ALB Finance

First things first:

A credit card is a piece of plastic (or metal if you’re fancy) you use to spend someone else’s money. Think I’m kidding? I’m not!

Finance Foundations

Cash is simple – you hand the barista six $1 bills and she gives you a coffee. 

A debit card works similarly to cash. You put cash in a bank account (or your boss does when she pays you) and it stays there until you want to use it. When you buy a coffee with a debit card, the $6 doesn’t come out of your wallet. Instead, it comes out of your bank account which – hopefully – has cash in it! The important thing to remember is it’s your money you’re using. A debit card is a piece of plastic you use to spend your money.

Alright, you came here to learn about what a credit card is and now I’m going on about cash and debit cards and not credit cards. Let’s get into what a credit card is now. I’ve dilly-dallied long enough, and I think you’re ready to dive on in.

A credit card is different from cash and different from a debit card. You don’t need to put money in an account to use it. The very first day you get your credit card in the mail, you can activate it and start using it. You can immediately march down to the coffee shop and buy a $6 coffee, even if you only have 63 cents to your name! Why? Because you’re sending someone else’s money. 

When the barista says “That’ll be $6 ma’am.” you don’t need to hand him $6. You don’t need to swipe your debit card and take $6 out of your bank account. You can swipe your credit card and the credit card company will pay the coffee shop $6 for your coffee. Free coffee – hooray! Doesn’t that sound too good to be true?

Yeah… that’s not quite it. So sorry… that was terribly rude of me! Whoopsie daisy – let’s learn the second half of what happens when you use a credit card now.

After the credit card company pays for your coffee, you have to pay them back. 

dun dun DUUUUN!

The credit card company did you a solid and fronted you that $6 for your coffee, but you still need to pay them back! Just like borrowing money from a friend, you now owe them that money. 

They did buy your coffee, but they didn’t do it for free. In about a month (or earlier if you can!) they expect you to pay them the $6 for your coffee. If you don’t pay them back in time, they’ll expect you to pay back the $6 and some extra for their trouble! That’s called interest, and you can click here to learn more about it.

So all in all, a credit card is just a fancy way of borrowing money.