Week 2 - November 10

SWC FINANCE CLUB - LESSON 2

Debit cards vs Credit cards

Welcome to the second lesson of our club! We hope everyone has enjoyed the first lesson. In this
version, we will be going over the concept of ​Debit ​and ​Credit​!

Debit and credit can refer to two different concepts. The first is commonly used in accounting, but we’re
going to focus primarily on the differences between debit cards and credit cards - since we’re
approaching the age to use these financial tools.

In the real world context, everyone will likely use debit cards and credit cards. Here is a table to display
the differences:

Debit​ Cards Credit ​Cards

● Limited to only spend funds that have
already been ​deposited ​(like a chequing
account)
● Easy, safe, and convenient to use for
direct transactions
● It’s the same concept as paying with cash:
you can only spend as much as you have
in your pocket, or bank account
● You can own a debit card under a legal
parent/guardian at as young as 13, but
you have to be 18 to own a credit card
● As opposed to credit cards, they have ​no
additional benefits
● Able to​ borrow money​ from the card
issuer to spend on common goods
○ The amount of money you can
borrow per month (known as
credit line) depends on your
credit score
○ You can pay credit card bills on
the due date every month
● Provides extra rewards for simply using it
○ Can include air miles, free money
back, discounts, etc.
● Usually have to pay monthly or annual
fees to own most credit cards
● Higher security than a debit card
● Affect your ​credit score!​ (very important)
● Much more risky because with bad
spending habits, you can incur a high
credit card bill that you may struggle to
pay back later on (leading to ​debt​)
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In summary, credit cards require you to spend more responsibly. There are definitely benefits to be able
to use a credit card, but without proper discipline over your spending habits, it might not be worth it. To
highlight some of the main benefits, we will first talk about the importance of building your ​credit score​.

Credit score​: Like how you have grades in your classes, a

credit score is used by banks to judge how responsible you
are with managing ​credit​. When you make purchases
using a credit card and successfully pay it back within the
set amount of time, your credit score will ​go up​! Make
sure to get a ​good credit score​ by building a good
reputation with your banks once you turn 18, because
they will give you loans on big purchases in your future
(for things like a house).

This image represents how people can

make decisions that lead to either ​good
or ​bad ​credit score! Good decisions
could mean only spending as much as
you can pay off​, or starting to build
good credit as soon as possible (when
you turn 18). Bad decisions might
include ​spending too much​ on
unnecessary expenses, or ​losing track
of your spending after a wild night of
drinking.

Another benefit to using credit cards is gaining the ability to reap their ​rewards​! The credit card market
is very competitive, so banks provide a lot of ​incentive ​for you to capitalize on. Examples may include air
miles to travel for free, cash back programs, or simple discounts for groceries. Some hardcore finance
people engage in a practice known as​ “credit churning”​, where they sign up for a multitude of credit
cards only to use their ​benefits​. People who know how to perform credit churning can utilize the wide
array of benefits offered by different credit card programs to go on free vacations, among other wild
things (You can google this on your own because it’s quite an extensive umbrella of information)!
Week 2 - November 10

Debt

Debt ​is when you owe money to someone or something. Have you ever ​borrowed ​money from your
friends to pay them back later? During that time frame, you were ​in debt​ to your friend. In the practical
world, this is how debt usually works - except you will have to take ​interest ​into account. You borrow a
hundred bucks from your friend, but this time you have to pay them back $105 because of a ​5% interest
rate.​ This is how borrowing in the real world usually works. And trust me, no matter what you’re going
to end up having to borrow money, so understand it!

Debt is notorious for ​snowballing ​out of control in people’s lives, leaving them destitute and unhappy.
This is an important subject, because many of us will be taking out loans to attend university in the near
future. By ​managing debt effectively​, it won’t be a problem, but if we ​ignore our debt​ then it will be
harder and harder to pay back over time due to ​interest​. Think of a snowball rolling down a snowy slope.
A snowball starts small but over time, it quickly collects ​more and more snow​ and becomes massive.
This is how debt works. Debt can seem insignificant at the beginning, but once you ignore it, it will pile
up and become harder and harder to pay off.

A general rule is to avoid getting into ​debt ​at all

costs - unless it's for a business investment. If you
do happen to get into debt, construct a plan to
get out of it as soon as possible. DO NOT IGNORE
IT! Make sure there isn’t a ​snowball ​in the first
place, but if there is, get rid of it before it
becomes too big to stop.

Facts about Debt

- The average American household owes $16,091 on their credit cards
- It will take 18 years to pay off the average credit card balance in America if you make
“minimum payments” - the minimum required amount that you are obligated to pay
each month
- Funny enough, a popular strategy used to get out of debt is called the ​“debt snowball method”
where you use the momentum of paying off small debts to pay off your larger ones
Week 2 - November 10

Here is a visual that puts into perspective how an average person will encounter debt in their lifetime.
For the average person, their debt would consist mostly of their mortgage, and they would spend on
average around 30 years to pay it off entirely. That would mean that if you were 25 and took a mortgage
off to pay for your house, then you would expect to finish paying it off when you are 55.

Extra Resources:
- Cool video that explains why credit is better than debit
https://www.youtube.com/watch?v=vsMydMDi3rI&feature=youtu.be&t=43m15s
- Surf around google, there's plenty of articles that cover these subjects in greater detail!
- If you know of any good resources, you can use the Finance Club discord to share them with the
club! Also, please feel free to ask our teachers about anything you’re confused about.
Week 2 - November 10

Facts about Debt​:

https://www.cheatsheet.com/money-career/facts-about-debt-may-alarm-you-today.html/

Image Sources​:
Credit Score Scale: ​https://www.nerdwallet.com/article/finance/what-is-a-good-credit-score
Good/bad credit signs: ​https://www.credit.com/credit-scores/what-is-a-bad-credit-score/
Snowball Effect:
https://thetaoofwealth.wordpress.com/2013/05/17/the-snowball-effect-of-credit-card-debt-and-how-t
o-break-it/
Average Debt Per Age: ​https://money.com/average-debt-every-age/