||Central Bank Of Barbados
What’s the difference between paying by cash, debit card, and credit card? When you use cash or a debit card, you’re using your money, but when you pay with a credit card, you’re really borrowing money from the bank or institution that issued you the card.
Senior Economist at the Central Bank of Barbados, Carlon Walkes explains:
“The basic premise of a credit card is that you are using money that isn’t yours. You are not taking the funds from your bank account; you’re using the bank’s funds. So, unless your balance is zero, you have debt. You are actually indebted to the institution that issued the credit card. That is just the basic idea of the credit card.”
Walkes was at the time discussing household debt in Barbados, which at the end of March 2020 totalled $6.1 billion. Of that, $295 million is credit card debt.
Given that credit cards have become a popular way to pay for goods and services in Barbados – the 2019 Financial Stability Report reveals that credit card transactions totalled $739 million during that year – it’s important to remember that while we often think of credit cards in much the same we do cash or debit cards, they are, as this 2018 article points out, mini-loans.
That is not to say that we shouldn’t use credit cards. As the same article explains, it’s more an issue of how we use them:
“When we fully repay our credit card bills on or before the due date, there isn’t much difference between them and other payment methods, but when we don’t repay the entire loan – our credit card bill – on time, that’s when we begin to accumulate interest. And because credit cards are unsecured loans, the interest rate on them is much higher than the one we would pay on a vehicle loan or a mortgage.”
So, as we make purchases with our credit cards, it’s important to remember how they differ from other ways that we pay and to manage how we use them carefully.