Business Times

Credit Cards Vs. Debit Cards

Cash is king, according to a senior banker who recommends that Sri Lankans should switch to debit cards as opposed to sinking in credit card debt. Debit is the preferable option for people who have cash at hand. On the other hand, credit cards are subject to 1% government tax and in the current scenario with lower interest rates, it does not make sense to use credit cards.

Even in the United States, according to data from Mastercard and Visa, the banker said debit card usage is exceeding credit cards because people’s fears of getting into interminable debt. He explained that during the recent economic crisis, default rates on credit cards in 2009 in Sri Lanka went up to around 10% on average from 5% and credit card usage declined.

However, for those Sri Lankans who don’t have cash at hand and need to use credit cards, particularly during the holiday season, there are certain things to keep in mind while shopping for those Christmas presents. Credit cards run on the principle that people will borrow or use credit and not pay. “Credit cards work on the principle of people getting into debt.

If people only make minimum payments, they get whacked with absurd interest rates,” the banker said. The ideal customer for a bank is a client who exhausts the limit on the credit card, makes the minimum payment or even defaults.

Credit Cards
According to Central Bank (CB) statistics on credit cards, the total number of credit cards in use at end June 2009 was 880,915, a 1.3% decline over that of end March 2009. The total number of new cards issued under all categories during the second quarter of 2009 dropped by 21% to 16,318 compared with the first quarter of 2009.

The total number of credit card transactions declined by 12.9% to 3.9 million and the total value of transactions decreased by 9.3% to Rs.15.3 billion in the second quarter of 2009 compared to the first. The CB attributed these declines to the drop recorded in the number of domestic cards in use by 35% during the second quarter.

The total number of cards in default, recorded by the Credit Information Bureau (CRIB), increased by 22% to 113,087 during the second quarter over the first quarter. The total value of defaults also rose by 37% to Rs.8.3 billion.

Debit Cards
According to CB statistics, the total number of debit cards in use increased by 4.7% to 4.8 million at the end of the second quarter of 2009 compared with 4.6 million debit cards at end March 2009. The total number of debit card transactions increased by 21.6% while the value of transactions increased sharply by 62.8% within the second quarter.

The CB stated that this shows that consumers opt to use the debit cards instead of credit cards without incurring finance charges and accumulating debt.

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