TeachMeAboutMoney.org

Credit/Debit Cards

What is a Credit Card?

Credit Cards can be a valuable addition to your financial tool box if you use them carefully and sensibly. Credit means someone is willing to loan you money - called principal - in exchange for your promise to repay it, usually with interest. Interest is the amount you pay to use someone else's money. So the higher the interest rate, the higher the total amount you pay to buy something on credit.

The best part about credit is that it lets you buy something you couldn't otherwise afford if you had to pay for it all at once. You get to buy the item now but pay for it over a period of time, usually with interest.

But sometimes people use credit purely for convenience. They have the money but don't want to carry cash with them. Or they simply decide they want something NOW, don't care if they have the money, and use credit for immediate satisfaction, which isn't a smart use.

What is a Debit Card?

Debit cards, sometimes called "check cards", have credit card logos on them but are very different. Instead of drawing on a line of credit, debit cards act like a check, deducting the amount of your purchase from your checking account. The good news is there's usually no interest associated with your debit card purchases because you're not actually borrowing money (you're drawing down your checking account instead).

When you flip over a debit card, the first thing you'll probably notice is the black magnetic strip. That's basically the intelligence center of the card. It stores data such as your name, account number, personal identification number (PIN), and financial limits. So you should be careful to protect it! If you accidentally wash the card, place it too close to a magnet, or scratch the strip, your card may not work anymore.

When you're at a store buying something with a debit card, you usually have to choose one of two options: to use it as a credit card-including having to sign for your purchase-or to use it as a debit card. In both cases, you or the cashier will have to swipe your card through an electronic terminal. But if you choose to use it as a debit card, you'll be prompted to enter your PIN. (And you may be asked if you want to get cash back, a handy way of making a withdrawal along with your purchase.) The terminal will then indicate whether the transaction was approved. If it was not, you must find another way to pay for your items.

Debit cards offer many of the conveniences of a credit card. They're particularly useful to people who don't like to carry a lot of cash and don't want to be tempted into accumulating too much debt. Compared with checks, there's less to carry, and checkout transactions usually go faster. But if you're not diligent about recording your debit card purchases and withdrawals in your checkbook register, you can end up with too little money to pay bills or a bounced check. And of course, someone who steals your debit card can use it to wipe out your account before you even know it's gone.

7 Signs of Smart Debit Card Use

  1. Memorizing and protecting your PIN (don't choose something obvious like your house address, phone number, or birthday) and not carrying it in your purse, wallet, or pocket. Remember, theft of your PIN can wipe out your account and leave you with overdraft fees.
  2. Immediately recording purchases and withdrawals in your check register.
  3. Signing the back of your card to make it harder for others to use.
  4. Keeping receipts to check against your statement.
  5. Using your institution's ATM machines to avoid fees.
  6. Being aware of your surroundings when you use your debit card, especially at an ATM at night.
  7. Immediately reporting lost or stolen cards.

Source: National Endowment for Financial Education - http://hsfpp.nefe.org

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