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Practical Guide to the Wise Use of Credit Cards

By Edited Jun 21, 2014 1 3

Debit Cards vs. Credit Cards

Credit Counseling Tips

Every spring a representative from our local Credit Counseling Service comes to the high school where I work to explain how to use credit cards wisely to our graduating seniors. In the past, many of these young adults would be given numerous applications as soon as they started college, and kids often needed to file for bankruptcy by the time they were in their late 20s. Fortunately, the regulations regarding giving credit cards to college age students have become stricter. A college age person must now have a co-signer or enough personal income to show that they have the ability to make their payments. However, the Counseling Service is still concerned enough about the financial well-being of our graduating seniors, that they want to be certain that they understand how and when to use credit wisely. In fact, much of the information they provide would be beneficial for all of us, regardless of our age!

Credit Cards and Cash

Differences between Debit and Credit Cards

By the time they are in their late teens, many young people have begun to use a debit card. Since they often have Master Card logos on them, some of our teens confuse them with credit cards. However, there are some significant differences between the two. For example, when you use a debit card, the money immediately comes directly from your bank account. As long as you have enough money in your bank account to cover your debits, you can use the card as often as you want without fear that it will affect your credit score. You can use it for large purchases, or even to buy a cup of coffee at your local coffee shop. However, it is important that you keep track of your debits; if you exceed your balance you can pay large fines.

On the other hand, if you use a credit card, you have a grace period before you must make payments. Many people do not think of their card balance as a loan. As a result, they may use their credit card with the same relaxed attitude that they have towards a debit card. For example, they may use their credit card to make small purchases for fast food. They do not realize that they will pay a high interest rate on these purchases unless they are able to pay the balance off in full at the end of the month. Using a credit card can also affect your financial rating or score. The Credit Counseling Service recommends that you do not have a balance on your card of more than 10% of your available line of credit. This means that if your available credit is $1000, you should not have a balance of more than $100. Of course, you may occasionally exceed that percentage for a short term expense, such as a hotel bill or car rental, which you plan to pay off as soon as the bill comes. However, keeping your balance low will help keep your financial score high!

You may also find it helpful to learn more about different types of loans, including auto loans and home mortgages.  If so, I highly recommend this Suze Orman book from Amazon:

Quick link to "The Money Book for the Young, Fabulous & Broke"

Why Should You Have a Credit Card?

Because of the potential risk of getting deep into debt, many young people wonder why they need to have a credit card at all. Wouldn't it be better if they just limited themselves to always using a debit card? For daily expenses, it is always best to use a debit card. You do not normally want to put food and routine expenses on your credit card, unless you are absolutely certain that you will be able to pay the full amount off at the end of the month, and you are confident that you will keep careful track of how much you are charging.

However, even though it is best to use a debit card, there are good reasons to have a credit card, too. For example, demonstrating that you can use credit wisely is one good way to prove your can handle your finances wisely. This will help you when you decide to purchase your first car or home. It is also handy to have a credit card when traveling because it is easier to reserve a hotel room or a rental car with one. In addition, you want to have a credit card in the event of a serious emergency and you do not have enough cash on hand to immediately cover the expense.

What if You Cannot Pay the Balance Off?

Invariably, most people have a situation where they are not able to pay the credit balance in full at the end of the month. As soon as this happens, they will need to begin making payments. Depending on your credit score, the interest rate on your card can range from around 10% to as much as 29%! Obviously, the sooner you pay off this balance the better off you will be. Many people just pay the minimum amount requested by the bank. As a result, it can take them a long time to repay just a few thousand dollars. However, if they pay just a little more than the minimum, they can get themselves out of debt much faster. During this time, it is important that you do not continue to use your card, or you will dig yourself deeper into debt. Soon you will discover that you will never be able to pay it off.

Here is an example of the difference it can make if you pay extra on your card balance: If you owe $3,066 and your interest rate is 18%, it will take you 37 years to repay the money if you only pay $60 a month! The total cost will be over $11,000. And, the time will be even longer if you ever charge anything else on that credit card during the 37 years!! On the other hand, if you owe that same $3,066 and your interest rate is 18%, you will pay the debt off in about 4 ½ years if you make payments of $80 a month. The total cost will be about $4,500. Paying just $20 more each month makes a tremendous difference in the long run. (These figures provided by the Consumer Credit Counseling Service)

Although it is obviously better to pay the debt off faster by applying an extra $20 to the bill each month, it is also obvious that the borrower would have been better off not using the card in the first place!  It is important to remember that you are taking out a loan whenever you use these cards.  If you cannot repay the balance quickly, you need to carefully consider whether or not it is worth it to you to borrow the money in order to purchase this item.

If you are interested in learning more about handling your family's finances, you may also want to read these articles:

How to Get a Free Credit Report

How to Build Credit with an Orchard Bank Credit Card

How to Decide if a Wedding Credit Card is Right for You

Financial Advice for College Students

How to Find Free Stock Research Websites

How to Prove You Don't Owe a Debt

This Is a Helpful Book for Consumers of All Ages

The Money Book for the Young, Fabulous & Broke
Amazon Price: Buy Now
(price as of Jun 21, 2014)
I bought this book for my daughters, but I learned a lot from it myself!


Apr 12, 2011 5:07pm
Thanks for the detailed explanation of how debit and credit cards differ! Well presented material.
Jun 18, 2011 12:04pm
hi thx for sharing the article. I never knew the difference between debit and credit. I think debit cards also have an extra 25 cent charge and debit cards have more security against identity theft. Is that how it is?
Jun 18, 2011 1:27pm
Well ... the extra charge may be true with some banks. My bank only charges me if I use a debit machine outside their network. Otherwise, there is no charge to use it. Both credit cards and debit cards have some security against identity theft, and both will give you headaches if you are the victim of identity theft. It is best to talk to your specific bank about their policies. I hope that clears things up a little more.
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