Eli5 can someone explain debit and credit cards and why and when to use one or the other
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Debit cards are linked directly to your bank account. They are basically a convenient way to carry “cash”.
I do recommend talking to your bank to DENY the overdraft protection they offer. This way if you have no money in your account, it simply doesn’t allow the transaction. If you keep the protection they’ll honor the payment, but also charge you ~$40..each time. It can get really really bad sometimes.
Credit cards are a *Loan*. You pay it back, with interest. Often hefty interest. That compounds.
If you have a $5,000 purchase that you *only* pay the minimum on (say 2% the balance.. $100 per month) at the standard 20% interest, you’ll take 30 years to pay it off. and pay almost 25,000 in total.
Minimum payments should be done only when absolutely necessary. Otherwise large overpayments are ideal.
Often if you pay off the entire amount the month you make the purchase, you owe no extra money.
The benefits of the credit card:
– Card perks, like rebates, points etc. These are good IF you almost always pay off your balance.
– Extra protections on purchases. Often extended warranties and return periods, all sorts of things really. Varies by card and company.
– Builds a credit history (debit cards do not). Having a card, using it, and paying it off regularly helps build your credit score, which is used by companies to justify how much and at what rate they’ll loan you money for other things.
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