Monday, 22 May 2017

Debit and credit cards are valuable financial tools for individuals and vital to the functioning of today's economy, so it's critical to stay on top of how you use them.

Here are some tips on the differences between credit, debit, and secured credit cards, and ways to compare the benefits of each.

Credit cards: pros and cons 

A credit card is essentially a loan: use it to buy something today, pay later. Easy access to credit can be extremely useful; paying it off can be another story.

While you are only required to pay off a minimum amount of the loan balance each month, you'll generally pay high interest charges on any unpaid balance. Current credit card interest rates vary widely, but can easily be more than 20 percent a year if you don't pay your full "loan" off every month. When you apply for any credit card, make sure you know what interest rates will apply to card balances, and if there is a capped maximum rate. 

Build a credit history with "good" use 

It's almost impossible to avoid credit cards in today's economy. You'll need a credit card to establish a credit history if you plan on applying for a car loan or a home mortgage. Banks won't lend to you unless they can verify that you know how to pay off debt. That's why establishing a credit history is important.

Having said that, try to use your credit cards like a pro, not a rookie. "Good" use of credit cards includes: 

  • Online transactions or big purchases like household appliances. Your card should include purchase protection so that if something goes wrong (items arriving damaged, are lost in delivery, etc.), you can ask your credit card company to withhold payment until the dispute is resolved. Some cards also offer warranty protection, eliminating the need for you to purchase a manufacturer's extended warranty. 
  • Regular purchases and timely payments will allow you to establish a good credit rating. But don't regularly charge more than you can pay back or carry a balance that is more than 25 percent of the credit limit – this can lower your credit rating and hurt your chances for a future home or auto loan. 
  • Car rentals require a credit or debit card. Check to see if your credit card company offers collision insurance, so you can avoid paying for extra (and often pricier) collision insurance from the car rental company.
  • Travel arrangements such as hotels and airlines generally require a credit or debit card to make a reservation and/or check in, although you can opt to pay with cash at checkout.

The debit card option

A debit card is linked to your checking account and can be used in lieu of cash or a check without the hassle of carrying either. It is not credit. Even if you have opted into an overdraft protection program, you can still incur fees if you spend more than you have in your account, so it's important to keep track of your balance(s). 

Secured credit cards: Good first round picks 

A secured credit card is an excellent tool for people who want to establish a good credit history or repair a damaged credit rating. Generally a customer is required to put cash into a savings or money market account or a certificate of deposit. It's a good first step toward obtaining a "regular" credit card. 

Use a secured credit card to make small purchases every month. Don't carry abalance on the card and pay the bill off in full each month to build and/or improve your credit rating. 


It's essential to shop around for a secured credit card, as terms vary widely. 

Pick a winner: Comparing card costs and benefits 

The plain truth is that card fees and benefits vary dramatically. Read the fine print and don't be afraid to call and ask questions. Good questions to ask include:

What are the annual fees?

What are the fees for late payments?

What is the interest rate and is it fixed or variable?

Is there a cap on the interest rate?

Many cards offer a low introductory rate, only to increase the rate after a few months. Get the lowest rate(s) for which you qualify.

How are cash advances treated? The interest rate is often higher and cash advances can trigger fees or interest on all outstanding balances.

Rewards: Determine what rewards are valuable to you. If you want points to spend toward airfare, hotel discounts, or cash back, make sure you understand how the program works, what purchases qualify for rewards, and when the rewards will expire. 

The content provided is for informational purposes only. Neither BBVA Compass, nor any of its affiliates, is providing legal, tax, or investment advice. You should consult your legal, tax, or financial advisor about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA Compass or any of its affiliates. 

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