Credit and Debit Cards

Credit

Credit involves using a card to make a purchase and repaying the amount at a later time. If the amount isn’t paid in full by the due date, interest is charged on the unpaid amount. Credit companies make money from the interest and fees that they charge.

Many students wonder if they should get a credit card. A credit card is a handy tool, particularly for emergency situations and for building a credit history.

Consider these tips when researching a credit card:

  • Look for a card with low or no annual fees.
  • Look for incentives that will be useful to you (i.e. frequent flyer miles or cash back on purchases).
  • Watch the interest rate. Credit card interest rates can be as high as 29% (annual percentage rate, or APR), or even higher.

And here are some tips for using a credit card:

  • Pay your bill on time every month.
  • Be sure that you have enough income or allowance to pay off any charges that you make.
  • Strive to pay your credit card in full each month.
  • Be wary of utilizing cash withdrawal from credit companies. Fees and interest on cash withdrawals can be significant.

 

Debit

Debit involves using a card to access funds that you have available. When you use a card as a debit card, the money is immediately withdrawn from your account. Most merchants do not charge fees for using a debit card, but your bank may have fees associated with using debit. Two down-sides of using debit to pay is that it not reported to credit bureaus, so you are not building credit when using a debit card, and that you have no fraud protection when using debit.

 

Credit versus Debit

Some cards will function as both a credit and a debit card. Which option should you choose?

Credit offers the following advantages:

  • You have time before payment is due. Should you need to return the purchase or are not satisfied with services, this affords you some time before you pay the merchant.
  • You are building a credit history as you use credit.
  • Credit has built-in fraud protection.
  • Many credit companies have built-in purchase protection.

Debit offers the following advantages:

  • You will not incur interest charges.
  • You are less likely to overspend because you must have funds in your account to make the purchase.
  • More convenient than carrying checks or cash.

 

Credit History

It is a good idea to begin establishing a good credit history while you are in college or graduate school. Your credit history will help you (or haunt you) for years to come when making both large and small purchases.

Establishing a credit history involves engaging in financial activities that are reported to credit bureaus. A good credit history can give you access to future borrowing, lower interest rates, and may be a job requirement in certain industries. Credit is assessed using 5 criteria, called the “5 C’s:”

  • Character (financial integrity)
  • Capacity (sufficient cash flow to repay the amount borrowed)
  • Capital (net worth)
  • Collateral (specific assets pledged to the lender if the debt isn’t repaid)
  • Conditions (larger economic climate, beyond an individual’s control)

There are a few things that you can do to begin to establish good credit. Using a credit card, having utilities and other bills in your name, and making regular and on-time payments will give you a good start.

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