Debit or Credit?

“Debit or credit?” is kind of a trick question. It seems like it should only have two answers (I mean there’s two options in the question, right?). But really, you have three options when it comes to paying with a card at the register. If I just confused you, don’t worry, I can explain.

To start with, remember the basic differences between your debit card and credit card. Debit cards are linked directly to your checking account. They take the place of cash or a check and the money comes directly out of your checking account. Credit cards are a line-of-credit from your credit card company. They are basically lending you money to make purchases up to a certain credit limit, then you pay them back later with interest.

But “debit or credit?” isn’t just a question about which physical card you want to pay with, it’s asking you how you want your transaction to be processed. That’s where the three choices come in. They are:

DEBIT AS DEBIT

In this option you:

  • Swipe you debit card and enter your PIN number.
  • The transaction posts immediately from your checking account (meaning the money is withdrawn from your account in real time).

CREDIT AS CREDIT

In this option you:

  • Swipe your credit card and sign for the transaction.
  • Your credit card company pays for the transaction, you have not yet paid for this item.
  • Your credit card company charges you interest on the balance of your card. You must pay back your balance in monthly installments.

DEBIT AS CREDIT

In this option you:

  • Swipe you debit card and sign for the transaction.
  • The transaction typically takes 1 – 2 days to post in you checking account. The length of time it takes to post is dependent on the merchant, not on your bank or credit union.

This third option is the one people most commonly forget about. Just because you used your debit card does NOT mean that your transaction was processed as debit. The key thing to remember is, unless you entered a PIN, the transaction was done as credit.

So let’s say you went through the Dunkin’ Donuts drive-thru to get your morning coffee. They grabbed your debit card, swiped it, and passed it was to you. That was a credit transaction because you didn’t enter a PIN. You might not see that $2 being withdrawn from your account for a day or two, so don’t forget about that transaction when you check your available balance. What your mobile banking shows for your balance might not include transactions run as credit!

Next trick question – “Is one way of using a card better than the others?” The simple answer is – not really. There are benefits and drawbacks to all three options, so the best answer is to do whatever is most convenient for you. As a credit union member and employee however, I will point out that your credit union benefits more from debit as credit transactions than the other two options, so if you want to help out your financial institution I encourage you to swipe and sign with your debit card!

I hope this post helps you feel more confident about your answer the next time you’re at the register. 🙂

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Unlike Rihanna, Your Lender Doesn’t Love the Way You Lie

If you’re dating a girl and you find out she’s cheated on every boyfriend she’s ever had, you automatically become convinced that she’s cheating on you, right?

Or let’s say you just found out that the guy you went on a date with last night is also currently dating seven other girls. If that’s not a turn off, I’m not sure what is.

Guess what? Your financial institution feels the same way. Not about your dating history, but about your credit history. A bad dating history can make someone hesitant to be with you; likewise a bad credit history makes lenders cautious about approving you for a loan. If you’ve mistreated other lenders in the past, what proof do they have that you’ll treat them differently? It turns out the world of finance isn’t just about numbers, it’s often more about the relationship between the lender and the customer.

As addicting as this show is, you wouldn't want to be on it yourself.

As addicting as this show is, you wouldn’t want to be on it yourself.

Here are two money habits that are a major red light to potential lenders looking to approve you for a new loan:

  1. You’ve made late payments in the past. This is where the “once a cheater, always a cheater” philosophy comes into play for lenders. One late payment might not seem like a big deal, but it is to your financial institution. Just like cheating on an ex shows your new love interest that you might cheat on them, making late payments proves to new lenders that you are more likely to get behind on your payments to them.  Plus once a payment is past 30 days due, it gets reported to your credit history and it stays there for two years. That would be like cheating, and then not only do you have to feel guilty about it and apologize to the person you cheated on, but every love interest you have for two years after that has written confirm that you’re a cheater. This will result in a lower credit score, higher interest rates, and in come cases denial for loan or credit application. So avoid the trouble. You committed to making a payment. You committed to a relationship with your credit union or bank. Now you have to follow through. Make your payments on time.
  2. Your credit card balance is close to your limit. Capacity, or how much of your available revolving credit you are using, makes up 30% of your credit score. Simply put, how much of the credit available to you are you actually using? If the limit on your credit card is $10,000 is your current balance $100 or $9,999? You want your dream guy to be desirable to others, but you don’t actually want him to date others. Similarly, you want to have credit (in the form of credit cards, Home Equity Lines of Credit, or Unsecured Lines of Credit) available to you, but you don’t want to use the maximum amount. So be selective. Don’t put unnecessary things on your credit card. Pay off your balance in full each month. Use no more than 40% of your available revolving credit at a time.

In conclusion, you gotta treat your financial institution right. Otherwise it will tell all of its friends and no bank or credit union will want to date you . . . I mean finance a loan for you.

Need more help understanding your credit history and/or credit score? Check out:  https://www.creditkarma.com/ or https://www.annualcreditreport.com/index.action.

Short & Sweet Credit Card Advice

Want to know the single best piece of financial advice I’ve ever been given?

If you wouldn’t go to a bank or credit union and ask for a loan to buy it, DON’T put it on your credit card.

creditcards

I got this tip way back at the beginning of my financial career (like 2 years ago) at a Financial Literacy Conference.  It came from Dr. Barbara O’Neill a member of the New Jersey Coalition for Financial Education. She’s a very smart lady.

The trouble with credit cards is, they don’t feel like real money. It’s not cash you have to hand to the cashier.  It’s not a debit card that affects your checking account balance right away.  It’s so easy to impulse buy or overshop with a credit card because payment is delayed.  And all of the sudden 1 or 2 small purchases turn into 20 and it all adds up to a big balance.  Worst of all, since you haven’t depleted your checking account or the cash in your wallet, you probably feel like you still have money to spend even though you’ve already burned through your monthly budget.

Another problem with credit cards? Interest rates are crazy high (average in the U.S. is 14.95% APR according to CreditCard.com). Why would you want to pay 14% interest on a purchase you could have paid for at 0% interest with cash or a debit card? You wouldn’t! You’re paying more for items in the long run just to delay payment for a few weeks or months. I’m sure you’ve been told before to pay-off your credit card balance in full every month, but how many of us actually do that? According to NerdWallet.com the average U.S. household in 2013 has $7,050 in credit card debt, which makes me think not too many of us are good at ante-ing up each month to pay off our credit card balance.

If you follow Barbara’s rule, however, you are less likely to drive up the balance of your credit cards unintentionally.  Before you swipe your credit card, think “Would I ask my bank for a loan to make this purchase?”  If the answer is “NO WAY” then pay with cash or debit instead.  For example, you wouldn’t walk into a branch and ask for a loan to pay for a pizza, would you? If you were brave enough to do it I can almost guarantee that you will not be approved (unless that particular loan officer has a great sense of humor).

If you reserve your credit card for big purchases that you could ask for a loan for, like car repairs or furniture, you will be a much more cautious spender. It’s likely you’ll have done some research into what you want to buy, where to get the best price, and whether or not you really need it. If it’s truly something you might not have immediate funds ready to purchase, your credit card can help you get it.  If you can pay for it out of your regular budget, do that instead.  No more racking up your balance on nail polish or new going-out clothes from Forever 21 (not that I’ve ever done that . . . ).

With the holidays, Black Friday, and Cyber Monday quickly approaching it’s more important than ever to remember this rule. All the knick-knacks, decorations, gifts, and food that come with the holiday can really put a dent in your wallet.  But putting all of those expenses on your credit card might not be the best solution.  Set a limit to your holiday spending that fits your current budget, even if these means cutting back a little. Start putting a little money away each week (start today!) so you have money saved specifically for holiday shopping.  And last but not least, see if your financial institution offers a Holiday Loan; the rates would likely be a lot less than your credit card and making the payments will improve your credit.

Leaving your credit card at home this holiday season might make your 2014 a little more merry and a lot brighter!