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Know the Difference

While debit cards and credit cards look almost identical, the way they work is totally different.

When a debit card is used, the amount you spend comes directly out of your checking account.  A debit card works more like cash in the sense that you can only spend what you have in the account. Debit cards have a PIN, but most places CAN run it like a credit card and get your signature instead–you just have to ask.

When a purchase is made with a credit card, you are borrowing the money from your bank and will have to pay a high amount of interest on that money if the money is not repaid within a certain time. A credit card also allows you to spend more than you have available, thus automatically creating a loan to your bank. These loans carry a high interest–it can cost you A LOT to borrow that money. Credit cards do not have PINs.

Let’s say you use a regular credit card to buy a new TV for $1000. Your payment will be about $20 a month, but the INTEREST on that will be about $15–the "cost" of "borrowing" the money from the bank that gave you the credit card–which leaves only $5 to go to paying off the original $1000 cost of the TV. Because of the way credit cards work, making the minimum payment each month will guarantee that you will be paying interest on top of interest. It will take you more than 17 years to pay off that TV, and it will cost you over $4000.  I don’t know about you, but I’d like to keep that extra three grand. 

If you do not know which of your cards is which, find out. Now, get your scissors out and bring them with you to next week's blog.

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