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Types of Charge Cards

As you become older, you will be making purchases that are both large and small. Most small purchases can be made using the cash that you carry in your pocket or wallet. For larger purchases you might have noticed that adults often use a plastic card. The store clerk often asks a customer if the card is a credit card or a debit card. Another customer might write a check for the amount. These are some of the alternatives to paying with cash.

credit vs debit card

Let’s begin by exploring the difference between a credit card and a debit card. You may use either to make a purchase, but in fact they differ in one important way: When you use a debit card, the money is withdrawn from your bank account immediately. If you do not have enough money in your account, your purchase will usually be denied.

On the other hand, using a credit card is like creating a loan. You will still have to pay for some part of the purchase at the end of the month when you receive your credit card statement. If you do not pay the full amount, you will have to pay extra charges and interest on your loan.

To summarize: The main difference between a debit card and a credit card is that a debit card is “pay now” whereas a credit card is “pay later.” While you can use either type of card, the type of card used can make a big difference not just to you but also to the store where you make your purchase. There are also different ways that your purchase might be approved by the store.

One way is called signature approval. With signature approval, you only have to sign the receipt, and your purchase is approved. The other way that a purchase might be approved is through PIN approval. PIN stands for Personal Identification Number. A PIN is usually used with a debit card. When you enter your PIN, the merchant is assured that the card is being used by the real owner. With the PIN consumers are also assured that only they will be able to charge directly from their account.

EXPLORATION

Compare the different advantages and costs of debit cards offered by two different local financial institutions. Which features are most important to you? Which card seems to offer the best value?

Some of the costs you find might include monthly fees, interest rate charged, late fees, and transaction fees.

A monthly fee is the amount that the bank or credit card company charges each month (or year) to issue a credit card.

The interest rate is the rate charged if the bill is not paid in full on time. Some cards charge a different rate even if you do pay your bills on time. So be careful to find out what fees are charged to a card because each card company has different conditions.

If you pay your bill late, then you may be charged a late fee. Some companies may also charge a transaction fee each time you use your card. Finally, there are special features for some cards, such as bonus cash for using the card, or cash back depending on the number of purchases made. Some credit cards might give bonus mileage on a frequent flyer program, or free gas if their card is used to purchase gas, or even a discount at a certain store when using their card. When you explored local financial institutions, did they offer some of these features? Describe the features.

Let’s talk about some of the vocabulary that is used in finance. For each bank or credit union account that you have, there are three types of transactions: deposit, withdrawal, and transfer.

  • Deposits add money to your account. You might make a deposit when you receive a paycheck or a gift for your birthday.
  • Withdrawals take money out of your account. For example, you might make a withdrawal to take money out of your account for buying clothes.
  • Transfers are special types of transaction, where money is moved or transferred from one account (a withdrawal) to another account (a deposit). You might make a transfer to take money out of your savings account (withdrawal) to pay a bill in your checking account (deposit). In this case, you make a transfer from your savings account to your checking account.
Example 1 Example 2

Sue opened a new savings account on January 15 by depositing $250. On January 18, she made a withdrawal of $100, and on January 24, she transferred $75 from her savings account to her existing checking account to pay the balance she owed in that account. What is her new savings account balance?

SOLUTION
Sue made one deposit of $250. She made one withdrawal from savings of $100. There is one transfer, which is the same as a withdrawal from savings, of $75. So her new savings account balance is: 250 – 100 – 75 = $75.

Suppose Andy has a checking account with a $800 balance. He has the following income and expenses. Create a check register to record the transactions and keep a running balance of what Andy has at the end of each transaction.

  • July 1 Mowing the lawn for the month of June $25
  • July 12 Birthday money from parents $40
  • July 24 Birthday present for mother $15.25
  • July 30 Water Park admission ticket $20
  • July 31 Babysitting earnings $24.75 
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