A financial literacy podcast from WKNC 88.1 FM HD-1/HD-2.
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Hello, and welcome back to a another episode of WKNC Money Talks. I'm your host, Akhil Mitta, And today we're going to talk about credit cards versus debit cards. Let's jump right into it. So what is a debit card? A debit card simply is a card that you can use online to pay for transactions, or you can use it in person as well to pay for transactions automatically deduct money from your bank account, and you're all set. But a credit card, on the other hand, lets you pay for things in advance without actually having the money and you'll have to pay bills to them at the end of every month or at a certain point in time. With a little bit of interest. I'm sure you've seen many people posting about how they boast the amount of credit card points they have in their account and what they do to use them. For example, some people use it to spend on travel, some people use it to spend on food, entertainment, and getting a credit card right now as a college student might sound pretty enticing because of the rewards behind signing up for one of these credit cards. And I'm here to tell you all about it. And why we should use credit cards over debit cards. There is definitely some disadvantages to using a credit card as opposed to a debit card. Because there are things like spending limits, which you may not be aware of. And credit limits is what they really call it that will enforce a certain limit you can spend each month on that credit card in a way, it's good because it's controlling your money. But it's also bad because you are pretty much given the freedom to purchase whatever you want and worry about the consequences later of paying your bills, you'll also be charged with annual fees perhaps depending on the card you sign up for, you will probably have an interest rate for the credit you spend each month to pay a small amount of extra money on top of what you've already spent. So those are some of the disadvantages of owning a credit card, you need to be a little bit smart about how you utilize it to your best advantage. And of course, there are people out there saying hey, this is what I did. But we're college students, we don't have that much of spending, we don't have that much of freedom or even a credit score to begin with. So let me break down some credit cards that we can get into as a college student. A great starter card with tons of benefits is Chase Sapphire Preferred, they mainly focus on travel benefits, and just having points which help you book flights or hotels or things like that they do have an annual membership fee of $95. But it seems that the benefits that you get in exchange for holding one of these is way more than what $95 is worth. Now, the best thing about these starter credit cards and these starter credit card companies is the fact that they don't really care too much about your credit score. But now is the opportunity to start building credit. Because this is the most important thing towards securing future loans and future investments that you might need to get approved for credit scores are talked about a lot. And this is basically the score that determines how likely you are to pay a loan back. And that's why credit score is often more important when you're trying to secure loans. If you have a higher credit score, you will get lower interest rates. But if you have a lower credit score, you will get higher interest rates. Some important things to note about credit card transactions in general is that there may be fees on each transaction that you make, it could be something like maybe 1%, or point two 5%. All those fees and everything can usually be found by visiting the websites and figuring out what works best for you. Another great option is the Discover student card which they have oriented specifically for students and they give you 5% cashback and a bunch of other rewards. And more importantly, they don't have any annual fees, which is great. If you want to start off just small with a credit card that could possibly work with you. One important thing to know about credit cards is that you have a spending limit. And this limit is usually determined based on your credit score and your financial history and other factors which we of course will never know about. And it's important to stay under this limit. In fact, it's so important that it could be the difference between you getting approved for a loan or denied for a loan. For example, if you have a credit limit of $2,000, make sure you only go up to 1500 because if you go anywhere near the credit limit or even a little bit over, there's going to be a lot more consequences. For example, charging you additional fees, charging you more interest and of course, worsening your credit score. One more important thing to note is that you should often be paying bills on a certain due date, you should often be paying these credit cards on a certain due date. But what's important to know is that these companies report your statements to the credit bureaus, which is what they do to manage all the credit scores every 30 to 45 days. It's important to check when the credit card company reports these so you check on their websites or just call up your bank and ask them it's very important to pay these bills as early as you can. So it looks like you have done nothing according to the credit bureaus or you don't have a credit history that's too bad. Like you know, you're not ending up with $1,500 and then the next day you pay it what's going to be reported is you have 1500
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dollars of credit card debt, they don't care about whether you pay it back afterwards, they're still going to be looking at it as $1,500. And that's going to ruin your score. So make sure you figure out the exact date or any timeline that determines when they're going to report to credit bureaus and make sure you're paying it right before then. So it looks like you have a clean slate. And of course, your credit score goes up not just to give debit cards a little bit of love. It's the fact that you spend the money that you own, which is great in the situations that you want to be budgeting or you want to be saving your money and you know how much you have in your bank and how much you exactly want to spend. It avoids the temptation of overspending entirely. However, one crucial thing that debit cards miss is the ability to supply emergency funds. So let's say you're running low on cash, and maybe you get into an accident or you need some sort of payment, you can do that if your bank has no money. However, with the credit card, you can do that you can pay off that and worry about it afterwards or get the money to pay back that Bill afterwards. It's a great thing with credit cards that you get to spend the money you don't have. But in a way, you still need to be careful to make sure you don't overspend. That's the number one important thing. don't overspend pay before they report to the credit bureaus. Pay before the due date and don't go over your credit limit. After you've done all these steps for a few months, you will probably see a rise in your credit score and there are some free credit score checkers online. Please be careful when you're checking your credit score, especially online because many of them can be scams. But more importantly, just ask your bank for a credit score check if they have it for free, they'll provide it for free. If not just pay it every once a month figure out what's going on. And whether you're making progress or not. Once we've hit a few months of usage, we're going to be able to start increasing our limits and increasing our spending limits and also will gain the ability to borrow more loans higher loans with lesser interest rates. And again, while it may not be useful for a college student who doesn't really need to take out a huge loan for any sort of significant investment, it's important to know that this will be really helpful in the long run when you need that credit score to borrow for something like a house or a car or just anything you need a loan for in general some more great advantages of credit cards, you get to see how much you spend on your credit limit each month, which is great to build habits such as budgeting if you want to make sure you limit yourself for the amount of money you're spending on food, go check out that other episode or something like entertainment or something like transportation, this will be a great time to figure out how much money you're spending in each place and make adjustments accordingly. One more thing to talk about in the realm of getting approved for cards is cards that you see on retail stores. Now these are cards that are usually just run by something like Visa, MasterCard, Amex, or anything else any other credit card company and they'll have their own benefits. If you sign up for a card on this specific brand. Like if you sign up for a gap credit card, you'll get 50% off or you'll get some benefits or some points. If you are a frequent shopper of the place you're signing up for a card for this is often a very good idea as well, because it lets you save money on the purchases that you're making. For example, if I was offered to sign up for a grocery store credit card, I would happily do it simply because I get more benefits. And I use that specific grocery store every single time I shop. If you shop at Nike exclusively, you can get a Nike credit card and you can save much more than you think. But if you generally don't spend much on food, or let's say clothing, or whatever it is, wherever you sign up for that credit card for I would advise not to do it holding many credit cards is a pretty good idea. But at the same time, it's not a good idea. Because imagine building up a credit that's due on 10 different cards. And don't use other credit cards to pay for other credit cards. Because that's just gonna go into a spiraling effect of you having an insane amount of debt with a lot of fees and a lot of overcharge, I would definitely say do not get multiple credit cards until you're familiar with at least one of them. Make sure you understand what the terms and conditions are. They're going to be fees there's going to be some hidden charges. Maybe you have to make sure you read through all those different things to make sure you make an effective decision on what credit cards you end up getting. Remember that wild credit cards offer things like cashback travel points, dining, credit, entertainment credit, they make all their money off of the interest and people who are overspending. And people who are not responsible with their money. That's where they make all their money, they charge those fees. That's how they make their money. That's why they're able to offer all these services to people and that's why it's an enticing offer. You have to be the one in control to make sure that you don't make decisions That'll hurt your credit score and your reputation with banks. So in summary 100% It is advised to get a credit card as long as you follow the rules that we've talked about in this episode to make sure that you are very responsible with that credit card because it can either be a blessing in disguise or it can be your worst nightmare you have seen people complain about needing to pay their credit card bills so many times do not let that be you and with that this episode comes to a close thank you all so much for listening until the next one