Understanding Payment Methods
Money talks and cash is king. Sometimes, though, you need other ways to pay your bills and keep track of your spending. Fortunately, most banks and other financial institutions offer several types of services to help. Each option has its own set of advantages and disadvantages, so choose wisely based on your needs and spending habits.
- Checking accounts offer a safe way to pay bills and keep track of your spending. Some accounts pay interest, but they may require a minimum balance.
- Often checking accounts, even those with a monthly fee, offer a cheap alternative to purchasing money orders. And cancelled checks, along with monthly statements, provide a record keeping system for spending.
- But bounced checks (or insufficient funds charges from a debit card) and overdraft fees can be extremely costly and hurt your credit. Overdraft protection can help, but these are like small “loans” the bank makes to you, and the interest/fees charged for this service can add up.
Using your debit card does not help you build credit. Even though debit cards and credit cards look the same, it’s important to remember that paying with a debit card is just like paying with cash. It does not help your credit score.
- Debit cards are accepted at many locations and, like cash or check payment options, they let you pay for your purchase now.
- Unlike credit cards, debit cards are linked to your bank account so you only can spend what is available. The money is deducted from your account at the time of the transaction.
- Like checking accounts, some banks offer overdraft protection for debit cards – but these small “loans” can carry hefty interest charges and fees.
- If your debit card is lost or stolen, your liability could be higher than the liability associated with a credit card.
Using your credit card does affect your credit score and does show up on your credit report. For more, see SAM’s Credit and Debt Basics course.
- Many credit card issuers offer return protection, purchase protection and extended warranties. But you need to remember that a credit card is a type of loan that has to be paid back.
- Be careful when choosing credit cards based on cash back and rewards programs. These can be great perks, but make sure that the benefits are worth the cost of other terms and fees.
- Some credit issuers charge annual fees for the convenience of having their card, whether you use it or not.
- If you don’t pay your debt on time or if you pay a portion of the balance due, then you will be charged additional fees and/or interest on the outstanding balance.
- Credit cards make purchasing easy, but you need to know what the card issuer is charging. Typical items to look for include:
- Annual percentage rate (APR) – the yearly interest rate or the “cost” of credit. The APR can vary, so get familiar with the terms before you sign up for the card.
- Periodic rate – the rate that is used to calculate your finance charge (on outstanding balances) for the billing period.
- Annual fee – how much the card will cost you each year for the privilege of having the card.
- Transaction fees or other charges – these are charges for any other items like cash advances or international purchases.
Secured Credit Cards
Secured credit cards are used to build credit. They are offered by most large banks and credit card companies and usually require a cash deposit.
- Make on-time payments and keep balances below the credit limit to help build or improve credit.
Prepaid Debit Cards
- Prepaid debit cards act like debit cards, but they are loaded with set amount that can be spent (and no more). Unless it is a secured card, most prepaid cards won’t help you build credit.
- They offer convenience and a way to help control spending, so they can help someone wanting to stick to a spending budget.
- Some prepaid cards can have higher fees than other cards, and offer less protection for consumers. Think about your goals and do some research before choosing prepaid cards.
Using Your Phone to Pay
Using ApplePay, Samsung Pay, AndroidPay or similar phone payment methods can help prevent identity theft because your credit or debit card information is “tokenized” – meaning that your real credit or debit card number is replaced with a placeholder, making it harder for thieves to use.