Plastic is fantastic, especially this time of year! But it’s important to know how to use it, when to use it, and what you can do to avoid becoming a victim of plastic-itis, otherwise known as debt, interest charges, and overdrafts. Which can harm you if your mortgage shopping.
Credit Cards
Credit cards are the oldest kind of plastic and still the most popular. They’re issued by both banks and credit card companies and most have limits on how much you can spend based on things like your age and credit score.
The Good
When you make a purchase with a credit card, you’re getting a quick loan from the company that issued it for the price of whatever you’ve bought. They’re handy for expensive items because you don’t have to carry large amounts of cash around. Also, when you pay off your credit card bill every month, you improve your credit rating which can help you get a higher limit and can make it easier to get a loan for a car or a house.
The Bad
All loans have to be paid back! The loan you get when you make a purchase on a credit card usually has to be paid back when you get your bill, once a month. If you don’t have enough money to pay for everything you’ve bought using the card, things can get ugly (see below).
The Ugly
Credit Card companies usually charge very high interest rates when you don’t pay your bill in full every month. That’s how they make a lot of their money: Ah the joys of living in a consumer society!
Debit Cards
Debit Cards are a lot like credit cards: they usually have a brand like VISA or MASTERCARD attached to them so they can be used wherever those cards are accepted. The difference is that Debit Cards don’t give you a loan for what you buy. When you charge something, the cost is instantly deducted from your bank account.
The Good
Like a credit card, a Debit Card keeps you from having to carry a lot of cash when you go shopping. Because whatever you buy is instantly deducted from your bank account, there’s no danger of racking up high interest fees.
The Bad
Whatever you spend is gone from your bank account the moment you spend it. Because it’s so easy to swipe your way through purchases, it’s important to keep an eye on how much money you have in your account.
The Ugly
It’s a little too easy to drain your bank account with a Debit Card if you go on a shopping spree. And if you buy more than you have in your account, you can wind up owing your bank a lot of money in penalties called “overdraft fees.”
Prepaid Cards
Prepaid cards are an alternative that many people use when they either don’t want or can’t get a credit card or don’t have a bank account that can be linked to a debit card. As long as they have the logo of a major credit card brand, they can be used almost anywhere.
The Good
Prepaid Cards are like gift certificates that can be used anywhere a credit card can. There’s no danger of interest charges or overdraft fees because it’s not loan or connected to your bank account.
The Bad
Once you spend the amount attached to your prepaid card, the money is gone, so it’s important to keep track of how much you’ve spent. While debit and credit cards are easy to cancel if they’re lost or stolen, prepaid cards are more difficult to protect.
The Ugly
Unlike credit cards, straight prepaid cards don’t help you build your credit history; they’re just cards you “load” with money but can use anywhere major credit cards are accepted. There are a few exceptions to this rule: some “prepaid” cards will ask you for a security deposit. However much money you can give the company will equal how much you can spend each month. If you pay off your monthly bill from these cards on time and in full, they may improve your score, but you have to have enough money to cover both the deposit and your monthly spending. If you’re not sure if your prepaid card will help your score, call the company that issues the card and ask.
Pheeewww, that was a mouthful but do remember that little number (your credit score) is a very important part of your mortgage application when it comes time to house hunt! If you have any questions about your credit score, feel free to get in touch.
