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In which we teach you what you MUST know debit and credit cards.

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*whimsical opening theme*

Mike: Hey, so a number of you have been asking us to talk about the difference between a credit card and a debit card. First impression: they look pretty much the same. Both of them are pieces of plastic that you can swipe in exchange for goods and services. Both could be used to unlock a door should you find yourself in a spy movie.

Emma: This is it.
Mike: It's go time. *groaning noise*

Mike: Now the biggest difference between a debit card and a credit card is whose money you're spending. With a credit card, you're using a line of credit. In other words, when you make a purchase, you're using the bank's money. You're expected to pay that money back, usually in smaller monthly chunks until the debt is payed off. And if you don't pay off your credit card in full, you will usually be charged interest on your monthly balance until it's completely paid off, and this interest can be substantial. According to bankrate.com the median credit card interest rate is 29% and believe it or not it can get as high as 79%. *oh no*.

On the other hand, when you make a purchase with a debit card you're spending your own money from your linked account which is usually a checking account. So generally speaking there really isn't interest or a lot of fees. If you spend $10 at the gas station, $10 comes out of your account just as if you had written a check. So why would anyone bother with a credit card when they could just as easily swipe a debit card?

Well, most credit cards offer perks and rewards based on your spending. When you pay your credit card bill in full every month, the perks and benefits can get pretty substantial. However it is really important to note that it doesn't do any good to get 5% back on all your purchases if you're not going to pay off your entire balance every month and you're just going to be accruing interest. So if you're using a credit card for its perks, be sure to pay off your bill in full every month.

But what if you can't pay off your credit card bill in full every month?

Though we don't recommend this, the other use for credit cards is to enable you to make payments over time on more expensive items. So for instance say that you "need" a 50-in TV to watch the new season of Doctor Who, but, unfortunately for you and the Doctor you can't really afford the thousand dollar price tag. Buying a TV on a credit card and spreading out those payments over a couple years might sound pretty enticing, but remember interest. If you only make the minimum monthly payments on the TV you will have paid $2700 for the $1000 TV, which is like 2.7 TVs, which is not what you get. You only get the one TV and regret.

Of course, debit cards have their advantages and disadvantages too. Advantages: debit cards are typically accepted at more locations than credit cards, debits cards usually don't have a minimum purchase required to use them like credit cards usually do, and because you're not using a line of credit with a debit card, if you happen to have a low credit score it shouldn't impact your ability to get a debit card. One unique disadvantage of debit cards is that because it's linked to your accounts, should the card or card data be stolen, the affects of fraud would be immediate. With a credit card, the charges would first go through a bank, which would give you more time to dispute them, but if you protect your physical card and keep your pin private you'll probably be okay.

Also never use public Wi-Fi for anything with passwords... just don't.

One thing to remember about both types of cards is that they made lead you to spending more money than you would have otherwise. Basically, it hurts more psychologically to hand over cash than it does to just swipe your card. So be careful that the convenience of the cards doesn't lead you to too much wasteful or impulsive spending. 

So that's all we've got for you today. This week's episode was brought to you by Audible.com an audio book service with over 150,000 titles. If you enjoy this channel, please support us by going to audible.com/howtoadult. For checking out Audible they're going to give you a free audiobook of your choosing. I recommend The Money Book for the Young Fabulous & Broke by Suze Orman, which was a really good primer for me to learn about personal finance. Again, to grab your free download just to go audbile.com/howtoadult. Thanks guys. 

*end title music*