Credit cards vs. bank cards

Credit cards
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Learn the difference.

A bank card (also known as a debit card) is essentially digital cash. It’s connected to a checking and/or savings account that you (and your employer) deposit money into. Each time you make a purchase, it immediately subtracts the money directly from your bank account.

A credit card is the bank’s money — for each purchase you make on the card, you have to pay it back by the end of the month.

For example, let’s say you have $200 in your checking account, but uh oh - emergency! You just got a flat tire and it’s going to cost you $300 for repairs — goodbye emergency fund.

Rather than go into overdraft and pay the bank a fee, you can put the expense on your credit card and pay it off when you have the funds.

The different types of credit cards

young woman holding a credit card
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New credit card users have endless options.

There are several different types of credit cards available and it can be overwhelming when you’re just starting out. Here are a few good “starter” credit cards for beginners:

Rewards credit cards — Rewards cards offer great benefits and redeemable points for all sorts of purchases: air travel, hotel stays, groceries, even prescription medication. As always, watch out for hidden fees and make sure that the rewards and benefits outweigh the costs. Don’t get burned by a tempting “10% off your entire purchase if you sign up today” offer!

Secured credit cards — These are great for building credit when you have no credit — you give the bank a deposit, but your money isn’t deducted from the deposit when you spend. Instead, you pay off the card month-to-month like you would with a regular card, until you’ve built up enough good credit to qualify for a card with better benefits.

Student credit cards — If you’re still in school, many banks offer a discount banking package that includes a student credit card. These cards usually come without an annual fee and lower interest rates, so they’re a great option for young adults looking to build their credit without getting nabbed.

Cash-back rewards — These cards give you back a percentage of the money you spend on regular on purchases. Cash-back rewards cards usually stipulate that you must be in a certain spending bracket (upwards of $2,000 or more) and usually come with a yearly fee, so watch out.

Getting a credit card

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Have a steady income and make regular payments to qualify for a credit card.

You receive a bank card by default when you open a checking account, whereas you have to apply and be approved to get a credit card.

The reason banks are careful about giving out credit cards is that credit works on a trust system: The bank trusts you will pay back the money you spend on your card.

To get approved for a credit card, the first step is to start using your checking and savings accounts regularly.

Having regular, predictable activity shows your bank that you are a reliable and consistent customer who can handle a credit card.

What happens if I can't pay off my entire credit card bill?

woman with worried face looking at bills
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Paying just the minimum on credit cards will land you in hot water.

Here's the most important part of using credit right: Don't spend more than you can pay off at the end of the month.

This seems like a no-brainer, but this happens to everyone. All. The. Time.

No worries, you can just pay the minimum, right?

Think again.

When you pay your bill partially, the money you owe carries over to next month's bill. On top of that, the bank slaps you with interest based on how much you owe. After all, borrowed money isn’t free money, and that interest can snowball into debt very quickly.

Also, as if interest wasn’t bad enough, failing to pay off your bill every month brings down your credit score, which needs to be high in order to get approval for things like mortgages and car loans. Yikes!

Budgeting and credit cards

coffee cup and notepad with the word BUDGET written on it
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Pick a budget and stick to it.

Don’t be terrified of getting a credit card. It’s actually an incredibly liberating financial tool, if used wisely and responsibly.

Figure out a budget that works for you and tailor your credit card use to that budget.

To do that, look at how much money you make every month, then subtract the amount that goes to fixed monthly expenses like rent, utilities, and your phone bill. Make sure you also set aside at least 10% for savings.

Whatever is left over after subtracting these things from your income is how much money you actually have left over to spend on shopping, hobbies, and entertainment.

The amount you spend on your credit card should not go over your budget though, no matter how easy it is to justify “treating yourself.”

To keep on track, regularly check your online statement and make sure you’re living within your means. It helps to download a spending tracker like Mint to make sure you’re not accidentally spending $120 on lattes every month.

Your credit score and debt

Hands holding plastic credit card and using laptop.
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Bad credit? Don't worry, your life isn't over.

Let’s say you have a credit card and you’ve already messed up by not paying your bills on time. Your credit may have taken a beating, but take a deep breath — your life isn’t over.

You just need to figure out how much money you owe and start making regular monthly payments.

Cut back on your lifestyle spending drastically and put as much money as possible toward paying off your debt, so it doesn't get any bigger due to added interest every month. Aim to put at least 30-40% of your take-home income into paying back your debt, and stick to it. Throw any added income at it, too.

If your debt is stomach-sinking, head-rush-inducing levels of bad, it helps to talk to a financial professional — they can help you figure out ways of consolidating your debt and fix your credit score faster.

Avoiding debt

Young woman with a piggy bank on a yellow background
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A purchase now is a debt later.

While it’s tempting to treat your card like a magical free money machine, it’s also great to be able to retire one day or afford a home. Remember that life is not about accumulating debt, but building wealth.

In addition to a credit card, look for the best high-yield or money market accounts to grow your income so that you’re not entirely dependent on credit cards.

Make a budget that’s doable. Tell people about your budget so that they’re not forcing you to live beyond your means. Be smart about your spending with credit cards, and you’ll be just fine.

About the Author

Esther Trattner

Esther Trattner

Freelance Contributor

Esther is a freelance contributor to MoneyWise.

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