Credit and Debit Cards

Credit and debit cards have become a common electronic payment instrument. However credit cards are different from debit cards. While a credit card is a way to “pay later” a debit card is a way to “pay now”. When you use a debit card, your money is immediately reduced from your current or savings bank account balance. This means that debit cards allow you to spend only what is in your bank account. On the contrary, a credit card is a form of short-term borrowing from the bank.   Indeed, some people find they do not have the discipline to control their spending especially when it is conducted on a credit basis, and thus make the sensible decision to do without a credit card. Therefore, if you are after the convenience but do not want to get into debt, you can use a debit card instead. Please read on!

Credit Cards

  • a form of short-term borrowing, allowing goods and services to be purchased sooner, even if at a greater cost, than if we had to save up for them.
  • a convenient payment instrument, reducing the amount of cash we have to carry around, including when we travel, for conducting purchases over the phone and over the internet.
  • may have attractive rewards programmes associated with them.
  • can also be useful as a source of emergency funds.

Do you qualify for a credit card?

If you are over 18, you may qualify for a credit card. Your bank will carry out a credit scoring exercise to assess whether you are eligible for such a card.

If you are under 18, you may qualify for a credit card if you are an additional cardholder. For example, a member of your family (e.g. your dad or mum) has a credit card in their own name and the bank issues a card to you as additional or “supplementary” card holder. However, your dad or mum remain liable for all amounts owing, including any losses from a secondary card-holder’s negligence.

How do credit cards work?

A credit card differs from a debit card.  When making use of a credit card the money is not removed from your bank account after every transaction. However unlike repayment on a traditional loan such as a car loan, credit cards do not allow you to spread the amount you owe over a fixed period of time. Instead, you are required to make a minimum monthly payment, which is the smallest amount you can pay and still meet your cardholder agreement, that is the terms you agree to when signing up for the card. The minimum payment is usually between 2 and 9 percent of your outstanding balance. Unfortunately, by paying only the minimum each month instead of paying off your entire balance, your debt will continue to grow.

Questions you need to ask before applying for a credit card

  • Do I need it?
  • Will I be able to afford it?
  • Will I be able to meet the monthly payments?
  • If I decide to apply for a credit card what should I look for?
  • What interest or finance charges will apply if I make use of the funds available to me on my credit card? . These are generally shown as the Annual Percentage Rate (APR) of charge. Do I need to pay any annual fees?
  • Does the credit card provide a time period where no payments are due before finance charges are incurred?

When should I use a credit card or make use of credit?

As a student/young adult, you will have to decide for yourself if you can handle the responsibility of a credit card. Credit cards are easy to get but not so easy to manage, especially if you end up with a high unpaid balance on which interest is accruing, and no payments are being made. Knowing when to make use of credit is the difference between purchasing what you need and paying for it or finding yourself in a situation of unbearable debt. The following are acceptable reasons to make use of credit:

  • Purchase of items which will result into cost reduction.

  • Purchase of a necessity.

What are the advantages of credit cards?

  • Using credit cards can help you build a positive credit history. This can enhance your ability to seek a future personal loan or a home loan;
  • Cash availability in the case of an emergency;
  • Automatic record keeping;
  • Internet orders;
  • Combine many purchases into one payment.

What are the disadvantages of credit cards?

  • They may be easy to get but not so easy to manage;
  • Impulsive spending increases;
  • Temptation to overspend;
  • Non-essential items being purchased;
  • Misuse of credit cards can lead to potential problems with your bank.

Will I be safe if each month I pay the minimum monthly payment only?

Although it may seem good to see that you have only a small amount to pay each month, in the long run if you continue to pay only the minimum payment you will never be able to pay the balance off. If you keep paying the minimum payment it might give you the feeling that you are on top of your bills and taking care of your responsibilities. This is a false illusion because if all you ever pay is the minimum, it will cost you money. Paying only the minimum payment amount or only a few euros over it, you will most likely take around 20 years to pay off your debt. After interest is added, your debt will be more than doubled.

The safest way is to carry no balance at all. If this is not possible as is generally the case you should pay at least an amount which is slightly above the minimum. This will also help you to slide a month or two when unexpected expenses arise.

If I get behind on my monthly payments, what should I do?

This is a situation that is easy to get into but tricky to get out of. The following tips are some precautions that you can take if you are not able to meet the payments:

  • Cut any recreational expenses;
  • Phone your bank to see if they can work out a new repayment schedule;
  • Develop a budget and stick to it. Having an excess amount of credit may damage your eligibility for future loans;
  • Use a debit card instead.

How is interest charged on credit cards?

Interest is generally either charged from the date of purchase of items or from the date your monthly statement is issued. For cash advances, interest is usually charged from the date of the withdrawal. Insist on seeing a copy of the Conditions of Use before you apply, so you can check because, other things being the same, you will most probably be better off with a card that only applies interest from the statement date.

Will I be charged fees on my debit card?

In Malta banks will give you a debit card for free, thus no fees will be charged when acquiring a debit card.

What are the advantages of debit cards?

  • A debit card is easier to get than a credit card;
  • A debit card frees you from carrying any cash or cheque books;
  • Using a debit card instead of writing cheques saves you from showing identification or giving out information at the time of the transaction;
  • Debit cards save you from carrying cash when you go abroad and are also more readily acceptable than cheques;
  • Debit cards do not have any interest charges linked to them.

What are the disadvantages of debit cards?

  • To make a purchase you need to have the money available in your bank account.

(As you can see, the advantages outweigh the disadvantages).

Watch out for fees

Depending on how you use your card, fees can add a lot to the cost of your card. Commonly charged fees include:

  • annual account fees;
  • fees to use rewards programs;
  • fees for late payments;
  • payment dishonour fees; and
  • fees for exceeding your credit limit.

Fees must be properly disclosed. –  They should  be published in the institutions websites and should also be available in the bank’s branches. If a card is connected to a payment account the applicable fees and charges shall be also displayed in a Fee Information Document.

As long as the terms and conditions for the card give the lender the right to increase existing fees and impose new ones – and they almost always do – there is not much you can do, if faced with a fee increase on your card, shop around for a different card or a new card issuer.