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.
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use either to make a purchase, but in fact they differ in one important way: When you use a debit card, the money is withdrawn from your bank account immediately.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.
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?
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.
1. What are the different types of charge cards? How are they different? Which do you prefer and why?
The two main types of charge cards are debit cards and credit cards. Debit cards withdraw money immediately from your account when you make a purchase. Credit cards do not withdraw money immediately when you make a purchase. Rather, you accumulate a bill that has to be paid off, usually within the month. The type of card that you prefer will depend on your personal circumstances.
The terms of the debit card you obtain will vary from bank to bank. For example, the bank may charge an annual fee to issue you a debit card. Remember to check up the terms and conditions of using your debit card.
3. Compare the different features offered by at least two local financial institutions on their debit cards. Then check on the internet to see whether you can find a debit card with more attractive features. Explain your findings.
Sample solution: Bank of America offers a debit card that lets you choose cash-back deals on purchases. Wells Fargo offers similar terms, and to avoid paying a monthly service fee, you have to maintain a daily minimum account balance.
4. Compare the different costs of least two local financial institutions’ debit cards. Then check on the internet to see whether you can find a debit card with lower costs. Explain your findings.
Answers will depend on the financial institutions you choose.
Credit card terms could vary in: the monthly spending limit, the interest rate charged for late payments, and the amount of time you have to pay each bill.
6. Compare the different features of at least two local financial institutions’ credit cards. Then check on the internet to see if you can find a credit card with more attractive features. Explain your findings.
A Bank of America VISA credit card: 12.99% to 22.99% APR interest rate on purchases. You have at least 25 days after the close of each billing cycle to pay your bill in full. If you pay your entire balance by the due date each month, you will not be charged interest. No annual fee.
A Wells Fargo VISA credit card: 12.15% - 25.99% APR interest rate on purchases. You have at least 25 days after the close of each billing cycle to pay your bill in full. If you pay your entire balance by the due date each month, you will not be charged interest. No annual fee.
7. Compare the different costs offered by at least two local financial institutions on their credit cards. Then check on the internet to see if you can find a credit card with lower costs. Explain.
See #6 above.
If you fail to pay your credit card bill at the due date of each month, you will be charged interest on top of the amount you owe.
You do not have to pay your debit card bill at the end of the month because a debit card immediately withdraws the purchase amount from your account.
10. Cathy’s savings account has $255.25 at the beginning of the month. She makes three withdrawals, for $25, $75, and $43.11. She also makes one new deposit for $125.45, and transfers $85 from her savings account to her checking account. What is the balance in her savings account at the end of the month?
255.25 - 25 - 75 - 43.11 + 125.45 - 85 = 152.59
11. Suppose you use a plastic card to make a purchase totaling $300. Compare the different results of making the purchase if you: a) Use a debit card that is tied to an account in which you have $400. b) Use a debit card that is tied to an account in which you have $200. c) Use a credit card for the purchase and pay the full amount on time when the payment is due the following month. d) Use a credit card for the purchase but are unable to pay the full amount when the payment is due the following month, and the card issuer charges 1.5% interest per month on the amount owed.
a) Use a debit card that is tied to an account in which you have $400: $300 is withdrawn immediately from your account
b) Use a debit card that is tied to an account in which you have $200: Your purchase may be denied, as there is not enough money in your account to be withdrawn.
c) Use a credit card for the purchase and pay the full amount on time when the payment is due the following month: You end up paying $300 when you pay the bill.
d) Use a credit card for the purchase but are unable to pay the full amount when the payment is due the following month, and the card issuer charges 1.5% interest per month on the amount owed: You pay $300 and the $4.5 interest (1.5% interest rate), assuming you pay the bill the next month.
12. Exploration: How do withdrawals, deposits, and transfers affect your balance in a checking account? Ask your teacher to help you find a couple of good internet sites.
A withdrawal means that you are taking money OUT of your account. A deposit means that you are putting money INTO your account. A transfer means that you are moving money from one account to another, so depending on the transfer, you could be moving money into or out of your account.
13. Mickie’s checking account has a $400 balance. She has a number of earnings and expenses listed below. Create a check register to record the transactions and keep a running balance of what you have at the end of each activity day. What is your final balance? | January 22 Baby sitting Job $25 | February 13 Valentine cards check #23 $15.25 | March 9 Birthday from Grandmother $50 | April 1 Baby sitting Job $20 | May 26 Teacher’s present check #24 $24.75
Date Memo Withdrawl Deposit Balance Jan 22 Baby sitting job $25.00 $425.00 Feb 13 Valentine cards check #23 $15.25 $409.75 Mar 9 Birthday money from grandmother $50.00 $459.75 Apr 1 Baby sitting job $20.00 $479.75 May 26 Teacher's present check #24 $24.75 $455.00
14. Pick a bank in your city and investigate what services they offer. Is there a charge for a checking account? How much is the charge? Do they offer any interest on the balance? Is there a minimum balance that must be maintained? Is there a charge for a credit card? How much charge? Is there a charge for a debit card? How much charge? What might be other questions you may have about this bank in comparison with another bank and their fees?
Answers will vary depending on the banks you analyze.
15. Ask your parents which type of card they use the most. Why do they prefer that type of card? Are there different fees associated with each? What are these fees? Do their cards also have special bonuses to encourage them to use any of their cards?
Answers will vary depending on your parents' debit and credit cards.