Let’s talk about MONEY! Why? Because it is JUNE, which means you’re making the most of summer so you’re going out with your friends, you’re headed to music festivals, your diet consists of boba tea, froyo, ice cream, and OMG now you’re broke. It’s so easy to spend WAY too much when your friends wanna go out, and you wanna have fun too! Who wants to be left out?
Now you might be thinking, KAREN, I don’t need you to explain to me what a credit card or a check is. I know, this stuff seems super basic. BUT if you don’t know what is an APR, credit score, interest, minimum payment, rewards points, credit limit, account number, or routing number is, then keep reading and you might learn something new! I am not ashamed to admit that I didn’t understand what a credit score was until I was 24 years old. It’s better to know EVERYTHING about money, because if you are even the slightest bit uninformed, you are exactly the kind of person banks and credit card companies exploit.
First, let’s rewind to the days of Capri Suns and Sister Sister...
How We Earn Money, How We Get Paid & Where We Store Money
When you were young, you probably earned money by doing small jobs like walking dogs and babysitting. You probably got paid in cash by people close to you, like parents and your neighbors. Then you’d store that cash by putting it in something PHYSICAL, like a piggy bank or your wallet for example.
When you get older, you get a job at a company. As their employee, instead of cash, you’re getting paid in paychecks. You’re probably making more money now, so you need a place to keep that money safe, so you deposit that money in the bank. A bank is kind of like an adult piggy bank. But your money is way more safe inside a bank, and it’s more practical when you’re dealing with large amounts of money. It’s easier to pull money out only when you need it, which leads me to my next point:
How We Spend Money
Take a look at these two cards.
Can you guess which one is a credit card and which one is a debit card? No? I can’t either! But don’t let their looks fool you, they couldn’t be ANY MORE DIFFERENT!
When you use a debit card, you are using your OWN money in your bank account. Checks and cash fall into the category of YOUR money as well. However, when you use a credit card, you are using a bank’s money to make a purchase, and you’re responsible for paying it back. In other words, there are WAY more strings attached!
How Debit Cards and Checks Work
Let’s drill into this important difference. If you want to spend YOUR MONEY, you have a few options. If you want cash, you can go to an ATM machine, put in your debit card and withdraw cash. If you don’t want to carry around a bunch cash all the time, you can also use a debit card for purchases. When you buy something, you swipe your debit card and that store will instantly pull money directly out of your bank account. It’s way more convenient than having to constantly go to the ATM to fill up on cash. Lastly, you can also use checks, which behave just like debit cards, except your transaction isn’t authorized instantly. The person you write your check to has to deposit your check at their bank, which is when the money will be withdrawn from your bank account. These days, writing checks is a bit old school, so I wouldn’t be surprised if you rarely use this form of payment, especially since we now have Venmo, Google Wallet, and Paypal.
How Credit Cards Work
The other way you can pay for things is with a credit card. Every time you swipe your credit card, YOU are spending your BANK’S money, and then you will have to pay your bank back.
At the end of the month, your credit card company will send you a bill stating how much you owe them, but they will only force you to pay a small portion by the due date. So naturally, you might think, “OMG sweet! I spent $500 this month, but I’m just going pay $25 for now, and pay the rest later.”
But NO! This is a trap! This is exactly how credit cards love to make money off of their customers. Because when you don’t pay off your bill, the bank will charge you interest. And they deliberately don’t make this super explicit on your billing statement or your online account, because they WANT to charge you interest.
Scary adult word check!
Interest is the fee that banks charge you in return for borrowing their money. The longer you wait to pay off your balance, you will collect more and more interest charges, which is currently about 15% of per year on average. So if you paid off $25 of your $500 balance, you now owe $475 plus an additional $5.94 from interest.
While all of this sounds probably extremely depressing, here’s the silver lining: If you pay off your bill 100% every single month when it’s due, you’ll never pay a penny in interest.
If you take away one thing from this episode, NEVER EVER EVER spend more money than you have. No debt = no interest = happy YOU. 😍