Millennial Finance Basics
Credit cards, debit cards, and charge cards. You’ve probably heard of at least one of these but are you familiar with how they work? Not knowing the pros and cons to each card could prove to be a gigantic, unnecessary stress in your life as well as disastrous.
While working in a convenience store during college, the majority of students would swipe their credit or debit cards. To my surprise, most students had no idea what the difference between the two were, let alone the benefits and downsides between the two.
This article is to clear up any basic misconceptions and confusion in order to allow you to make better financial decisions.
Now, some of you might be thinking about waiting or passing up on financial information. My response to that logic is why? A big part of why you went to college is to receive an education with the purpose of getting a job (presumably a well-paying job).
Even if you were making tons of money, your work would be in vain if you don’t know how to spend what you’ve earned. Think of it this way, athletes make tons of money, right? However, about 70-80% of athletes go bankrupt within years after retiring. Why? It’s because of poor financial decision making.
Don’t put off tomorrow what you can do today.
And in case you’re thinking well I’m different, I want to note that an overwhelming amount of college graduates regret not taking more time to learn about their finances (specifically, credit cards and how they work).
To be clear, this is not a comprehensive guide on finances. I’m not a financial advisor or expert.
Instead, this is just a small guide to make you more aware of how you can spend your cash.
As I mentioned, most college students graduate with very little understanding about credit, how to spend, and other key concepts regarding finances that’ll affect you every day of your adult life. When it comes down to it, for the majority of us, this type of information just isn’t taught in school (or at the very least, it’s not a requirement to learn for most of us).
While my goal is to provide a decent amount of information that you can use from this point on, I do recommend picking up some finance books to get you more familiar with these concepts.
Personally, I recommend the book: I Will Teach You to Be Rich by: Ramit Sethi, which you can purchase from the link below (click the picture). Besides just teaching you about basic finances, it also introduces you to investing and accumulating more money in small, easiy executable ways. I’ve personally read the entire book twice and I have nothing but good things to say about it!
Now, allow me to get into it: The basic differences between Credit, Debit, and Charge cards.
I’m sure most of you have heard about this before. A few of you out there might even have one or two of these. A credit card is basically borrowed money. Imagine you’re at a clothing store and you purchase a $15 pair of jeans with your credit card. The bank (or whatever institution you received your credit card from) is basically fronting the bill for you like a good friend.
But this friend expects some form of compensation and his costs aren’t cheap. When your friend grabs the bill for you and spots you the cash, he wants more than what he put out. This is known as interest and is essentially what defines a credit card.
Inherently, credit cards aren’t bad.
They’re great for building credit which will be very important later on down the line when you attempt to buy a car or house. It’s important to be careful though! If you don’t keep up with your spending, you can end up owing hundreds or thousands more than you originally spent!
- Try to pay back your balance IN FULL as soon as you can. A $15 pair of jeans can easily end up growing into a $60 purchase if you aren’t careful. Don’t JUST pay back the minimum.
- Depending on what college you go to, colleges may attempt to persuade you into getting a credit card by offering something akin to a free t-shirt. Don’t fall for the trap. These cards tend to seem great on the surface but will actually increase the interest owed (this won’t be obvious but it is written in fine print and tends to be in confusing English). I’ll discuss this more in a future post but for now, trust me: Don’t sign up. As a matter of fact, don’t even take the free t-shirt. That’s how they guilt you.
- If you’re in a store, you can ONLY use the credit option. You can’t use debit. While this may seem like common sense, you’d be surprised at all of the people (students and adults) that don’t realize this and try to use the debit feature at a cash register with a credit card.
- DO NOT use your credit card for emergencies (create an emergency fund for this). Make wise, planned purchases with your credit card in order to build you credit up.
If you have any cards at all, you likely have a Debit Card. While credit cards involve you borrowing money to be paid back later on, Debit Cards are you strictly using your own money. When you swipe with this card, you’re using the money from your own bank account (typically your Checkings account) to make purchases.
If you have no cash in your account, your card will be declined and you can’t make any purchases. It’s as simple as that.
In my personal opinion, a debit card is the safest of the three. While you can’t really build credit with a debit card, for general purposes, you can’t really go wrong.
Contrary to popular belief, you CAN run a Debit card as credit at a cash register. Yes, I understand, it’s not a credit card.
However, from what I understand, using the credit option tends to be a faster, yet slightly riskier way to pay for items during a transaction. I say risky because it’s possible (depending on your bank) to overdraft money from your account.
Let me explain. Perhaps you’re trying to buy a meal at Chipotle for $12 but you only have about 7 dollars in your account. If you were to run the card as credit (and some stores might use credit as their default method for cards) the transaction would go through but your bank would spot you the remaining $5.
But wait! Banks don’t just give away money.
It’s crazy but when you overdraft, your bank will likely charge you and it tends to be costly. For the $5 that they loaned you, they might charge you $50.
Using credit isn’t an immediate deduction from your account either. So, it’s possible to make a lot of purchases in a short time using the credit function before the money is withdrawn.
This could also lead to hefty overdraft fees. Using the Debit option is the safer bet since it immediately pulls the money from your account and won’t take more than what’s available.
The only downside to using Debit (and this is barely a downside) is that you’ll have to enter your 4-digit pin number which can take a few more seconds longer than usual.
- Always keep track of your account balance. There are so many web and phone apps for banks now that allow you to check your balance and even phone apps like Mint are available for free. There’s no real excuse not to be on top of your bank account balance.
- Whenever possible try to use an ATM that doesn’t charge you. Believe it or not, ATMs do tend to charge you for withdrawing your money. If you have a bank that’s scarce on ATMs, I recommend taking out cash and managing that wisely until you can get to another ATM. Believe me, nothing is more frustrating than needing $20 and being charge $3.75!
This card is probably the least well-known of the three. At its core, a charge card is very similar to a credit card as you’re basically borrowing money with the intent of paying it back.
However, charge cards often don’t have a maximum spending limit where credit cards typically limit you to around $1000. Now, wait, that doesn’t mean you can just buy everything you want.
While a charge card typically doesn’t expect interest, you are expected to pay back the balance in full at the end of each month. Overall, the risk is a bit lower as you’re not expected to pay more than what you spent and your credit score isn’t really affected.
Just be warned, you don’t want to get carried away and spend more money than you actually have.
Thanks for sitting through this one! I’ll admit, this article was a bit on the lengthy side but I think the information present is extremely important to get a grasp on while you’re in college.
If you have any questions at all, always feel free to email me or message me in the comments section. I’m always happy to respond and communicate with everyone. Also, if you thought the information in the article was useful in any way, I would greatly appreciate you sharing this article using one of the social media icons on the left side of the page so others can benefit from this information! Believe me, it would mean a lot! Once again, thanks for reading!