Personal Finance presentation, should I use a debit card or credit card for daily purchases? Prepare to get financially fit by practicing personal finance. We’ll start with the pros and cons of the credit card then move to the pros and cons of the debit card. Starting with the pros of the credit card benefits of using the credit card for daily transactions. First being it’s generally an easy thing to use, you can make purchases online quite easily. The setup of online purchases, of course, generally been designed for the use of a credit card, although other sources possibly being more and more likely, as we move forward in the digital age.
Here, we’ve have the building of the credit history. This is something that often seems counter intuitive, in that the history or your credit history of your credit rating could be built up by using the credit card in order to be dealing with the credit that’s counterintuitive, oftentimes to me, because if you’re in a situation where you’re not using the credit card and you never have any debt, you would think that would be a good indication of your finances being healthy. However, the way the credit score is built is that if you have some debt that is involved, and you pay off the debt in a timely fashion, that will increase your credit score.
So you want to make sure of course, if that is one of your objectives, that you’re making sure that you pay off in a timely fashion so that you don’t actually damage your credit score. by not paying off the credit card in a timely fashion, you can afford to earn rewards with the credit cards and many credit cards have have a long history of setting up rewards and they’ve been changing over times. And that can be a significant bonus help finance large purchases. So the credit card can help to give you that financing if you need to, to purchase some type of large purchase like the washer and dryer over here,
then you want to be careful about financing with the credit card because if you don’t pay it off in the short time period, you could be subject to the higher rates of the credit card, then if you use some other type of financing, however, you have that financing option, which you do not have when you’re thinking about the debit card, in essence, which is limited to the checking account may have free financing for a short time if you pay off the balance each month.
Now if you’re thinking about paying off the balance each month, then you may then not have any interest that will be involved or penalties and be involved in have small you know fees possibly for the use of the credit card, which in essence gives you a loan for a short period of time, which can be a beneficial thing, any type of loan is good. So if we can get money for a longer period of time, for any period of time, without paying interest on it, even if it’s only for a fraction of a month, that adds up that could add up over time. So if we pay off the balance every month, then we could have you know a benefit related to that.
The credit card cons One of the disadvantages of the credit cards, clearly, we’re going to be paying interest on the outstanding balance. So obviously, if we do not pay the balance off each month, then we have the financing the financing in and of itself is a benefit of the credit card because we can use it for financing for things such as purchases. But of course, the downside is that we have to pay for the financing the rent on the money we financed, which would be interest, we also have to make sure that we’re planning for the finance because it’s so easy to use the credit card, it’s easy to go into the debt, more so than then we were hoping to or something like that. And so we have to make sure that we’re careful about the financing,
we’re going into due to the fees that we’re going to pay on an in the form of interest, the receiver of payment may have credit card fees, resulting in other forms of payments going further. So in other words, if you’re paying somebody else like a restaurant or a small business, or something like that, or tip or something like that, with a credit card, note that the establishment that is receiving the money is actually paying for the credit card service, they have to you know, fees to the credit card company. Now, credit card companies have actually worked very hard to try to hide this too. So meaning in the past, you used to have organizations such as gas stations and whatnot that would say, hey, if you pay us with cash, we will charge you less.
Why? Because we don’t have to pay the credit card fee you pay us with cash. But the credit card companies actually, of course got mad at that they don’t want different fees being charged to customers based on what what the form of payment even though the use of the credit card usually costs the business more to use the credit card. So you usually won’t see that change in fees. But you know, if you’re doing business with a small business or something like that, then it might be the case that actually paying them with cash could go further for them due to the fact that you don’t have that that credit card fee in there.
And also it’s it’s not quite as trackable with cash and then you know, they should be reporting it on their taxes no matter what whether they get a credit card or not. But obviously cash is not as good Track who either, so tips may go further if you paid with cash. So if you pay with cash in terms of a tip, then you know, it depends how the tips are set up. Obviously different restaurants have different ways to tips gonna happen. But wherever you’re giving a tip to the question is, are they good? Are they going to take that tip? Do they have to pay taxes on the tip?
Are they going to put it into a pool that they’re going to divide the tips up later? This is another area where different laws and local state laws have have changed, you know, what, what tips will do? Or how you’re going to treat tips? How are you going to pool the tips? How are you going to pay taxes in on the tips, and it’s another area where if you just gave someone cash, then they might have a little bit more options in that they might not have to be paying for the credit card fee with relation to the tip. And if you actually want the tip going to the person that you’re that you’re giving to the money to, it’s more likely that they’ll be able to just pocket the money to the person you’re trying to give the money to.
If you just give them the tip, they might have more leeway, less kind of things they have to do with it. So in some cases, depending on where you’re at, it might be worthwhile to actually pay the bill with a credit card, and then pay someone to tip in cash just in in the event that possibly the cache might go a little bit further than then the credit card for the individual who you’re trying to trying to tip. So it can be more difficult to account for credit card purchases when using a cash basis. Meaning the bookkeeping with with regard to the credit card may be a little bit more difficult. We’ll talk we’ll talk a little bit more about this in a second.
And but just note that when you’re actually recording the transactions, it may be a little bit more difficult, especially if you’re not paying off the credit card transactions on a monthly basis. That doesn’t mean you shouldn’t do that, it just means that you got to make sure that you’re thinking about how you’re going to be compiling the data. And obviously, if you if you make it more difficult for the bookkeeping, that’s going to make it more difficult for the budgeting as well, especially when not paying off the minimum balances.
So to think about that, we can think about the cash versus the accrual method. So remember, if you’re if you’re using a credit card, you’re basically how you’re forcing yourself to kind of use an accrual method. Meaning that, well, there’s two ways you could do it, you could still use a cash method, if you pay for something with a credit card, and then and then you’re getting charges on the credit cards, and then you pay off the credit card at some future date, it’s not actually hitting your checking account until you pay off the credit card. But if you wait until that happens till you pay off the credit card to record it in your bookkeeping system, and you just say,
Yeah, I paid $1,300 to the credit card company or whatever the minimum balance is, you don’t know what you paid for. You don’t know the expense accounts, you don’t know the vendors, because all that detail is in the activity from the credit card statement. So that that’s where the problem comes into play. So you’ll end up then if you’re on a cash basis, just recording the payments that you’re making, and possibly not tracking the liability that has been incurred. And you’re not tracking the expenditures when you actually incurred them.
But when you paid off the bill, and and you’re also not being able to group the categories into the relevant groups as you pay them. Now you can do that it just is you just got to be mindful of it, it might not be too difficult to do if you pay it off each month, because at least then you’re recording the expenditure in the same month that you incurred it. But if you’re paying the minimum balances off, now you’re paying for the actual cash is going out at a later date, then the actual services that you that you consumed happened.
And so what you would like to do is go to more of an accrual basis in that event, which would be that you’re recording the detail of the credit card activity in your account so that you can see who you paid by vendor, you can group the accounts by what you paid for. And you can basically run your budget and so on by those categorizations. And in order to do that, you got to do kind of an accrual type of thing and look at the credit card transactions. Now note, if you’re using software, like a QuickBooks or a OneNote, or QuickBooks, or zero software or wave accounting,
that uses a double entry accounting system, you can typically add the credit card as a financial institution, which will download those transactions from the credit card as well. And you can basically track them in your income statement in that way. So software is quite helpful for that kind of grouping and budgeting activity. Although again, if you use that kind of software, you’re going to have to have some grasp of accounting and bookkeeping. Within within the software. If you use some kind of method where you’re entering the transactions into a spreadsheet or something like that, or using the check register. You got to think about how you’re going to be adding the credit card transactions if they are significant, so that you can track them and budget for them.
So then we have the debit card pros and cons. So debit cards are pretty easy to use. Use of course in person, they can be quite easy, do not need to worry about paying another bill in the future. So the credit card, I mean, the debit card is nice because of course it comes right out of your checking account. That means that you’re not gonna have to worry about the credit card bill, as you would with a credit card coming later, that you then have to make another bill, right. So it’s actually has has less activity to it, because of course, you’re just making the payment you’re done with it, you’re not going to get billed by it for the payment. In some future time period, you avoid interest and fees. So obviously, if you’re paying with a debit card, as long as you’re not, you know,
overdraft, or so on, you’re going to be avoiding the kinds of interest in fees that you would get for a credit card, if you have the outstanding balance that would be involved in the credit card. That of course means that you have to pay off the balance because you can’t get you know, you don’t have the capacity of having the loan, bookkeeping maybe easier using a cash method. So if you’re using a cash method with a debit card, then all the transaction detail is going into your checking account.
And you can go and that makes it a little bit easier if you’re just using the cash method, because you can just download the data on your checking account or look at the activity in the checking account. And you’ll have all the detail including the vendors who you paid. And then you can kind of grouped by category and whatnot. If you’re using software like QuickBooks, or zero or wave accounting, then you could just connect to one institution, which would be your checking account instead of your checking and credit card account. And that would be a little bit faster as well.
And you can just be on a cash basis more so. And so that’s a little bit easier. I’m not saying the credit card, you shouldn’t use it in that way. But just remember, the credit cards a little bit a little bit more complicated, especially if you have to track that outstanding balance, which you do if you’re using credit if you’re trying to track the credit card activity in software, or you’re gonna have to come up with some method to do that. If you’re just doing a cash basis method and you don’t want to do any accrual thing at all, it’s simple as possible, it’s more simple to not use the credit card, because because then you then you don’t have to track that information on a on which would be an accrual type of thing.
But in any case, the debit card cons may be more difficult for online purchases. So the online purchases are usually designed more for a credit card. There might be more options. Of course, these days with more applications, like a pay pal and other types of things that can be used to pay your bills directly from your checking account without the use of a credit card. And that’s becoming more and more prolific. I’m not sure if it’s as high at this point as the use of a credit card, which is the most straightforward way to make a payment online these days generally, but I think more and more, you’ll be able to make payments using these applications directly from your checking account.
And that might make it easier to be more on a cash basis for online purchases, which would be really important for a lot of people to move or really good, easier again to move from a credit card to making those online payments with the with the cash payments, because again, you don’t have that tracking problem with the credit card. And you can have everything coming out of one account. So will not help with the credit score.
So obviously, when you’re thinking about using the credit card, you’re not going to be building up the credit which again, it seems counterintuitive to me, it seems like if, you know, it seems like the best track record for someone finances would be that they don’t have any debt maybe. But again, that’s not the way it is. And if you want if you want your look better by having debt and then paying off the debt, so if you might want to, if you if that’s your explicit person, purpose of the credit card, just be careful on how you use the credit card in order to achieve that goal, do not have to benefit of free short term financing.
So obviously, when you’re using the debit card, you’re limited to the amount that’s in your checking account. So if you go over that you might have overdraft protection, and so on and so forth. And it might you might have one that works as a debit card and a credit card or whatnot. But in general, if it’s just a debit card, you can’t go into negative you can’t take out the financing. The way you can with a credit card may be more likely to overdraft if you do not pay attention.
So clearly, if you’re just if you’re just using a debit card and you’re not tracking it closely, then if you go into an overdraft, meaning your account goes below zero, you can that can cost you can cause more problems than if you you wouldn’t have that same kind of situation with a credit card because of course, you would just have more debt, you know, you would have the credit would just go up. So those are just some of the pros and cons between the debit and credit card.