Nowadays, I rarely carry cash on me, and on the few occasions when I do, it is usually only about $10. I don’t like having cash. Not only is it dirty, but it also takes up a lot of space. What’s more, if you lose it, the money is gone forever (immediate flashback to the time when I was in middle school, on a field trip, and a $20 bill slipped out of my back pocket and into the toilet, and I helplessly watched that fortune of a sum swirl into the abyss).
Of course, back in middle school, there was no way to avoid carrying and paying in cash. I did not have a bank account, let alone a credit card. I opened up a student bank account with Bank of America during my senior year of high school. I believe it was called a “Campus Edge account” (?) back then. It made sense to me to open up a checking account at that time. Not only did I have a stable part-time job as a volunteer coordinator at The CUREchief Foundation (thank you Sandra for this opportunity!), but I had also earned some money from my Bel Canto Quartet gigs (I was the second violinist), and my private tutoring job at The Learning Company. Plus, I had received a few scholarships to be used towards college expenses. That senior year, I had saved up quite some money for an 18 year old.
My parents were the ones who encouraged me to open up a checking account to put all of my money in one place. They brought me to one of the Bank of America branches, and I remember laying out on the table all of my various checks, an envelope of bills of different denominations, along with some coins. I was excited to have someone help me consolidate all of these forms of money. I was even more thrilled about having my own checking account--- wow, I thought to myself, I’m becoming a legit adult.
Image not my own; from Shutterstock.com
Holding a checking account requires some responsibility, however. I quickly learned the importance of reading the brochures/handouts provided with opening any account, along with all of the fine print that is easy to overlook. For one, my checking account would come with monthly maintenance fees if I did not maintain a certain amount of money in the account. I would be charged a fee for withdrawing cash using my debit card at a non-Bank of America ATM. And, if I ever wrote a check out for more money than I have in my account (even if it was an honest mistake on my part), I would be fined a fee for a bounced check. Fortunately, because I had read the fine print, I was able to avoid all of these scenarios.
Before I get to elaborating on why I rarely pay with cash, let me go over the very basics of having a checking account for those readers who are not yet in this point in their life. A checking account is a specific type of a bank account that you can open at just about any age. If you are under the age of 18, however, I believe you would have to have an adult (parent or legal guardian) be the joint account holder. Since I was 18, I opened up the account under my own name, without any supervision by a parent. You can open up a checking account with any bank institution. I chose Bank of America because 1) my parents had accounts with it so super easy to transfer funds, 2) Bank of America has ATMs everywhere across the country and 3) I did not know about any other bank. You will need to provide some personal information when opening up an account, such as your social security number (which is a way to identify you and track your working status; more about this in a different post), your date of birth, a photo ID (like a driver's license or passport), etc. The requirements may be slightly different today.
A checking account is like a virtual bank account from which you can withdraw money that you have and deposit money that you earn whenever you want. With a checking account comes a plastic card called a debit card. Treat it like cash, although, if you lose it, you won’t lose all the money on that card if you report the loss in a timely manner. And if the card was stolen and used by an unauthorized person, you won’t be responsible for the charges if you report the incident ASAP (I’ll share more another time, because my wallet did get stolen in 2017 and over $9000 was charged without my authorization). If you get paid by check, you can deposit the money by going to a bank, or an ATM, or scanning the check with your phone (if your bank has a mobile app for this). Then your money is safe, and you don’t have to worry about losing that check. Please note that some checks even have expiration dates, so don't hold on to them forever! If you need cash, you would go to the nearest ATM, insert your debit card, and withdraw the amount you want, in multiples of $20. If there is no ATM near you, or you cannot find an ATM that is owned by your bank, you can also get cash by going to a grocery store, buying a cheap item, paying with your debit card, and when you insert your card, you would select “YES” for “cash back?” and indicate the amount you need. Then the cashier will hand you the amount in bills. It's that easy! I’ve done this on several occasions and it has saved me lots of time!
To access your checking account via your debit card, you will need to enter your personal pin number. This is something you setup when you open up your bank account. Keep this pin number safe! At most stores, when you pay with your debit card, you will need to enter that pin number to withdraw funds from your account. At some stores (like at Walmart, darn you!), no pin is needed to withdraw money. That means, anyone with your debit card can swipe it and spend money, courtesy of you. I don’t know why there is such variation but I don’t like it. It's frankly quite stupid.
A debit card is not the only way to access money in your checking account. You can also use personal checks. When you open up a checking account, you will receive a complimentary checkbook with approximately 25 checks (or is it 10 now?). If you would like more, you will need to order them for a fee. In my younger years, I did not find the need to pay for additional checkbooks, because there were few instances when I needed to pay with a check. However, once I started working full-time and renting an apartment, it was necessary (and more convenient) to be able to pay with a check. If there is interest, I’m happy to go into greater detail about when to use a debit card vs. a check, along with how to properly write a check, and how to deposit a check.
On the same day that I opened up a checking account and received my debit card and checkbook, I also opened up a credit card account because I was eligible to do so at age 18. If you are not yet 18, you can become an “authorized user” of a parent’s credit card account. This is a fantastic alternative and can help you build up your “credit history” and increase your “credit score,” which is basically like a GPA for adults that describes how financially responsible you are. Many institutions will use your credit score to determine whether they will lend you money when you need it (such as when buying a car). Furthermore, believe it or not, in order to rent an apartment nowadays, your credit score will often be considered! If you don’t have a credit score, that is because you have no credit history, and having no credit history is due to you not having a credit card. There is no credit history associated with a debit card, since you are not borrowing money. With regards to cash, there is no trace of a history, which can also be good in certain cases, but that's another story...
When you open a checking account, you receive a debit card. Likewise, when you open a credit account, you receive a credit card. A credit card looks nearly identical to a debit card, except that it does not say “DEBIT” along one of the edges. You can open up a credit account at nearly any bank or financial institution. You can also apply for them online, but there is no guarantee that your application will be accepted. Why is that? It comes down to the main difference between debit and credit. Debit deals with your own money, whereas credit deals with money that a financial institution will lend to you, with the expectation that you will pay it back, often with a fee called “interest” on top of what you owe the institution. For example, if you borrow $10.00 and the annual interest rate 12%, you will need to pay back $10.00 (if paid in full within the month) or $10.10 (if paid late by one month, thereby making you responsible for 12%/12 months = 1%/month interest). If you continue to delay paying back the amount you borrowed, you will continue to be charged 1% each month. What is different, however, is that the interest is now of the new total, not the original $10.00. The idea is, the amount of money you owe will add up if you don't pay back on time, especially if you swiped that credit card for hundreds of dollars. Therefore, if you are not a financially responsible person, then it is very likely that your application will be denied, because the bank has little confidence in your ability to pay the money back (based on your past history of credit card transactions and payments). We can discuss credit cards in greater detail at a later time.
So, you ask, how do I show that I am a responsible human being when it comes to managing money? One way is to show that you are earning money in the first place from a job. I had several jobs in high school, and consequently, several paychecks. Because Bank of America knew I had money that I can use to pay it back, they accepted my application for a credit card, and allowed me to use that card to borrow money from the institution. If you don’t have a job, not to worry! As I mentioned earlier, you can ride on your parents’ coattails and be an authorized user on one or more of their credit accounts. If your parents have a good credit history and a high credit score, then those benefits will automatically transfer over to you and become part of your credit history since your name is now under their account. The earlier you have a credit account (your own or under your parents), the longer your history will be, and the more and better offers for credit cards you will receive in the future. This is great training, because you can practice handling a credit card, make payments with it, your parents will pay the credit card bill (because that can be scary the first time you do it), and you pay them back in cash or something. As an authorized user, you are not fully responsible for managing that account. If this is all very confusing to you, don’t worry. I realize now that this post is getting longer than I had intended and I promise to delve into individual pieces more in future posts. Consider this an overview post---a post to get you thinking about different aspects of money management and to expose you to some new terminology in the world of finance. I genuinely believe that the earlier you are exposed, the better off you will be. I am no financial expert, but I have spent a lot of time learning on my own, out of need, to inform my decisions.
Finally, to answer the question of why I pay for things with my credit card, and not with my debit card or with cash… it all boils down to that credit score and my credit history. At some point in the future, I will want to own my own place. Houses, however, are expensive and there is no way I can pay for the entire sum out of pocket. That means, I will need to borrow money. My parents don’t have that kind of money (parents are busy enough trying to save up for their own retirement!), and I don’t have super wealthy friends from whom to borrow tens of thousands of dollars. So that means I will need to turn to a bank or another financial institution. No bank in its right mind would lend me $300,000 if I don’t have the proof that I would be willing to and able to pay that money back. It doesn’t matter how high of an interest rate they charge; if I don’t have money or I don’t have a history of paying back money, they won’t lend me that amount, period. So then, I would be stuck, and no house for me. No car for me, either, if I want to purchase a new car in the future. To prove to banks that I am financially responsible, I need to show them I have a reliable credit history and a high credit score. I can do so by using my credit card to pay for everything I possibly can (basically borrowing money), and paying that money back on time so that I don’t incur a fee (and to show that I am responsible). Does this make sense?
Quick check (comprehension check) for everyone:
Let’s say you go to the grocery store, and you are buying a pack of gummy bears for $1.25. Let’s also assume that the grocery store will not charge you a fee for using your credit card to pay for anything below $10. Sure, you can pay with cash, and sure, you can swipe your debit card at the register. After all, $1.25 is nothing! Why, according to the previously described content, should you reach for your credit card instead?
If you feel confident about your answer, then mission accomplished, and my intro lesson has been successful. If you are not sure how to answer this question, please leave a comment with what you have in mind, and I will gladly give you feedback and guide you!
Thanks so much for reading! If the content of this post was too simple for you, don’t worry, I will move on to “advanced money matters” soon enough. Just want to make sure we all have the foundation down :)
Warm regards,
Catherine