Credit is money borrowed that must be paid back within a determined time period, such as a loan. Financial institutions give out credit all the time. For example, you or your parents may have credit cards, through which the financial institution pays for all your expenses. This service is provided with the understanding that you will pay back the financial institution at the end of the month.
Credit is a form of consumer debt– when you spend money on a credit card, the financial institution is essentially lending money to you. Usually, you’ll be required to pay this money back by the end of the month. However, if this debt is not paid back on time, the money you still owe is called your outstanding debt, and you will have to pay additional interest on it. Generally, if you can’t pay it all back and leave borrowed money (debt) from one month to the next, you’ll end up owing more money than you borrowed. This is called accruing interest. To accrue means to increase or keep growing in value or size over time. For example, if you don’t pay your debts, and the financial institution is charging you interest for them, you will be accruing debt, as interest grows on top of the money you owe.
Consequently, financial institutions will set a spending limit on your credit card that you can’t go over. This limit is calculated by the financial institution and is based on how likely you are to pay the money back. To help you pay off your credit card debt, you can work out a monthly repayment plan with your financial institution. This plan can have large payments so you pay back your debt quickly, or small payments so it’s more affordable. At the very least, your financial institution will expect you to pay back some amount every month, called a minimum monthly payment. You should note that you will NOT be able to pay off your credit card debt if you continue making purchases with the card while only making minimum monthly payments. This is because interest on the debt will continue to pile on, sometimes for years… You must either stop making purchases on the card or pay more than the minimum monthly payment.
In contrast, when using a debit card, the money you spend is withdrawn directly from your account, and is only limited by how much money you have in your account. One of the main advantages of credit cards, their convenience, may actually be a disadvantage for some people. Overspending with your credit card is easy. You walk into the store, grab something, swipe a plastic card, and you’re out. It might not feel like you’re spending money, but never forget that you have to pay everything back. Debit cards, therefore, provide you with the convenience of credit cards while eliminating the danger of accruing credit card (or consumer) debt. Remember to only use credit cards for convenience, never for getting yourself into debt. If you ever find yourself accruing credit card debt, consider using a debit card until you’re sure you can responsibly use a credit card again.
Some consumer items, like cars, lose value over time. Try to avoid using credit to buy these types of consumer items. By the time you pay your debt, you will have paid thousands of dollars more than the asking price because of interest, and the item will have lost much of its value.
Credit cards do have some advantages over debit cards, though. For example, by spending on a credit card, you will likely receive rewards like flight miles and cash back. Also, if your credit card was lost or stolen, the financial institution would most likely cancel any payments you didn’t make, but might not do the same for a debit card.