Credit Cards!

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What is a Credit Card?

For creditors, a credit card is a convenient way to loan money for everyday consumer purchases, such as clothing, gasoline, or restaurant meals. For consumers, credit cards (slangily sometimes called plastic) are also very convenient: just swipe the card at a checkout line and pay for everything in one monthly bill.

Credit or Debit? What's the Difference?

Credit cards and debit cards often look the same. Both can carry the familiar Visa or MasterCard logo. You can use both of them in the same way when making a purchase. So does it really matter which type of card you use? Despite their similar appearance, credit cards and debit cards work in very different ways. When you use a credit card, you are borrowing money to make your purchase. You will receive a bill later, and if you cannot pay the full amount of your purchase by the due date, you will be charged interest on the loan. A debit card provides a way to use your checking account. It is like writing a check, only faster. When you use a debit card, your bank will debit, or subtract, the purchase amount from your account. (To confuse matters, sometimes your debit card company will encourage you to press the Credit button instead of Debit after you swipe the card. The card itself is what is important, not the button.) Are you buying a new laptop computer? If you pay for it with your debit card, the purchase price will be deducted immediately, so be certain you have funds in your checking account to cover the full purchase price. You might use a credit card instead to give yourself more flexibility. On the other hand, you might prefer to pay as you go with a debit card for purchases such as pizza. Otherwise you would be using credit to pay for something that will be gone before the bill arrives!

What Are the Pros and Cons of Using Credit?

Credit cards let you buy things you cannot otherwise afford. That can be fun until you realize you are deep in debt. So why do most people carry credit cards?

1. Credit can be a big help in an emergency. If you are facing a large, unexpected expense that is more than you can cover with your checking or savings accounts, a credit card can give you more time to pay.
2. Credit cards are useful for making purchases online or over the phone.
3. Responsible use of a credit card helps you establish a good credit history, which can help you in many ways in the future, such as in getting a job you want or a good deal on a car loan.
4. If you pay your credit card bill in full every month, you can avoid finance charges. In effect, you can borrow money (if only for a short time) for free! Most importantly, credit cards are convenient. You can buy what you want without the need to carry around large amounts of cash.

1. It is easy, really easy, to buy more than you can afford.
2. Interest rates on credit cards are usually high, especially for young people who have not yet established a good credit history. If you do not pay your bill in full each month, then you actually have a high-interest loan.
3. Credit card companies permit you to make a small minimum payment each month, but beware! If you regularly make only the minimum payment, your balance can continue to grow, even if you do not put any new charges on the bill. Using a credit card and making only minimum payments is like digging yourself into a deep financial hole. Making things even worse, if you fall behind and cannot make the minimum payments by the due date, you will also incur late fees!