Credit vs Debit: A Guide for Millennials

The age old, or a few years old, joke, Millennials suck at money concepts! We have massive college debt, live with our parents and our budget includes $4,000 a month for 2 avocados.

But what if we really dug into these money concepts and learned more. Such as what is money and how it really works. How to spend money and when to spend money. What a credit card even is and why you should have one. Or what is the difference between credit and debit.

What money is-

When we look back at what money even is we obviously know how a barter system worked, but before the barter system, we had money, and before we had that money, well we had a barter system. What a cycle huh? Well not totally, I was mixing societies up. Some societies had money, while others still used the barter system.

The barter system is something like, I have 3 loaves of bread, you have Jelly. I need jelly to make sandwiches and you need bread to make sandwiches. We could just combine resources but if I spend so much time making bread, and you spend less time making Jelly, I would lose out on how much time I have exerted.

So we would do a swap. I give you one bread loaf for a small jar of Jelly, and you would have Jelly left over, and a loaf of bread. I would have bread leftover and a jar of Jelly.

Then we got down to things like, I need a car and I make bread, but no car makers need bread. So I can’t trade with them. Unless I find out what they need, say its shoes, and go trade for shoes then trade for a car. But this can get out of hand if the shoe maker doesn’t need bread, then so on and so forth.

So we invented coin. Gold and Silver became money, after trials with shells, rocks, and other various trinkets. Gold and Silver became valuable for their shiny attributes, then came along the silver notes, something that we now see is Federal reserve notes, or dollars.

Money has transformed over the years but one thing’s for certain. It has always been used as a medium of exchange of value. If you find something valuable and wish to have it the person willing to give it up wants value in return. This of course is measured by what money represents. That fair exchange of value.

This is a fair exchange because if I was to really sell you an Avocado for $4000 you would lose your mind and tell me some choice words. But in reality there is a fair price that you are willing to pay as a consumer vs a fair price that you are willing to accept as a supplier. This creates the real price of a product. In economics this is called the equilibrium.

How money works-

Money is really just a way to shift value back and forth between societies members. If i provide you value in labor, you reciprocate that value in monetary paychecks. If I provide you value in a product you enjoy like toilet paper, you provide me value in monetary payment of cash at the register.

Money also has a great way of attracting more money. It also has a way or repealing more money. The way society has placed value on items and how that value grows or depleted over time has showcased the core principles of what money is, value. Value changes over time.

If you buy a car and go to sell it a year later, the value is probably less than what you paid for it. But if you buy a share of stock and go to sell it a year later, the value may have doubled than when you purchased it.

The same is true for investing in cash flow assets like rental properties. You can purchase a property for a price and earn a small amount of money in income from that purchase.

Money is a phenomenon that many have studied and few have mastered although it’s really just a medium of value exchange. It seems to baffle so many people.

On the consumer side of things, there are a few ways to view money, I consider them debit and credit. When you go to the store to purchase goods and the teller asks if you want debit or credit and you have a bank card linked to your checking account, it can be super confusing. You have a debit card but you can pay with the credit button? What is going on here?

All this means is a timeline of payments. Debit is paying right now, Credit is paying later. (but still paying right now in an odd way) Lets dig into what credit and debit are.

Credit: an overview-

When we talk about credit being a pay later we also have to know how this works. For debit cards typing credit on the small kiosk at the grocery store, it means that the charge will come out of your bank account in a few days.

When we use credit cards, the credit card company will pay the charges for us and we pay the credit card bill when it is due. This in turn means that you get a product that you pay for later.

Credit cards also offer a system where we can track credit scores. Most scoring models will focus on the Fico score while we also have the 3 credit bureaus. There of course is also a scoring model that consists of…

• 35% payment history
• 30% amounts owed
• 15% credit length
• 10% new credit
• 10% credit mix

Credit is a key component in your personal finance journey as it focuses on building a foundation for getting loans, mortgages and better interest rates on further lines of credit.

There are a few types of credit cards to know as well

• Standard Credit cards. These cards just simply offer a line of credit to users. They may also come with an annual fee.
• Rewards Cards. Some cards offer points or cash back. These are the cards everybody should strive for and use for their purchases.
• Secured Cards. These cards are typically for those rebuilding credit and thus require a cash deposit to hold as collateral

The best course of action for a young millennial is to have a credit card and only spend about 10% of the credit limit to ensure you build good payment history and low credit utilization. Never ever overextend yourself in terms of your credit payments and always under every circumstance pay the bill in full every single month.

Debit: an overview

Debit is a little different, something we are obviously good with. A debit purchase is if you want to buy $50 in stuff at Target, and have $500 in your bank account, and swipe your bank accounts debit card, you now have $50 worth of products from Target and $450 in your bank account.

That’s really all debit is.

Debit is allowing bank customers to spend their own money by drawing from the funds in their account they have already deposited at the bank. However there are a few types of debit cards like there are a few types of credit cards.

• Standard debit cards. These cards are linked to your bank account and allow you to draw your own funds out.
• Electronic Benefit Transfer cards (EBT). These cards are issued to qualifying persons by state and federal governments to provide benefits to the card user.
• Prepaid debit cards. Some people have no access to bank accounts and thus use prepaid debit cards to load money onto the card and use them as if they were a standard card.

The only factor to worry about when it comes to debit cards is the security and ability to reverse transactions if a purchase was compromised.

Credit vs Debit-

Now that we have a basic overview of both Credit and Debit Cards we can compare the two.

Both cards will come with the 16 digit number something like 4395–3729–5869–3736 (this is random but it will be this format) and come with the expiration date and cvc code. The cvc code will be a 3 digit number something like 100 or 489

Credit Cards will extend a line of credit to you, Debit cards draw on your own personal funds.

The big thing to focus on is what you want to do long term with your finances, if you are looking to get a loan for a car or house, it might be best to work on building your credit history to make it favorable for you when applying.

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