Personal Finance for the naive/unsavvy: Credit/Debit cards

WARNING, THIS GUIDE INVOLVES READING, AND IS DESIGNED FOR MATURE (ISH) AUDIENCES INTERESTED IN ADVANCING THEIR KNOWLEDGE OF FINANCE!

Hello and welcome to the second installment of my finance guide. This guide deals primarily with the topic of credit and debit cards, what they are, and how they can be used. Read on to empower yourself other these measly plastice cards! If you missed the first installment about banking and investing, you can find it HERE

Credit and Debit cards​

Debit​

Credit and debit cards are two entirely different tools which are frequently misunderstood and confused. Each has its advantages and disadvantages, which we will discuss. We will begin with the debit card. Debit cards are a card which is issued by your bank once you have an account with them. It is an optional tool; your account does not need to have a debit card. But if you want one, they will normally try to set your account up with one when you first open the account. Debit cards can be used almost anywhere to purchase goods. Whenever you walk through a checkout aisle, you can use this to purchase the goods.

What gives this small piece of plastic the magical ability to buy stuff? Well the debit card is directly linked to the money in your bank account. When you use your debit card to make a purchase, the funds are taken directly out from your bank account. It is, essentially, paying with cash, without having to go make a withdrawal. In this sense, you are using your own money for the purchase, and it immediately is removed from your account. Debit cards normally have no special offers attached with them in the way that credit cards do. Similarly, since debit cards are essentially paying with cash, there are no monthly bill or interest charges associated with a debit card.


(A debit card, similiar looking to a credit card, but remember the differences well!)

Credit​

A credit card, in some ways is very similar to a debit card, in the sense that it can be used to make purchases as well. But the funding source for a credit card is quite different from a debit card. First of all, in order to obtain a credit card, you must apply for it. It is not associated with a bank account, but many banks do offer a type of credit card. The credit card is basically a loan from a company that you promise to eventually pay. When you use a credit card to purchase something, the company is fronting the money for you to make your purchases. In return, you promise to pay them back; with the amount of interested they set.

Credit cards will have a monthly payment, with a specific minimum that must be paid off each month. Also, for any amount of money that is left unpaid on the credit card, it will begin to accrue interest, and you will pay finance charges on it. Most credit cards have a credit limit, meaning that you cannot have more than that amount of debt on the card. Most credit cards offer some type of reward program as well, which ends up getting you measly rewards or cash back for the money you spend. They do this because they know that in the long run, you will pay more in finance charges than what the rewards program will give you.


(some plain credit cards. Credit cards come in all shapes and sizes, but will be small, plastic, and will contain a 16 digit unique number)

Pro’s and Con’s of each​

Debit cards generally tend to be a safer bet for people who do not yet have a full time employment. Unless you are already set in some type of career, then you might want to avoid credit cards. Credit cards have a high credit limit, as a senior in high school, with no work experience; I got one with a $3,000 dollar limit! Credit cards can very quickly get you into trouble. If you are a responsible person with some form of income, I would recommend getting a credit card for three reasons. The first reason is it is a very convenient form of currency, similar to the debit card. No need to go to the bank in order to withdraw cash. The second reason is because it helps to establish a good credit history. If you have a credit card, use it, and pay the balance off every month, you will begin to set yourself up for success when the time comes to apply for loans for things like a new car, or a house, etc.

Lastly, you CAN find credit cards that offer decent rewards programs (if you enjoy traveling, find a card with an airline company, miles are typically one of the most generous rewards programs offered by credit cards). So if you think you can be responsible and pay off a credit card every month, then go ahead and apply for one. Otherwise, stick with a debit card. The debit card will not allow you to spend more money than what you have. Plus, when using a debit card, you tend to think more about the purchases you make, since it is coming directly from your bank funds. Well that’s the low down on Credit and Debit cards! Take a deep breath, go get a snack, and apply the knowledge you have learned!


(Withdrawing money from an ATM using a debit card, one of the many advantages a debit card offers)

[For a brief, detailed instruction on how to apply for a credit card, call your local bank to view their offers, or check this link http://www.ehow.com/how_1000615_apply-credit-card.html]

Saving/Spending​

I will now give you the best advice you can get anywhere. This is better than any course that any finance guru will offer you. It is only one sentence long as well. Are you ready? Here it is. Don’t spend what you don’t have. Simple right? Yet no one can seem to follow this. If you cannot afford that flat screen TV, don’t try to finance it, just make do with your old television. If you don’t have the cash for that new car, or the new purse, or whatever it may be, then don’t buy it. Simple as that really. The only exception to this rule is if you are purchasing something that will, in the long term, be a solid investment. The most obvious example would be getting a loan to purchase a house. Since populations tend to increase, real estate tends to go up with time. Sure there are bumps in the price, but over time, housing will always rise in price. Begin practicing responsible financial habits now, and you will benefit for life. Open that checking and savings account, get a job, and try to put away 10% of your income into your future savings. Little things like that might not make sense as a young adult, but when you are older, you will be glad you did it!

I hope you enjoyed reading my guide, and that you learned something from it. Now go out into the world, and become its master! (feel free to ask any questions you may have)



NOTE
The former article I wrote, and had published, on triond. The entire article can be found here http://bizcovering.com/business/gui...eens-young-adults-or-the-financially-unsavvy/ Please note at the bottom the name (-Nate), which is me. If the authenticity of this being my guide comes into question, I will gladly supply screenshots of me logged into my triond account, with this article as one of mine that i submitted