Credit Cards Vs Debit Cards | How Credit Cards Work

Did you know that there are more active credit-card accounts in the United States than people? That’s right:83% of US citizens have at least one credit card, and the average citizen now has four. But wherever you have credit cards, you also have credit card debt.

Now credit card debt is one of the worst kinds of debt. It’s particularly hard to get rid of and it’s notorious for its high-interest rates. The average American credit card debt has grown by 52% since the year 2000, so it’s no wonder that, as a nation, Americans now owe more than one trillion dollars on their credit cards. The average US household has $8,390 in credit card debt and many families struggle with a much higher figure.

So for all these reasons, we love to hate banks and credit card providers. But who’s really the bad guy here? Are the banks as evil as we think, or are we to blame for our woes? Let’s find out. Before we move on to answering this complicated question, let’s take a step back and clarify how credit cards work.

Credit cards look like debit cards, but they work in exactly the opposite way. You see, when you pay for something with a debit card, the funds are drawn from your account. That’s money that you have. And when you pay for something with a credit card, you borrow money from the credit card issuer. That’s money you don’t have. You’ll have to pay it back eventually, and the later you do, the more it will cost you.

Now, the thought of not being able to pay off their credit card balance scares many people, so they stick to cash and debit cards. However, people who swear by using credit cards say it’s silly not to use them just because you don’t understand how they work. And here’s something interesting about those people – they actually use their credit cards as if they were debit cards.

Let’s take a look at this in action. Meet Gary. Gary wants a new TV. So, he goes to the store and chooses one that costs $700. He pays for it with his credit card and goes home to rewatch Sabrina the Teenage Witch because Gary is old school. Gary’s credit card balance is now $700.That’s money he owes to his credit card issuer.

So from now on, he’ll receive a statement each month that will tell him the total amount he has to pay, the minimum payment he must make, and the due date for this payment. From here, Gary has three options – Option number one: Gary pays the full amount by the due date and avoids paying interest. His credit card balance is $0 once again.

Good for Gary! Option number two: Gary pays the minimum amount by the due date and pays interest on the remaining sum. Not great, not terrible. Option number three: Gary knows no fear. He doesn’t even bother to pay the minimum amount by the due date. And now, he has to pay both the interest and the late fee. Bad move, Gary! As you can see, the first scenario is the only one in which Gary doesn’t lose any money.

But it also seems kind of pointless. If you already have the cash, why use a credit card? Well, most avoid credit card users are actually “number one Garys”. This is what we mean when we say “using a credit card as if it were a debit card.” You only spend the money you either have now or will definitely have by the due date.

So, why do they take this extra step instead of just using a debit card? Because it’s the fastest way to build a credit score. People with good credit scores can get loans at favorable interest rates. They also pay less for insurance and get better cellular plans. There are other benefits, too. For instance, when you use a credit card you can earn cash-back rewards on activities like traveling, dining out, and staying at hotels.

Remember, the cleverest credit card users pay off their balance in full every month. It’s the only way you can make credit cards work for you and not against you. So, here’s the bottom line: if you decide to use a credit card instead of cash, only use it to buy things you can already afford. Use this power wisely, and with practically zero effort you’ll raise your credit score while also enjoying perks like cash-back offers and travel rewards.

Sounds easy, right? It might even make you wonder why those credit card companies are so generous… The truth is, fewer than half of us cardholders use our credit cards to their own advantage. The rest get themselves into debt. It’s so bad that the average credit card balance in America is now$6,028. And unpaid credit card balances have a nasty tendency to build up.

That’s why the total national credit card debt has grown to more than one trillion dollars. We collected more gloomy statistics that you can find in the description below! But when did this trillion-dollar journey begin? Let’s go back to the year 1949 – to manhattan restaurant where Frank X. McNamara, head of Hamilton CreditCorporation was having dinner with a couple of business associates.

Frank here had changed his suit before going out and didn’t realize until after dinner that he’d left his wallet at home. Awk-ward! After this embarrassing little incident, Frank was inspired to make sure this would never happen again and a year later, he and his buddies created Diners Club – a card system where each member could charge expenses like dining, hotels, and gas to their card for $3 a year, plus 7% interest on every transaction.

Many restaurants in LowerManhattan agreed to sign up to the system, and by 1952, the number of Dinersmembers had grown from 200 – mostly the founder’s friends – to 42,000 members. Although it wasn’t exactly the same as the credit cards we use today, DinersCard is the forefather of today’s most popular payment options, including Visa and MasterCard.

Since the good old days, public opinion has swung heavily against the banks. But is this hate really justified? After all, it’s not like they made us get a credit card, let alone use While this might be true, it’s not the whole story. Our negative attitude actually originates from the belief that banks do something much more subtle…

They NUDGE us. You see, we’re trained to get used to debt from a very early age, and we’re not just talking about student loans. Minors, for example, are encouraged to join their parents’ credit card account so they can start building their own credit score early, because, if your credit score is zero, the bank won’t loan you any money to buy a house or a car. Yes, that’s right: you can’t get a loan if you’ve never owed money.

It’s completely counter-intuitive. Many financial experts, some of whom are millionaires, say this is an artificially created necessity. And while it might not make much sense, it definitely makes dollars. According to this theory, banks do everything they can to make the general feel like it’s not the only natural to her money – it’s unavoidable.

This is why people think banks are evil, scheming institutions that earn money by exploiting people’s weaknesses. But who compels us to spend so much borrowed money when we know we’re going to regret it later? No one, really. It comes to us naturally. Behavioral economists use a term called ‘the pain of paying’.

It’s that cringey feeling we get when a dollar bill leaves our hands never to return. It might sound weird, but paying for something with cash actually activates the same part of the brain as physical pain. When we pay with a debit card, the intensity of this feeling is significantly lower. But it’s still there. We feel that same sense of loss every time our bank balance drops.

But, with credit cards, these feelings aren’t activated at all. Why? Because there’s such a large gap between the purchase and the payment. We don’t feel like we’re really spending money, because we aren’t. At least not until the end of the month. As a result, we tend to spend between 12and 18 percent more with credit cards than we would with cash. Customers are well aware that they’re playing with fire by using credit cards irresponsibly.

But they still do it. And to make matters worse, credit card debt is just about the worst kind of debt you can have, thanks to its sky-high interest rates. Now, we still haven’t answered the question of who’s to blame for our 13-figure national credit card debt.

Or have we? They say it takes two to tango. Bankers are leading the dance and it’s up to you whether or not you want to follow. Let’s take a quick look at the situation. Credit card companies constantly study consumers’ behavior and use those findings to encourage people to overspend.

They also make minimum payments so low that it’s easy to postpone paying off our balance. After all, interest charges are credit card companies’ main source of income. The longer they keep their customers in debt, the more they earn. It’s a simple equation. When you think of it like that, it’s not surprising that banks use these disconcerting psychological tricks to influence customers’ behavior.

But did you know that someone else has the power to control customers’ behavior? Customers! The truth is, there are two sides to every coin. While credit cards can improve the quality of your life, they can also ruin it. One thing’s for certain: they’re not for everyone.

You have to be disciplined to build your credit score using a credit card and if you’re not the type, you should try another approach. Sure, that might not be as fast, but it’s better to be safe than sorry. Perhaps the scariest thing about all of this is that we no longer object to paying more, as long as it feels like just another bill.

But if we’re not careful, we could end up paying that bill off for the rest of our lives. The only way to break this cycle is to change the way we view credit card debt. For instance, well if someone told you that you could stop paying your electricity bill for good?

Would you pay a little extra for a few months knowing that, once you paid it off, you’d never have to spend a dime on electricity again? Of course, you would! This is exactly the mindset you should apply to your credit card debt.

Banks and credit card providers will continue to hone their psychological tactics. They’ll entice you into overspending, just as they always have. And our flabbergasting national credit debt will continue to grow. That’s why it’s up to you to avoid becoming just another number among the 1 trillion.

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