Are financial decisions easy?

After much thought, I decided upon embarking on the second innings of my entrepreneurial journey. The path that took me to reach where I am today hasn’t been a cakewalk. At times an experience alone can unknowingly pave the way for us to take certain decisions. But were those experiences always easy? Well, not really as you would soon find out.

As much as I love venturing outdoors, summers in Dubai literally force me to stay within the limits of my perfectly air conditioned home. Being an avid fitness enthusiast, this means visiting the gym regularly. That day at the gym I was politely reminded about the impending renewal of my annual membership. As I was about to swipe my credit card, the manager informed that the loyalty programs’ benefit of my card entitled me for a complimentary renewal. Needless to say, I was overjoyed hearing this but right at that moment it struck me that all these years I have been burning a hole in my pocket unknowingly. Had I been aware of these benefits earlier, I would not have had to shell out such enormous amounts of money. I would have instead used my credit card to the best of its potential. The banker in me felt a bit cheated for having lost out on a potential savings opportunity. I realized that perhaps I wasn’t the only one carrying unexploited credit cards in their wallets.

The next instance was at the Dubai Airport, my husband was traveling and forgot an important document. Of course, I rushed to the airport in peak traffic and handed over the car to the valet. Once I handed over documents and bid adieu to dear hubby it was time to redeem my car by paying fee. I was pleasantly surprised to see my parking ticket because it offered complimentary valet parking on the credit card neatly tucked in my clutch. I had a feeling of déjà vu.

Haven’t we all faced situations similar to this? Whether we end up using all the benefits or not is a prerogative best left to the person concerned. But we must be aware of what our credit cards can offer as additional benefits apart from only paying bills and taking care of shopping trips.

It wasn’t the only time I realized my mistake and one such experience literally pushed me to the brim of my patience.

Like most expats in the UAE, we sacrifice a lot to realize the dream of building a house back in our home country. We stretch our limits to save each dirham. After my husband and I had finished finalizing the deal of our dream home, we religiously kept paying the pre-EMI. At that point, little did we know that we were in for a rude shock. Almost 2 years down the line, our loan officer informed that we had only been servicing the interest and not paying towards the loan principal. This essentially meant, we had lost out on substantial savings. To top it all, we realized that this was definitely avoidable. Coupled with these experiences, I wondered if my ignorance about the importance of proper investment decisions could affect my long term financial management.

For the uninitiated, it is always a challenge to take the smartest of financial decisions.

Especially in our 20s and 30s, when we have to decide about various financial needs like car loans, home loans, personal loans, etc., it definitely helps to have a portal that compares and assists with our financial decision making.

With a career in HR spanning over 17 years, I have met people from all walks of life seeking a simple, transparent and trusted friend who can help us with financial planning. Somebody who can read the fine print, compare various products and help us chose the best, not necessarily the cheapest. This triggered the inception of SoulWallet, an unbiased and comprehensive comparison portal for the financial products like Credit Cards, Personal Loans, Home Loans and Car Loans and more. At SoulWallet we have earnestly tried to create a virtual friend who helps make financial decisions with confidence.

How is Credit Card interest calculated?

While most people have a very good understanding of what a credit card is and that they incur interest charges on their credit cards, very few people understand how interest charges are actually calculated on their credit cards.  Here, we give you a detailed description of how credit card interest charges are calculated.

In the UAE most banks communicate their credit card interest rates as a monthly percentage rate, for e.g. the ADCB Touchpoints Infinite credit card has an interest rate of 3.25% and the Emirates Citibank Ultima credit card has an interest rate of 2.99%.  To understand how interest is charged on the credit card, we need to first convert these monthly rates into an annual rate of interest. This is done by multiplying the monthly interest rate by 12 which gives us what is known as the “Annual Percentage Rate” or APR for short.

Credit card interest is calculated using the APR.  This is the interest rate, expressed as a yearly (hence annual) rate of interest.  However, banks calculate interest on the credit card outstanding balance on a daily basis.  To do this, the annual interest rate (APR) applicable on the card is divided by 365. The resultant daily rate of interest is multiplied by the total outstanding balance as on that date to arrive at the interest charge for that particular day.  This process is repeated daily until the entire outstanding balance amount is paid off in full.

To illustrate this with an example, assume that you have an amount outstanding on your credit card of AED 10,000 and let’s assume the monthly interest rate on the credit card is 3.25%.  

  • We first find the APR by multiplying the monthly interest rate by 12.  This gives us an APR of 39%, which is the annualized interest rate for the card.
  • Next, we arrive at the daily rate of interest by dividing the APR by 365, hence we get a daily interest rate of 0.1068% (39%/365).  
  • The interest charge for the day is calculated by multiplying the outstanding balance as of that day (which in this example we have assumed to be AED 10,000) and the daily interest rate (which we have just calculated to be 0.1068%).  Thus, we arrive at an interest charge of AED 10.68 (10,000*0.1068%).
  • This interest charge of AED 10.68 is then added to the outstanding balance amount due, so the new outstanding balance on the credit card becomes AED 10,010.68.  
  • If there have been no purchases or payments made on the same day, then the opening outstanding balance on the next day will be this figure of AED 10,010.68.  
  • The interest charge for the next day will be calculated using this new outstanding balance amount.  Hence, in our example the interest charge for the next day will be 10,010.68 * 0.1068% which is AED 10.69 making the new outstanding balance amount AED 10,021.38.
  • While these amounts may not initially seem significant, it is very important to realise that they can add up very quickly to become significant amounts.  In this example, simply continuing this calculation and assuming no payments or additional purchases are made, the outstanding balance increases to 10,150.63 which represents interest charges of AED 150.63 in just 15 days.  
  • What is also critical to note is that this amount does not increase uniformly over each day but is in fact compounding because interest for each day is also calculated on interest that was charged for every day prior to that.  In our example, after 30 days the outstanding balance increases to AED 10,314.54. The total interest charges in the first 15 days was AED 150.63 but the interest charges over the next 15 days totaled to AED 163.91. This figure would only keep rising with time unless payments are made to reduce the outstanding balance.

What are some common credit card related terms?

APR

APR is a term that you would come across frequently in the context of credit cards.  It is short for “Annual Percentage Rate” and is the interest rate that the bank charges on outstanding balances carried on the credit card.  It is important to note that although every credit card in the market has an assigned APR, you can use your credit card in a manner such that you do not incur any interest charges at all.

APR, as indicated by the use of the word “Annual” in the name, is an annual percentage rate of interest.  However, credit card companies levy this interest rate on a daily basis. To do this, they use the stated APR and divide it by 365 to arrive at the applicable interest rate per day.  This is used to calculate interest charges on the outstanding balance on the credit card.

While APR is the most commonly known interest rate with regard to credit cards there are also other rates such as the Cash Advance Rate (applicable to cash withdrawals made using the credit card) and the Balance transfer interest rate (applicable to outstanding balance amount brought forward from another bank’s credit card to this credit card).  These charges are different from the APR which is used for all other (retail purchases) charges on the credit card.

Total Credit Limit

Every credit card is assigned a “Credit Limit” by the bank.  This is also sometime known as a “Credit Line”. This is the maximum amount up to which the customer can use his or her credit card.  Credit limits are assigned based on many factors which include the customer’s income, other liabilities, disposable income, employer, type of credit card applied for and so on.  Credit limits are assigned at the time of issuing a new credit card but can also be changed multiple times over the lifetime of the credit cards. These changes can be initiated by either the bank directly or by the bank based on a request the customer.  Banks usually initiate an increase in credit limit over a period of time based on a review of the customer’s usage and repayment history on the card. This change could be either an upward revision i.e. an increase in the credit limit based on good usage and repayment history displayed by the customer.  Or it could be a downward revision, i.e. a decrease from the previous credit limit assigned based on unsatisfactory performance on the credit card which is most likely due to delayed repayments on the card. Customers can also request for increases or even decreases in their credit limit. Increases in credit limit will of course require the bank’s review and approval as it is effectively an increase in the “line of credit” being offered by the bank.  Decreases in credit limit, however, can be done simply based on the customer’s request as there is no additional credit line being granted.

Current Outstanding Balance

This refers to the amount that is outstanding or in other words yet to be repaid to the bank.  This could comprise of purchases that the customer has made on the card as well as charges such as interest charges and any other charges that have been levied by the bank.  Such charges could include annual fees, late payment charges, over limit charges and so on.

Available Credit Limit

Available credit limit refers to the amount available to the customer to utilize on his or her credit card after taking into consideration previous purchases already made on the card and any other charges such as interest, fees etc. that are yet to be repaid.  It is basically calculated as the difference between the Total Credit Limit and the Current Outstanding Balance:

Available Credit Limit = Total Credit Limit – Current Outstanding Balance

Credit Card Billing Statement

A credit card statement is a summary of all transactions that have occurred over the specific billing period.  Credit card statements are issued for each “billing period” which is a specific amount of time, usually around 30 days.  The credit card statement shows key details of all transactions that had occurred on the card. These include the date of purchase, name of the establishment where the purchase was made and the value of the purchase.  A credit card statement also includes details of other items that are billed to the customer by the bank such as interest charges and fees (annual fees, late fees etc.) and details of all credits including payments made by the customer, any purchase reversals and so on.  Credit card statements also provide important information such as the payment due date and a summary of the rewards program associated with the specific credit card. For example, an Air Miles credit card statement would provide details of the Air Miles earned by the customer during the particular billing period and also the overall Air Miles that he or she has accumulated overall.  While the details mentioned above are common to almost all credit card statements, banks also utilize the credit card statements to communicate other aspects to customers such as special offers, various payment options, branch locations and so on. Banks also encourage customers to opt for e-statements i.e. statements sent over email as opposed to physical statements that are mailed to customers.  E-statements are obviously a much more efficient and environment friendly alternative compared to paper statements and these days many banks actively discourage paper statements by charging customers who opt for physical credit card statements.

Payment Due Date

The Payment Due Date is the date provided by the bank by which the bank must receive at least the minimum payment amount due by the customer.  This date is mentioned on the credit card billing statement and is an important date to remember to avoid incurring any late payment charges. Many banks allow for a day or two of “grace” days before levying late payment fees on the card if payment is not yet received.  It is especially very important to make the payment before the payment due date if you want to avoid incurring any interest charges. This is in a scenario where a customer makes the total payment due as mentioned on his credit card statement. Banks do not charge interest if the total payment due is made on or before the payment due date.  Interest is charged on a credit card on an “Average Daily Balance” method and if the total payment is not received on or before the payment due date then all purchases on the credit card will incur interest charges from the day that they were made until they are cleared by a payment.

If you have a savings or current account with the same bank that issued you the credit card you can setup an automatic payment debit to make sure that payment on the credit card is made directly (and automatically) by debiting your savings account.  This payment instruction can be setup for the minimum amount, any pre-specified amount each month or for the total statement amount. This is a very useful tool that customers can utilize to ensure they do not miss making payments before the payment due date and thereby saving them considerable amounts in late fee charges and interest charges.

Most banks these days provide customers with online banking and mobile banking facilities and customers will do well to utilize these services to make their lives simpler and also help save them money.  If your savings account and credit card account are with two different banks then you could still set up a monthly auto-debit instruction with your savings bank account to transfer a specified amount of money each month to your credit card issued by the other bank.  The main shortcoming of such an arrangement is that specific details of the credit card statement such as the minimum amount due or the total amount due will not be known to your savings bank and hence only a fixed payment can be made automatically each month. However, in such scenarios customers can still utilize the online banking services to make payments on their credit cards with other banks thereby saving them time from having to travel to branches, ATMs or other payment locations.

What are Islamic credit cards and how are they different?

Islamic credit cards were introduced because ribaa (the Arabic word for interest) is forbidden in Islam.  These cards work a bit differently from conventional credit cards. One format offered by several banks is that of a “profit rate”.  Here, instead of the customer paying interest charges, he or she is effectively paying an additional amount or “profit” to the bank for every purchase made on the credit card.  It is very similar to the concept on an interest rate but the ideology is that the user is incurring a “profit” fee for services enjoyed by using the credit card.

Another format of an Islamic credit card offered by some banks in the UAE is a monthly fee based credit card.  Here, instead of paying interest charges for each purchase the user only pays a fixed amount or a fixed fee each month for using the credit card.  This fee is payable irrespective of the amount used on the credit card.

Of the two general types of Islamic credit cards, the one based on a fixed monthly fee is obviously the most different as compared to a regular non-Islamic credit card.  The other type which is based on a profit rate is more or less similar to a non-Islamic credit card.

What are the different types of credit cards available in the UAE?

While there are no general fixed definitions of types of credit cards available, based on the kind of key feature or the reward they offer credit cards available in the UAE can be broadly classified into some categories.  It is useful to have a basic understanding of these types to determine which card is most suitable for your specific needs.

Cashback credit cards

Cash back credit cards are credit cards that offer the user a benefit of earning back a percentage of his or her spend on the card through a direct cash back credit.  For example, if a card offers you cashback of 5% on all supermarket spends and you use this card in a supermarket for AED 1,000 in a particular month, the bank will give you a credit of AED 50 (5% of AED 1,000) in your next credit card statement.  This means that you have effectively saved AED 50 and your supermarket spend only actually cost you AED 950. Cash back credit cards can be very useful in helping you maximize your savings by simply using your credit card.

Rewards credit cards

These are credit cards that offer their users a benefit in the form of rewards points (or Air Miles) against purchases made by them on the card.  The type of rewards offered can vary from points that can be redeemed against mall shopping vouchers, dining discount vouchers, air miles and so on.  The value of rewards earned and the process of earning as well redeeming the reward points can vary significantly not just from bank to bank but also within different credit cards offered by the same bank.  This can make it very challenging for the lay person to understand which offers the best rewards program that is most suitable to him or her. Using a credit card comparison website such as Soulwallet will help narrow down the choices for you.  

Balance Transfer credit cards

Many banks in the UAE allow customers to transfer a balance outstanding from another bank’s credit card to a credit card of their own.  The benefit they offer to customers for doing this is a lower interest rate on the balance transferred, typically for a specific period of time.  For instance, if you have an outstanding amount of AED 10,000 due on your credit card and are unable to pay this up in full you could consider moving this balance to a balance transfer credit card of another company which offers you a lower interest rate.  Doing this will help you potentially save a lot of money depending on a few factors. These include the rate of interest in your existing credit card versus the rate of interest offered on the balance transfer credit card; the period of time with the lower interest rate offered on the balance transfer credit card; and the time horizon by which you believe you will be able to pay off the total amount outstanding.

Balance transfer credit cards can be very useful in helping you reduce your overall credit cards interest debt.  Many banks even offer 0% interest for a short period of time which can save you several hundred dirhams based on the total amount you have outstanding on your credit card.

Islamic credit cards

Islamic credit cards were introduced because ribaa (the Arabic word for interest) is forbidden in Islam.  These cards work a bit differently from conventional credit cards. One format offered by several banks is that of a “profit rate”.  Here, instead of the customer paying interest charges, he or she is effectively paying an additional amount or “profit” to the bank for every purchase made on the credit card.  It is very similar to the concept on an interest rate but the ideology is that the user is incurring a “profit” fee for services enjoyed by using the credit card.

Another format of an Islamic credit card offered by some banks in the UAE is a monthly fee-based credit card.  Here, instead of paying interest charges for each purchase the user only pays a fixed amount or a fixed fee each month for using the credit card.  This fee is payable irrespective of the amount used on the credit card.

Business credit cards

Business credit cards are issued to small and medium sized businesses to offer them the access to more working capital to fund their operations by providing short term credit for various official expenditures.  These are different from corporate credit cards which are offered to large established corporates based on the company’s credit profile. In contrast, business credit cards are issued to the owner or proprietor of a small or medium sized business based on his personal credit profile.  

These cards are useful to help the owner gain more access to working capital, make payments to suppliers through the card rather than a personal check, give access to employees to the credit limit by issuing them separate supplementary credit cards, to earn reward points on regular expenditure of the business, enable the owner to separate his or her personal and business transactions, keep a record of official expenditure made on the credit card through the credit card statements and so on.  

While the credit card is issued to the owner for use in his business, the owner is liable for all charge incurred on it irrespective of the performance of the business.  Hence, while enjoying the many benefits of the credit card, the owner also needs to ensure he manages it as he would his own personal credit card to protect from any fraud and other liabilities.

Travel credit cards

Given its location and large expatriate population, the UAE is a hub for international travel not just regionally but globally as well.  A significant proportion of residents travel internationally very frequently either for business purposes or for tourism and banks in the country have seized on this opportunity to offer residents credit cards featuring various benefits related to international travel.  

Travel credit crds offer users travel related rewards and benefits such as air miles that can be redeemed against flight tickets, reward points that can be redeemed against hotel room bookings and so on.  In addition to the rewards that these cards offer, they also offer customers various other travel related benefits such as free travel insurance, free visa processing fees, emergency cash replacement, emergency medical insurance and so on.  Some banks have even got into arrangements with large travel related companies to offer customers benefits such as discounts on every booking made using the particular travel company and so on.

As with all the other types of credit cards, travel credit cards also vary significantly in their rewards offerings and value proposition for customers.  Understanding the benefits offered by each travel card and identifying which card is most suitable to your specific travel spends and needs will help you maximize the benefits that can be enjoyed by using these cards.

Premium credit cards

Premium credit cards offer customers not only certain key benefits in the form of specific attractive rewards such as Ari Miles, Points and so on but also many ancillary benefits such as complimentary premium lounge access at various international airports, complimentary access to golf courses, free offers on cinema tickets, complimentary offers on valet parking, special features such as purchase protection and extended warranties for purchases made on the card.  Premium credit cards almost always carry reasonably high annual fee charges but at the same time can also offer significant value to customers if their features are utilized effectively. Many banks also impose minimum monthly salary eligibility criterion for such credit cards to add to their sense of “exclusivity” in the credit card marketplace.

Standard or Plain Vanilla credit cards

Almost all banks offer customer Standard credit cards which do not carry any annual charges but also offer only very minimal benefits in terms of rewards and other features.  Standard credit cards are usually offered with relatively low credit limits. While they do offer users the advantages of a credit card as opposed to using cash, they do not offer very much else.  However, for customers in lower income brackets or for customers who want a credit card with a very low credit limit for any particular reason these cards can prove to be a useful alternative.

What are the different types of credit cards Rewards?

Credit cards rewards can be categorized based on the nature or type of features they offer to customers.  Many cards also offer multiple features which in fact can make them belong to more than one category. The main rewards categories are as below:  

Cash Back Credit Cards:

Cash back credit cards are credit cards that offer the user a benefit of earning back a percentage of his or her spend on the card through a direct cash back credit.  For example, if a card offers you cashback of 5% on all supermarket spends and you use this card in a supermarket for AED 1,000 in a particular month, the bank will give you a credit of AED 50 (5% of AED 1,000) in your next credit card statement.  This means that you have effectively saved AED 50 and your supermarket spend only actually cost you AED 950. Cash back credit cards can be very useful in helping you maximize your savings by simply using your credit card.

You must always be aware of the specific conditions associated with the particular cash back credit card.  Almost all cash back credit cards have very specific conditions on what type of purchases allow you to earn cash back credits.  These could be based on categories such as grocery or supermarket purchases, fuel purchases, retail purchase, dining and restaurant purchases and so on.  In addition to the specific category of spend almost all cash back credit cards will have limits on how much cash back you can actually earn. This could be based on a maximum spend per category type, for example, cash back credit on grocery purchases could be capped at grocery spends of AED 3,000 per month.  In such a scenario, if the cash back percentage was 5% then the maximum amount you can save each month on grocery spends would be AED 150 (5% of AED 3,000).

Certain banks could also set minimum spend requirements to be eligible to earn cash back credits.  Usually, this is based on wither minimum spends on a specific category of purchases or on the overall total spend on the credit card for the month.  For example, a bank could specify that cash back credits can be earned if a minimum spend of AED 1,000 is reached during the month.

The form of cash back given to you can also vary.  Some credits will offer you direct statement credits for the value of cash back earned.  These can then be considered as good as a cash payment. Some cash back cards offer gift vouchers at specific stores or malls for the value of cash back earned.  Some banks may also require customers to contact them to redeem cash back miles while others may simply credit the cash back earned to customers without any request having to be placed.  

As you can see, there are a lot of aspects to keep in mind in trying to ascertain the most suitable cash back credit card for you.  Having a sound understanding of the cash back rules of any particular credit card and also your specific spend patterns will help you make an informed decision on which cash back credit card to choose.  However, since there are more than 200 credit cards in the UAE market and a lot of them offering some form of cash back, it is almost impossible for a lay person to understand which card is most suitable to them.  This is why a cash back simulator as provided by SoulWallet can be invaluable in saving you the trouble of hours of research in identifying the right credit card for you.  

Rewards Credit Cards:

The majority of credit cards available offer some form of rewards to their customers based on the amount and type of spend on the card.  Rewards can broadly be classified into Air Miles and points.

Air Miles refer to points earned that you can redeem for airline tickets. Air Miles earned are most commonly associated with a specific Airline’s frequent flyer program.  The amount of air miles that can be earned depend on the particular credit card’s characteristics and the number of miles that can be redeemed for airline tickets would of course depend on the particular airline’s frequent flyer program.  Given this, the true value of the Air Miles that you can earn on your credit card spends depends not only on the card’s Air Miles program but also the airline’s frequent flyer program and hence can vary over different points in time.

Point rewards are also earned based on spend and can be redeemed against vouchers at specific retailers, malls and so on.  Some reward programs offer rewards on only certain categories of spend while some may offer rewards on all purchases made with the card.  Some may also exclude specific categories from earning rewards. Some banks in the UAE exclude utility payments (electricity, water bills etc.) from their reward programs.  Many reward programs are also tiered based on spend patterns across specific categories (grocery, school fees, fuel etc.) and specific levels of spend (for example between AED 1,000 to 5,000, AED 5,000 to10,000, AED 10,000+ and so on).

Both air miles and points rewards schemes can offer significant benefits to card holders but similar to cash back cards there can a lot of conditions that need to be understood fully to maximize the benefits earned.  

One type of reward program is not suitable for every customer, and determining which one is most suitable for you requires a good understanding of the reward program characteristics as well as your likely spend amounts across various spend categories.

A point to note is that typically credit cards that provide some type of rewards program usually have annual fees associated with them.  However, if one uses the card is a manner such that no interest charges are incurred then the value of the rewards earned will almost always be significantly higher than the annual fee cost.  

What are Supplementary credit cards?

Supplementary credit cards are credit cards issued by the bank to you based on your request for them.  Supplementary cards are linked to the primary credit card and access the same credit limit available to the primary credit card.  Supplementary credit cards are issued so your family members can also enjoy the benefits of using a credit card. In most instances, supplementary credit cards are only issued to immediate family members.  In the UAE, some banks offer supplementary credit cards to children as young as 13 years of age. An exception to only family members being offered credit cards are Business credit cards offered by certain banks where supplementary credit cards are issued to employees of the company owned by the primary credit card holder.

While supplementary credit cards access the same credit limit as the primary credit card, their credit limit can be set lower than the primary credit card as per the instructions of the primary credit card holder.  This is a useful feature for the primary credit card holder to have more control on their overall credit limit. Giving your 13 year old access to your full credit limit might not prove to be a very wise financial decision! Having said that, however, introducing your children to a credit card at an early age can be an opportunity to help them understand how credit cards work and prepare them better for when they have access to credit themselves as young adults.

Most banks also do not levy any charges on supplementary credit cards.  This is at least the case for the first 3-5 credit cards issued. Any supplementary credit cards issued beyond that may incur marginal annual fee charges.  If this is an important criterion of consideration please do keep it in mind when assessing options of which credit card to apply for.

How can I avoid incurring any interest charges on my credit card?

Contrary to popular belief credit cards are not the evil debt traps that they are often made out to be.  There is a simple way to ensure that using a credit card not only prevents you from taking on any debt but indeed helps you save more money by just using it.  And that is by making sure you pay the statement balance in full on or before the payment due date stipulated by the bank.

This is of course “simple” only if you have used the card wisely and keeping in mind your ability to repay the entire outstanding when the payment is due!  In doing so, you will not only ensure that you do not pay any interest charges but will also earn any reward points or cash back credits if these are features offered by your credit card.  

There is an exception to this however, and that is if you had used the credit card to withdraw cash as you would do with your regular bank ATM card.  In such cases, most banks will charge you a cash advance fee and a cash advance interest rate. This is why we do not recommend withdrawing cash on your credit card unless in an emergency.  In case you do use your credit card to withdraw cash, your best option to reduce the amount of interest you repay to the bank is to make the payment as soon as you can, and, if and when possible without waiting until the statement is created.

What are the differences between a credit card and a debit card?

A debit card can be used at a retailer in a much the same manner as how a credit card is used.  However, there is a key difference between debit cards and credit cards. A debit card is issued by your bank as a means for you to conveniently access your savings or checking account.  When you use a debit card you are using the funds available in your savings or checking account to make a payment to the retailer. You can use your debit card only to the extent to which there are funds available in your account.  There is no line of credit involved in using a debit card. As it is linked to your bank’s savings or checking account, it is obvious that a debit card can be issued to you only by the bank with which you have a savings or checking account.  

A credit card on the other hands provides you with a line of credit (better known as the “credit limit”) to make purchases.  You do not need to have these funds available with you in your savings or checking account to make a purchase. Since credit cards are not linked to your savings or checking account they can issued to you by any bank irrespective of whether you have a banking relationship with them.  As you are not limited to only banks where you have an account, you can have multiple credit cards issued to you by various banks. In fact, in many developed economies the average credit cards per person is more than one and frequently 2-3 unlike debit cards.

In addition to the line of credit available, one of the main benefits of credit cards over debit cards is the opportunity for customers to earn reward points and cash back based on spends made on the credit card.  This allow customers to use credit cards to gain valuable rewards while going about their usual spending. However, if customers do not pay the total balances due on their credit card each month, then the interest levied on the outstanding balance can well exceed the rewards earned.

Debit cards have the advantage of course that you cannot spend more than what you can afford since you are only spending the money that is already available to you in your account.  This is viewed as a significant advantage for people who find it difficult to manage the urge to spend more than they can afford by using their credit card.

Debit cards and credit cards have similar levels of risk if they are lost or stolen and misused.  In both cases you will need to contact your bank as soon as you can to inform them of the theft or misuse.  Based on this information they will have the card blocked hence preventing any further misuse. Most banks have a specific length of time by which you need to report the card stolen or lost. Both debit cards and credit cards can be setup so you receive emails or SMS messages every time the card is used.  This can prove to be critical in identifying any misuse.

What are the advantages and disadvantages of using a Credit card?

Credit cards are frequently accused of being stress inducing debt traps forced on gullible, unsuspecting customers!  However, if managed in the right manner, and as with many other financial products, a credit card can be a very useful and indeed profitable tool available to customers that can help them manage their personal finances more effectively.

What are the advantages of using a credit card?

Availability of short-term credit:

The main benefit of a credit card is that it provides you with the option of making a payment immediately without requiring you to have the money to pay for the purchase at the same time.  This gives you the flexibility of having access to a short-term loan whenever you require it. This is especially useful in situations such as a medical emergency or while travelling and so on.

Convenience:  

A credit card provides you the convenience of not having to carry cash with you to make the purchase.  This is especially helpful in situations where you need to make a large payment or spend time finding the nearest ATM!  Credit cards also provide you with the convenience of making payments without having to leave your home. You can use your card to make payments online, or even over the phone saving you a lot of time and effort of not having to travel to make the payment.

Credit cards can also be used to make recurring payments such as monthly school fee payments, insurance premium payments and so on.  This feature not only provides you the benefit of saving time by not having to travel to the school or insurance office every month but also saves you the trouble of having to remember to make the payments each month.  Just make sure your credit card has a sufficient available credit limit for the payment to go through!

Safety:

As credit cards give you the freedom to not carry around cash with you, this saves you from the risks involved in carrying cash including the risk of it being stolen, damaged, lost etc.  While the same could happen to your credit card as well, the risk is typically much lower as you can have your credit card blocked by just a phone call and also limit your liability of any misuse on the credit card.

Earn Rewards on your purchases:

Many credit cards offer Rewards for the purchases that you make on the credit card.  These rewards could be of various forms – “Air Miles” that can be used to pay for airline tickets, reward points for dining discounts that offer you discounts every time you use your credit card at a restaurant, shopping vouchers at specific malls or stores and many more.  The key point to note here is that you enjoy these additional perks just for using your credit card even if it is for your routine expenses. This is a significant benefit over using cash to make your payments.

Cash-Back Rewards:

Many credit cards offer you a direct cash-back against purchases you make. You receive a specific percentage of your purchase as “cash-back” through a credit in your credit card statement.  

The nature of these cash-back programs (and Rewards programs too) can vary significantly from bank to bank and a good understanding of these work will help you maximize the amount you can save by using the card.  A typical example is that most credit cards have specific categories of charges for which you can earn cash-back (groceries, school fees for example) and most will also have an upper cap on the amount up to which you can earn cash-back or even reward points.

Additional Benefits:

Almost all credit cards offer some form of additional benefits or “perks”.  These could vary from a whole host of benefits including: complimentary access to golf courses, free valet parking at busy malls, free cinema ticket offers, travel and medical insurance while travelling, free access to fitness centers, purchase protection and extended warranties on items that you purchase using your credit card and so on.

As you can see these additional benefits can vary significantly but most provide a significant tangible value to you as a customer if you can identify the credit card that is right for you and use it smartly.

Instant Access to Cash:

A credit card can also be a useful source of cash as most cards give you the benefit of withdrawing cash on the credit card against your credit limit using a regular ATM.  Although such cash withdrawals usually incur high fees and interest charges, they can be a useful alternative in case of an emergency.

Record Keeping:

Credit card statements can serve as a tracker for your expenses freeing you from the need to do this separately.  Some banks also provide you with a summary of your total spend.

What are the disadvantages of using a credit card?

Overuse:

The most significant disadvantage of a credit card is that it can potentially be used to make purchases beyond the customer’s ability to repay in full.  In such a scenario, by only paying a part of the total amount owed to the bank the customer incurs interest charges on the outstanding amount carried forward.  Credit card interest rates are amongst the highest in any financial product and carrying forward a balance outstanding and paying interest over a long period of time can be a drain on a person’s financial resources.  

While credit cards provide us with the flexibility of making purchases without the need for cash, if used excessively and with no ability to repay the amount quickly they can very easily result in the customer falling in to what is known as the “credit card debt trap”.  It can be very tempting to use your card to buy your loved one that perfect gift, or treat your family to a great vacation, or buy the latest electronic gadget available but when there is no clear plan on how soon you can repay these amounts, it is very likely that you will end up incurring large interest charges which will continue to build up until you pay the total amount outstanding in full.  However, just like any other financial tools, if used smartly credit cards can provide a range of benefits to the user both tangible (reward points and cash back amounts earned back based on spend) and intangible (convenience, security, safety etc.).

Misuse if stolen:

You could potentially be liable for amounts used on your credit card after it is stolen.  However, with improvements in technology such as PIN based transactions, instant SMS and email alerts on all purchases, and also password-based access controls for online usage it is possible to prevent and limit such unauthorized expenditure on your card.  Having said that, thieves and hackers are also always trying to keep up with the latest technologies and it is always most advisable to be aware of and follow all instructions advised by your bank to help safeguard your credit card details and usage.

Hidden Charges:

Credit cards have many varying kinds of charges that can vary depending on a lot of factors.  The most commonly known charge is the Annual Membership Fee (AMF) which is a yearly fee charged by the bank for use of the card.  Not all credit cards have this charge though and almost all banks offer some credit cards which do not have an annual fee. Also, many banks will have a program to waive your annual fees depending on how much you spend on the card during the year and how well your repayment history has been. You could also request your bank to review your card history and provide a waiver on the annual fee if your card performance history has been good.  Please do realize however that it is up to the bank’s sole discretion to waive any fees for you!

However, there are several other types of charges such as late payment charges, over limit charges, cash advance charges, supplementary card charges and so on.  It is very important to have a sound understanding of what charges your credit card carries and clarify any questions with the bank in case you are not sure of what a particular charge is levied for.