cash and credit
Module Overview
Focus on understanding cash vs. credit card usage.
Learning objectives:
Learn the differences between cash and credit card usage.
Identify situations for appropriate cash or credit card use.
Cash vs. Credit
Cash and debit cards appear similar but function differently.
Cash:
Immediate deduction from personal funds.
Transaction is complete once money is handed over.
Debit Cards:
Funds are deducted directly from the bank account.
Also results in immediate withdrawal, like cash.
Credit Cards:
Do not withdraw money from bank account immediately.
Each purchase represents a loan against a predefined credit limit.
Example: Spending $100 on credit means you owe $100 to the credit company instead of spending $100 cash.
Understanding Credit Cards
Credit Limit:
Individual credit cards offer different credit limits based on approval (e.g., $1,000 to $50,000).
Using a credit card is equivalent to taking a loan each time you make a purchase.
Interest Rates:
Credit card interest rates are typically high compared to standard bank loans.
Keeping track of how much is owed is crucial to avoid debt from accruing.
Pros and Cons
Advantages of Cash/Debit:
Transactions are final and uncomplicated.
No ongoing debt.
Advantages of Credit:
Flexibility in purchasing items without cash available.
Provides a buffer for larger purchases, as credit limits can cover them.
Risks of Credit Cards:
Vulnerable to theft and fraud (physical and online).
Users might encounter fake credit card readers, especially at gas stations.
Essential to protect card information and report losses immediately.
Loss of card should be followed by prompt notification to the credit card company to prevent fraud.
Minimum Payments and Interest:
Making only minimum payments can lead to accumulating interest costs that grow over time.
Higher interest rates (14%-22%+ are common) can turn small debts into substantial amounts due to compounding.
It's critical to manage credit card debts effectively to avoid excessive interest charges.