In this second of a series on credit cards we’re going to cover the advantages and disadvantages of credit cards versus debit cards. To understand these differences we first have to explain how a credit card and debit card work, at least generally speaking.

In general, the way a credit card works is you go to a store, or these days even online, pick out the item you want, plug in your credit card number and your purchase is complete. The item isn’t actually paid for yet, as far as you’re concerned, because no money has changed hands. After the transaction the merchant will receive payment from the credit card company who issued you the card, usually within 30 days and in turn you will receive a bill from your credit card company, also within 30 days, at which time you must remit at least a partial payment. Each credit card company has different terms. Some, like American Express, require you to pay your balance in full.

The way a debit card works is basically the same in most respects. You make your purchase, plug in your number or swipe your card and the purchase goes through. The merchant, again, will get paid by the company who issued you the debit card. Here is where the difference is. With a debit card the money already has to be in your account. In other words, you’ve already paid in a certain amount of money to be available to your debit card. By using the card the money is simply transferred out of your account and your balance is reduced until it reaches zero, at which time you have to pay more money into the account or the card can’t be used.

The advantages of a credit card are that you don’t have to have the money available at that time to pay for your purchase. You will usually have at least 30 days to pay for the item and even then, based on the terms of your card, may not even have to pay the whole balance.

The disadvantages of a credit card is that it becomes way too easy to use them and run up large balances. Then when it comes time to even pay partial payments it can be very difficult to make those payments. Add to that the finance charges and people with credit cards can run up large debts that they sometimes never recover from.

The advantages of a debit card is that you know you have the money in your account to pay for the item and you don’t have to worry about future bills or finance charges. It’s as good as cash without having to carry cash around with you.

The disadvantages of a debit card is that if you don’t have the money in your debit card account then you can’t use it. In a sense it’s pretty much the same as if you don’t have cash on you.

Many people feel that a debit card is just a compact cash equivalent and doesn’t really offer much more convenience than cash. Others feel it is the only sure way to prevent yourself from falling into a financial hole that you may never recover from.

The debates between credit and debit cards will probably go on forever.

Whether you’re planning on leaving the country for pleasure or business, it is important to think about how to pay for your stay. While traveling, extensive use of a credit card is becoming more and more common. With a credit card, there is less concern of your money being lost or stolen and you don’t have to deal with the hassle of changing your money into foreign currency. However, one thing that any international traveler should be aware of is the fact that many credit cards feature a foreign transaction fee.

Foreign transaction fees usually come in at around 3 percent or so and, depending on the credit card company, are tacked onto every charge you make while outside of your home nation. Because this is a recent charge, having just come into existence in the last few years, it is important that everyone who travels be aware of what they signify.

The first thing to understand about foreign transaction fees on your credit card is that they are figured using a percentage of your purchase. Also, you should note that the foreign transaction fees are also derived from the amount of money spent in your own country. For instance, if you purchase something for 200 Euros, you’ll be paying about 270 US dollars, and the transaction feel will be a percentage of the 270 dollars. Because these charges can mount up, it is important to understand exactly how much you are spending whenever you use your credit card. Before departing, call your credit card company and find exactly how much you will be spending in fees per purchase.

While this should not stop you from using your credit card while abroad, it is still an important fact to keep in mind. While using your credit card, you can also supplement your spending with the use of travelers checks, which are almost universally accepted. Similarly, you can also use a prepaid debit card, though their use may be limited in some areas. You should also call your credit card company to see if there are any deals available on foreign transaction fees; sometimes, you can get the fee lowered or dropped for a brief period of time.

This is a relatively new fee; representatives of the major credit card companies state that these fees are used to offset errors made while processing charges made in another country. This fee is meant to account for issues with foreign merchant charge backs, issues with the conversion of the currency involved and even outright fraud.

If you are young and are looking for a good way to build credit, a secure credit card may be a good option. Secured credit cards are also good for older people who have never established credit. Getting credit is difficult if you don’t have any. Many lenders will attempt to look at your credit report to determine whether or not you qualify for a loan. If you don’t have a credit history, they may not take the risk of lending you money.

This can put you in a difficult situation. It is very difficult to function in society without having good credit. Getting a car, house, or job will often require a credit check. Because of this it is important to have a solid credit history.

How Do Secured Credit Cards Work?

While there are many ways you can establish credit, the most common method is to get a secured credit card from a company which offers them. As the name implies, this type of card is secured by using the money you deposit in the account. The money will stay in the account as long as you use the card. The card will have a balance limit on it which will not be more than the deposit you made. Once you have made a deposit into the account, you will be able to use the card just as you would with any credit card. Secured credit cards are secure for both the lender and the borrower.

Zero Risk For Your Credit Card Company?

The credit card company lowers its risk by only lending money which can be secured by the money deposited by the borrower. It helps the borrower because they avoid taking on a large amount of debt that they may not be able to handle. The secured credit card has many similarities to a regular credit card, and you will receive a bill every month. These cards are different from prepaid credit cards which do not have an account which is used to secure them. Most prepaid credit cards are very similar to debit cards, and you cannot build a credit history by using them.

Building Credit By Spending

You will begin building your credit report as you use the secured loan to make purchases. Though you can use your secured credit card for as long as you want, most people eventually switch to an unsecured credit card. Secured credit cards tend to have much higher interest rates than unsecured credit cards, and they typically don’t have an annual charge. With secured loans, a portion of your money is locked in an account and you are not able to access it; this isn’t a problem with an unsecured credit card.

Step Up For An Unsecured Credit Card

At the same time, having an unsecured credit card requires you to be responsible. You should only get this type of card if you’ve consistently made payments on your secured credit card with no problems. If you find that you have been late making payments, it may be best to continue using the secured credit card. You don’t want to put yourself in a situation where your debt increases.

Secured credit cards are great for young people who are just starting out. They carry a low amount of risk; this is something which benefits everyone. Since secured credit cards have a much higher interest rate than unsecured cards, you can expect to pay more in interest when using them. Those who are looking for low interest rates will want to look at unsecured credit cards. These cards are aimed at people who have built up a good amount of credit, and have demonstrated that they can make payments on time. Building up a solid credit history is an important part of managing your finances.

Closing a credit card requires a HARD CLOSE. It requires more than a simple phone call.

It is in your best interest to perform the following steps when closing a credit card. Regardless of what you are told over the phone by the credit card representative, it is important to contact the card company and get the exact address to submit your ‘Request to Close Credit Card’ letter.

DO NOT accept the a promise ‘over the phone’ that the credit card company will close your credit card account. You may find yourself fighting with the credit card company to delete charges after you close your account.

Submit your letter and reference your name and include your account number. In your letter request that they ‘HARD CLOSE’ your credit card.

If you do not use this language, the credit card company has the right to maintain your account and bill you for non-user fees including yearly fees according to the agreement that you signed when first applying for the card. Paying fees on a credit card that you are no longer using is not in your best interest.

Make certain that you send your letter “Certified Mail – Return Receipt Requested”.

In your letter, request a written confirmation acknowledging receipt of your request.

Finally, if you do not receive the letter of confirmation follow up in 2 to 3 weeks with a phone call and a follow up letter.

Your being proactive in ‘HARD CLOSING’ a credit card is very important to avoid any future charges and maintaining a good credit record.