Rene Roux, head of Sanlam Liquid, takes us through the different aspects of debit and credit cards...

Many consumers view debit and credit cards as the most convenient way to pay for day-to-day purchases. What's more is that these cards are often identical in appearance and even cashiers accepting a transaction are unable to tell them apart.

"It is, however, at the point of transaction where all their similarities end — leaving many consumers in the dark about their significant differences," says René Roux, head of Sanlam Liquid.

According to Roux, the most notable difference is that a credit card allows you to purchase goods and services via a pre-approved loan while a debit card allows you immediate access to your available cash or savings.

Getting a debit card is easier

Obtaining a debit card is often easier than getting a credit card, because your credit risk profile will not significantly impact the account. You only need to open a savings, transmission or cheque account to obtain a debit card whereas a credit-card application on the other hand may take longer to process as the service provider will need to determine whether you are an acceptable credit risk.

"Furthermore, at a time of high interest rates and market uncertainty, debit cards linked to money-market accounts operate as a safe haven for your savings and it allows you to earn high interest on your savings," she says. However, you should be mindful of credit-card expenditure when interest rates are at their peak. Depending on the amount and over what period you are able to repay your purchase you could end up paying a lot more than what the item is worth, she cautions.

Nevertheless, Roux says both cards free you from carrying cash or a cheque-book and it is also readily accepted over cheques. But should you return an item that was purchased using your debit card, the transaction will be treated as if it was made by cash — meaning the cash will be returned to you and not transferred back into your account. If, on the other hand, you were to return an item that was purchased on a credit card the credit amount will be reversed electronically on your card.

Roux says when it comes to matters of financial discipline, debit cards are often the better option as they can prevent you from spending money that you do not have.

Unlike a credit card, a debit card makes provision for electronic debit orders. For instance, monthly expenses such as your home loan and car repayments, school fees and telephone bills can be paid via a debit order system. You can also pay these bills via your credit card, but be careful about trapping yourself in unnecessary debt. Remember, a credit card holds money that is on loan to you!

This also implies that a credit card can be quite handy when you are short on cash. As long as you can repay the money within 50 to 60 days (depending on your bank), the purchase will be treated as cash and you will not be charged any interest on it. Again, be careful as it becomes much too easy to get carried away with buying on credit!

Roux says the main thing to remember when using either card is that it's not just a piece of plastic. "Both cards, if not used sensibly, can lead to financial disaster. Debit-card abuse can leave you cash strapped while credit-card abuse can lead to serious debt. Make sure you understand the differences between the two so that you manage them both effectively!"

www.justmoney.co.za

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