In very general terms, I always knew the Annual Percentage Rate (APR) and the Annual Percentage Yield (APY) were essentially the same, but there must be some difference. I finally decided to do some research and discovered the below.
||Annual Percentage Rate
||Annual Percentage Yield
||The annual cost of borrowing money that includes fees
||The rate at which your deposit account can earn money
- Savings Account
- Certificates of Deposit
APR = ( ( ( ( Fees + Interest Paid over Life of Loan ) / Loan Amount ) / Number of Days in Loan Term ) * 365 ) * 100
APY = ( 1 + (r/n) )^n – 1
r = annual interest rate
n = the number of times interest compounds per year
Based on a recent article from the National Retail Federation, consumers will be relying less on credit cards this holiday season. In fact, it’ll be the lowest since 2002. People are making this decision because they want to actively budget they’re spending on gifts. I believe this a strategy that works well, but if you can control your spending WHILE using your credit card, then you’re getting the best of both worlds.
In light of the holiday season, I’ll give you my Top 8 reasons of why using a Credit Card is better than a Debit Card:
- Credit cards provide better security. If you have any charge disputes on your debit card because your card got stolen, then the bank will not release your money until it has been cleared. That means you can be out of hundreds or thousands of dollars, when it wasn’t even your fault.
- Accumulate Reward Points. More credit cards than debit cards allow you to accumulate points towards reward items (e.g. travel, electronics, even cash)
- Build your credit. As always, building a good credit history is extremely important and only a very few debit cards can do this.
- Warranty coverage. Surprisingly, most credit cards offer a special warranty on items you purchase with it. Perfect for when your gift is broken within a year. I was surprised to find out how many of my own cards offered this benefit. You should call up your credit card company and see if you’re covered as well.
- Stress-Free Authorization Holds. You’ll notice when you check into a hotel, they typically have signs telling you that they will place a temporary charge on your debit card. This charge is used to protect the hotel from delinquent guests, which is fair. However, this charge will remain on hold for days after you’ve checked out. This means you’re have less cash on hand.
- Cheaper to rent a car. Perhaps you’re visiting family outside your hometown and need to rent a car. If you try to rent with a debit card, they will require that you use pay the daily insurance coverage.
- Price Protection. Another surprise is that some credit cards also offer price protection on the items you purchase. This means if you purchased a product and the price drops within a certain time period (usually 30 days), the credit card company will match the new price.
- Various Additional Perks. Roadside assistance, lost luggage coverage, are just to name a couple and when the snow falls or you have a valuable gift in your luggage, these will come in very handy.
You may wonder why I left out “overdraft fees”. This was a major advantage of credit cards over debit cards. However, with the new federal law passed in July 2010, it prevents banks from charging you an overdraft fee and simply decline purchases if you don’t have enough. You can get around this by providing your bank the permission to withdraw from another account, but my personal opinion is to not opt-in and simply let charges get declined.
Another great perk of a credit card versus a debit card, is that if you get a 0% APR or low interest credit card, it’s essentially free money.