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Lesson 8: Credit Cards & Debit Cards

Video Transcript

If you’re like most people, you probably use some type of plastic card to make purchases. You’ve been asked “credit or debit” in the checkout line, but do you really know the difference between the two. And more importantly, do you know why it’s important to know the difference?

In this lesson you’ll learn how credit and debit cards work. You’ll learn when to use one and not the other, and we’ll give you tips to stay on top of payments and avoid fees and interest charges. So let’s get going, and we’ll start with debit.

A debit card, also sometimes called a “check card,” is linked to your checking account. When you make a purchase, the money is automatically removed, so make sure you have enough funds to cover the cost. Banks charge overdraft fees, and if you’re not careful, you could get hit with one.

Unlike debit cards, credit cards don’t pull money straight from your account. With a credit card, you make a purchase now and pay for it later. You’ll be sent a bill, and as long as you get to it on time, you won’t be charged fees or interest. The amount of time that you’re given to pay your bill is called a grace period.

So how do you decide which card is better for you? Well, debit cards usually come free when you open a checking account, and with the exception of draining your account and getting hit with an overdraft fee, you’re unlikely to spend beyond your means. Credit cards are more flexible, but they also come with risks. You can rack up debt and get stuck paying fees and interest that will only make your situation worse.

If you choose to use a credit card, we have two pieces of advice: one, only use it to buy things that are in your budget, because credit cards are easy enough to use, but making charges that you can’t afford will be costly in the end.

Our second piece of advice is to always pay your bill on time. The most reliable way to do this is to use your bank’s online system. Get in the habit of setting up the payment when you get the bill, and check your balance regularly to make sure you have money to cover it. Paying your bill on time is the single biggest contributor to a good credit score.

Another option with online accounts for credit cards is to set up an automatic payment that will cover the balance when it’s due. But if you choose this, you risk forgetting about the payment and overdrawing your checking account. One way to avoid this is to adjust the payment to cover only the minimum amount required, and pay the rest manually.

When deciding which type of card to use, the bottom line is this: credit cards are great financial tools, but only when managed wisely. If you worry that you might spend beyond your means, maybe start with a debit card, and then work your way up to credit.

So there you have it: the pros and cons of different kinds of plastic.

 

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