Take a look at these. Sure, they look the same but this one's a credit card, this one's a debit card. So what the heck is the difference? >> Well, debit cards work. By drawing money directly from an associated checking or savings account to pay for transactions. There is no monthly bill to pay. Instead the money in your account is subtracted or debited every time you make a purchase. This way of spending makes transactions very easy to track. Rather than accounting by hand and trying to match that to a monthly statement. Most banks offer online features to directly monitor how much money there is available in your account. And what transactions have taken place. For example, this is my account page with Chase. Here I can check the balance of my checking account linked to my debit card. And track the expenses associated with it. It's like a live, updating bank statement. I can see instantly how much money I have to work with when creating a budget for myself. I can also go into settings and have the bank e-mail me. If there's a large transaction or if the account balance gets beneath a certain point. With a credit card, the bank lends you money for each transaction. Then you pay them the outstanding balance at the end of every month. If you can't pay all of it, the remaining balance carries over to the next statement. And you are charged interest for the remaining money that the bank has lent to you. Often, the rate you are charged is called the APR, or Annual Percentage rate. The APR is the combined interest and fees you would expect to see over a one year period of a loan. As this handy graph from Wikipedia shows, if you were to borrow $100 over the course of a year. You would add up the fees and compounded interest of paying the loan back and you would get the APR. In this case, it's 49%. Now, a quick word on the concept of credit. It's called credit because it adds on to a balance of what you owe the bank. Rather than subtracting or debiting straight from your account. Institutions keep track of your history with paying these balances. And compile it into a credit report which has a score associated with it. It essentially quantifies your past history in regards to paying debts on time. And how able you are to take on new debts. Taking out larger lines of credit, i.e, loans, and paying them off sooner and on time give more points. Your credit score is really important, because it is used when you apply for most lines of credit. As a general rule, the higher your credit score, the less risk the bank sees you as. And the APR you pay will be lower. On the other end of things, a person with a lower credit score is seen as a higher risk to lend to by institutions. So he or she would get a higher rate to compensate for the perceived risk of default. Where default means you don't pay the loan on time, or at all. We'll talk more about credit reports later in the course. But I wanted to show you how they affect payments for a credit card. [MUSIC]
