This post was originally part of my credit card advice page, but I thought it was so important that I made it into a separate post.

If you are just starting out with debit and credit cards, you should always, always go for a debit card first! Everyone wants a credit card. They are shiny. Some, like the American Express Platinum Card and Chase Sapphire Preferred and Reserve cards, are made of metal. Unlike cash or debit cards, you don’t have to think about paying off your credit card right away.

The Case for Debit Cards

Putting it simply, debit cards take money directly from your bank account during a transaction. You can easily keep track of what you spend because after each purchase, there is less money in your checking account.

For those starting out with budgeting or have never had a credit card, use a debit card for a few months first. Track your spending habits and make sure you are not overspending compared to your monthly income.

The main downside of debit cards is that you are mostly stuck with bank debit cards with fewer perks and protections versus those offered by credit cards. Additionally, there are often no rewards or cash back. You may be on the hook for faulty transactions you didn’t make. You also cannot build credit by using your debit card. All of these caveats aside, it is best to start off using a debit card to gauge your spending habits since you are more likely to spend more with a credit card.

The Target Red Card debit card (non-affiliate link) is a great bank debit card alternative with a perk that gives you 5% off all Target transactions. I recommend this over the credit card version, and you should get it even if you already have a cash back and/or a rewards credit card if you shop regularly at Target. Otherwise, feel free to stick with your traditional bank debit card.

The Case for Credit Cards

Think of credit cards working on an IOU basis. You use your card for a purchase with a promise to pay the bank back at a later time (usually at the end of every month or at the end of your credit card cycle). rCedit cards will put each transaction you make into your account, and you’ll pay it off a few weeks later once your bill is due. You can pay it off immediately if you wish, but it takes a bit more effort.

Credit cards can be dangerous because you don’t have to think about the money coming out of your account instantly. These type of cards tap into our most basic instinct of impulse buying, and make us think “oh I’m not taking this directly from my bank account, I’ll just put it on my credit card!”

If you think like this, get carried away while shopping or do not have good self control while spending, DO NOT get a credit card. That’s right. Many blogs like to promote credit cards as a means to “free” or luxury travel, which is mostly true if you use the cards correctly and pay them off with no interest. But the banks are betting you won’t pay off your monthly balance on time. If you haven’t figured out your budget or know you’ll put that $600 Bloomingdales jacket on your credit card and think about paying for it later, stick with cash or a debit card.

Credit cards offer great perks like cash back, points or other rewards. They also offer protection if a fraudulent purchase is made on the card, and many offer great travel protection benefits (Citi recently eliminated these on many of their cards). I recommend starting out with the Citi Double Cash Card (non-affiliate link) for those who don’t want to deal with points or the Chase Sapphire Preferred (non-affiliate link) for those who travel at least a few times a year and want points instead of cash back to use for travel.

Readers of this blog should be smart and responsible consumers and beat the banks at their own game. That means not keeping a balance on your card and paying it off every month while keeping your spending in check (use an app like Mint, see this blog post).

Be sure to track your spending on an app or manually!

APR: What is That?

Ever go to a credit card page and wonder what those percentage numbers are? This is the Annual Percentage Rate, or APR. It’s a nice way of confusing consumers who just want to sign up for the card and don’t realize what they owe the bank if they miss a payment or don’t pay in full each month. That weird percentage—often 16.8% or something like that—is how much you will pay in interest YEARLY if you don’t pay your card statement in full. The yearly part is important because your monthly total is only subject to part of that total APR.

I’m going to explain APR in more simple terms, but let me reiterate: pay your balance in full each month.

Let’s keep it simple. Say you spend $2,000 on your card each month, and that is your total monthly balance. If you pay the balance in full and on time, you owe the bank nothing. If you decide to skip that month, the APR will be divided into something called DPR, or a Daily Public Rate. The DPR is calculated by dividing your APR by the amount of days in the month you owe.

DPR Calculation

In the example above, if you have to pay $2,000 on your card and have a 19% APR, your DPR for a given month will be 1.56%, so you’ll have to pay $31.2 in interest if you decide to skip that payment. $31 doesn’t sound like much, but keep in mind:

  • That number will compound and grow if you continue to not pay it off
  • Not paying your balance in full can significantly impact your credit score in a negative way
  • That number mitigates any cash back or points you would earn for that month (you’d get $40 in cash with the Citi Double Cash Card, for example, but would end up with only $8.80 if you had to pay interest. Moreover, the cash back rules for the Citi Double Cash card is 2% if you pay your card off in full, so you’d end up owing $11.20 with 1% cash back)
  • The APR for your card can fluctuate throughout the year and be higher than 19%

The good news is that if you pay your card off each month, you can ignore all of these numbers because the APR won’t apply to you. Only put money on your credit card that you can pay off. It’s that simple.

What about cards with 0% APR for a year? Ignore that too. Unless you want to finance a big purchase on a credit card (which I do not recommend), these cards do not offer a lot of other benefits, and there will be hidden fees along the way. Plus, holding a balance on your credit card hurts your credit score. Be a smart consumer and say no to these cards as well.

Questions? Comments? Be sure to e-mail me or post below!

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