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These two words sound similar, but in fact they are very different: debit and credit. This month, Young Americans Bank introduces these two concepts to help youth understand what they are and how they are used in the banking world.
The term credit relates to borrowing. When using a credit card, you borrow money from the credit card company to make a purchase. The company pays for the item purchased, and then you pay the credit card company back at the end of the month.
If you spend more of the borrowed money than you can afford to pay back, the credit card company will allow you to pay part of the bill that month, and pay the rest the next month. But, they will charge you interest on the remaining money owed. Interest adds up fast, and that’s how credit card companies make money.
A good rule to follow when using credit cards is not to spend more with a credit card than you can afford to pay back. That way you won’t owe the companies interest at the end of the month. When you do this, you’re using a credit card responsibly.
Using a credit card responsibly helps you build something called “good credit.” When you have good credit, you have proven to a bank or financial institution that you can borrow money and pay it back. Many people can’t afford to pay for large expenses like a house or college; they need to take out a loan to buy them. So, having good credit helps you secure a lower interest rate on your loan so you’ll pay less money in the long run.
Debit cards look just like credit cards at first glance, but there is an important difference. When you swipe a debit card, the money comes directly out of your checking account rather than from a credit card company. You are spending money you already own. Therefore, you can only use a debit card if there is enough money in your bank account to pay for the item you want to purchase.
Because this money comes directly out of your checking account, it is very important to keep track of how much money you’re spending so you don’t overdraw your account. You can keep track using your checkbook register and by checking your balance regularly when you visit the bank or when you do your banking online.
Ready for a challenge? Take our Danger Ahead Quiz! These scenarios will help you think about how to use debit and credit cards responsibly.