preparing to buy a home by ordering and reviewing your credit reports and scores.  Today, we’ll discuss improving specific areas of your creditworthiness, to put you in the best position possible as you apply for a mortgage.

Establish a pattern of paying on time. On your credit reports, each account includes a record of your payment history. Each month will be marked as “Paid as agreed,” or late, along with the length of time in which the payment was late, in 30-day increments.

When lenders look at your credit history, they want to see that you consistently pay on time. When considering a mortgage application, with a term that can last as long as thirty years, lenders look to your past history to predict the future pattern of your payments.

If you frequently pay late, and your late payments are recent, this can indicate credit risk to a financial institution. To lessen the potential costs that come with that risk, a financial institution may charge higher interest rates than they would offer to a lower-risk applicant.

If you have this pattern, first recognize that this negative information stays on your credit report for a finite period of time: in most cases, seven years.  With time, you can replace negative marks with positive ones. Next, your most recent behavior will be considered more heavily when your application is evaluated.  If you take the time to establish a good pattern now, that can lessen the effect of negative information.

To change this pattern, find the source of the problem. If you’re simply forgetting that certain bills are due, then email reminders, calendars, and automatic payment plans can help a great deal. Experiment with different tools to find what works for you.

If you haven’t been able to pay bills on time because you have been experiencing shortfalls, this requires a deeper fix. The first step is to carve spending down to your most basic needs. Make a list of your essential expenses, and total them. If this amount is less than your monthly income, it’s a question of sticking to those monthly expenses, as you would stick to a list at the grocery store. It can be difficult, but with time, you will adapt to the new spending level, and establish a healthy pattern of paying bills on time. Another option is to look for ways to increase you income, so that you can comfortably pay your bills on time.

Bring down your credit balances. As we talked about in an earlier column, the amount of credit you use will impact your creditworthiness. Lowering your credit balances will help improve your score.

Limit your applications for new credit. If lenders see that you are opening several new credit accounts in a short period of time, they can view this as a credit risk. It’s best to limit new credit applications only to what you need, and to refrain from new credit applications in the immediate period of time before you search for a mortgage.

Hang on to your credit cards. When you close your accounts, this lowers the total amount credit available to you. Rather than closing them to avoid credit card use, keep them for emergencies and store them away.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 19 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

Teach teens to use credit cards responsibly

If your teenager is about to graduate from high school, he or she may soon be applying for a credit card. As a parent, you can provide advice on the smart use and management of credit cards from the very start of your teen’s credit history. With your guidance, your teen can develop a healthy attitude toward credit, and build a sound credit history that can be beneficial in the future.

Here is some basic advice you can discuss with your teen:

Try to use credit cards only to build a credit history and for emergencies.

Credit cards can provide an easy way to create a pattern of positive credit behavior, which will help when applying for future loans and credit cards.

To build that pattern, you can purchase a few things on your credit card during the month, and then pay off the balance in full, on time, when the statement comes in. It’s easy to let things slip when you have that purchasing power in your hands for the first time, so try to commit to a few small purchases each month that you know you can pay off quickly.

In emergencies, a credit card can help at the moment, but you’ll want to create a plan soon afterward to manage the new balance and pay it down as quickly as possible. The longer the balance remains on your card, the more you’ll pay in interest, and the less money you’ll have available for spending on items that you need.

Set your own credit limit. Spending within your means will help you avoid interest payments and larger financial problems down the road. Your credit card may come with a credit limit, but you can set your own credit limit, tailored to what your budget can afford each month. This way, you won’t have a problem paying off your balance in full each month.

It also can help if your personal limit is less than 25 percent of your credit card’s total limit. The percentage of available credit that you use, or your “credit utilization,” can have a major effect on your credit score, and consequently on your applications for new loans and credit cards in the future. If you consistently stick to a low credit-use percentage, you’ll increase your chances of maintaining excellent credit for the long term.

Understand the cost of paying late. If you’re late paying your credit card bill, you incur more than a bad mark on your credit history. A late payment will add late fees to your balance and may even trigger a penalty APR, in which your future expenses are charged at a higher interest rate.

As soon as you know that you’re going to have trouble paying a bill, ask for help, so that you can resolve the problem before the due date.

Set your own minimum payment. The minimum payment on a credit card bill is often a very small percentage of the total balance. It leaves you with a high remaining balance, and consequently a high interest payment for next month. You can set your own minimum payments by choosing to pay an amount that is more than the minimum due, and sticking to that amount in upcoming months, until your balance falls to zero.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 19 years experience in retail banking and with financial institutions in Guam and Hawaii.  You can email him at  moneymattersguam@yahoo.com

Looking for errors on your credit report

You can start improving your score by reviewing your credit reports. Dips in your credit score may be due to mistakes on your report — an erroneous late payment or a lower credit limit than you actually have. Correct those mistakes, and your score will rise.

If you check each of your credit reports once a year, you should never have to pay. You’re entitled by law to see your information every 12 months for free. The three nationwide credit bureaus manage one official website that gives you these free credit disclosures: annualcreditreport. com.

You’ve probably seen many other offers for a “free credit report.” Just be aware that the Federal Trade Commission has issued a consumer alert for these claims. These other offers tend to be packaged with subscription fees for paid products.

When in doubt, your safest bet is to link to annualcreditreport.com through the FTC website,  www.ftc.gov. You’ll also find the official toll-free phone number for requests (1-877-322- 8228), and the order form you can use to mail in a request.

Once you have your reports, here’s what to look for:

Accounts that aren’t yours. A fraudulent account on your records will do extensive damage to your credit, as the perpetrator runs up bills in your name and loads your report up with delinquencies. If you see an account that you didn’t sign up for, alert the issuing financial institution and the credit bureaus immediately. The steps you can take are available on http://www.ftc.gov/idtheft.

Incorrect late payments. On your credit reports, verify any of the payments marked as “late” with your records, as well as the time frame in which they occurred. A 90-day late payment is much more severe than a 30-day late payment. If you notice an error, make copies of your records to use when you file a dispute.

Resolved issues still marked with outdated information. If you’ve paid a late account or a collection item and the payment is not recorded on your report, dispute the error and get your points for your efforts.

Inaccurate balances and credit limits. If your credit reports list higher balances or lower credit limits than you actually have, it will appear as though you’re using a greater proportion of your credit than you really are. That will adversely affect your score.

Inaccurate opening dates. It’s a good idea to check your opening dates, and get credit for all of the years your account has been active. The length of time your accounts have been established counts for 15 percent of your score.

Missing accounts. Not all financial institutions report to the three credit bureaus– the process is voluntary. If your credit score is low because you have an insufficient number of accounts open, it can help to have your missing account on record. Explain your situation to your financial institution, and ask them to report the information.

Inaccurate personal information. These inaccuracies could be due to a misread form, a data input error, or something more serious — a change of address and an identify thief behind it.

When you have a dispute, keep everything in writing, include copies of r ecords that verify your claim, and be clear about the specific change you want in your report. Clarity will lead to a quicker resolution and a potentially higher score.

Michael Camacho is the president and chief executive officer of Personal Finance Center. He has more than 18 years experience in retail banking and with financial institutions in Guam and Hawaii.

Handling unexpected financial upsets

Sometimes debt comes on suddenly, on the heels of a major loss or traumatic event — the death or disability of a loved one, a medical emergency, a job loss, a disaster, or any other of the nasty surprises that life can bring. If all of your expenses remain the same, and you lose part of your income, you can accumulate debt quicker than you anticipated.

In a few months, we’ll discuss some of these difficult situations in detail, and talk about how you can handle your finances in their wake. But for now, here are a few things you can do if you’re experiencing severe financial hardship.

Talk to your lenders. Explain your situation to your lenders. Tell them what happened, and show them how your finances have been impacted. You might be able to get a temporary reprieve, in the form of reduced payments, while you get back on your feet. The sooner you contact your financial institution, the better. Try to negotiate lower payments now, before you rack up late fees and hits to your credit score.

Hard numbers will help you make your case. Before you go to your lender, put together your budget. Come up with a proposed amount that you can pay, and outline all of your other needs for daily living. Also plan for your recovery: you can’t pay a reduced amount forever, and you’ll be in a better position to ask for a reduction if you set a specific time frame. Show that you intend to return to your full required payment as soon as you can, and you’ll have better luck in your talks.

Once you make an agreement, ask for a record for your files. Make sure that record lists the start and stop date of your reduced payments, as well as the agreed-upon amount.

Talk to all of your lenders. It doesn’t hurt to ask, especially if you have a history of paying responsibly.

Check if you qualify for forbearance or deferments. Some of your installment loans may grant you a temporary forbearance or deferment on your loans, depending on your level of economic hardship. You can temporarily suspend payments while you recover. Just remember, in most cases, your interest will continue to accumulate. If you’re having trouble paying your bills, a forbearance will be better for your credit score than a late payment, so look into it now.

Restrain your spending. It’s now more important than ever that you cut your budget down to the bare basics. Don’t wait to look at your budget — the longer you do, the more money you’ll lose. Study your basic needs, and determine if you can cut basic needs, and determine if you can cut spending to your new income, so that you limit the amount of debt you incur, and reduce any long-term damage to your finances.

Resist your credit cards. You have them for an emergency and the emergency is here. But if you’ve lost part of your income, it’ll be even more difficult to pay back your cards, and you’ll risk drops in your credit score if you can’t make your minimum payments. If you must use your cards, be sure that they’re only used for your essential needs.

Michael Camacho is the president and chief executive officer of Personal Finance Center. He has more than 18 years experience in retail banking and with financial institutions in Guam and Hawaii.