Why Didn't I Learn This in School: Credit, Get it?

Credit or debit? That's the big question.

So it's time to get your first, real-life credit card. Those bills aren't just for your parents to worry about anymore.

But don't panic -- we're here to help. We'll go over debit cards vs. credit cards, and good credit vs. bad credit.

The little pieces of plastic in your wallet can have a huge impact on your financial future, so it's crucial to understand what each card means -- and when to use them.

SEE MORE: Best cash back credit cards for holiday shopping

Let's start with debit.

A swipe of your debit card deducts money straight from your bank account.

Use your debit card to withdraw cash from the ATM, and for smaller purchases like your morning iced coffee or that salad you want for lunch.

Now let's dive into credit.

Credit cards allow you to use the bank's money -- not your own. How cool is that?

Well -- there's a catch, of course.

It's way easier to spend lots of cash if the money doesn't feel like yours. Banks capitalize on this concept by charging you interest rate.

Interest rate is the price you pay back the bank for borrowing money.

Take a look at some of the best credit cards available:

Best overall credit cards
See Gallery
Best overall credit cards

NextAdvisor has sorted through major mass-market credit cards and reviewed each to help find the best for certain needs.

Check out the credit card compare tool on AOL Finance for specific card features.



American Express Blue Cash Preferred

(Photo courtesy American Express)


Citi Diamond Preferred Card

RELATED: Compare this card to others

(Photo courtesy Citi)


Chase Slate

(Photo courtesy Chase)


Chase Sapphire Preferred

(Photo courtesy Chase)


Discover it Cash Back Match

RELATED: Compare this card to others

(Photo courtesy Discover)


Discover it for Students

(Photo courtesy Discover)


Ink Cash Business Credit Card

(Photo courtesy Chase)


Blue Cash Preferred Card from American Express

(Photo courtesy American Express)

Browse even more credit cards and find the best fit for you on AOL Finance's credit card compare tool powered by NextAdvisor.

The average interest rate for most cards is approximately 13.66%, but the maximum allowed by law is a whopping 29.99%. Yikes.

Let's say you buy a $300 pair of jeans. You could be charged over $40 of interest if you don't pay the initial $300 off -- so it's best to avoid that.

However, there are tons of perks that come from using your credit card, including extended warrantees on large purchases, anti-fraud protection and airline miles.

The big lesson here? Pay off as much -- if not all -- of your bill each month. By doing so, you're not only saving money, but also building credit. Monthly, on-time payments will make your credit go up.

But don't let your card sit on your wallet to avoid getting billed. It's actually good for your credit to keep charging -- as long as you pay it off!

10 purchases you shouldn't make with a credit card
See Gallery
10 purchases you shouldn't make with a credit card

#1: Household bills

If you are already cutting it close for the month, you may be tempted to use plastic to pay the utility, cellphone or cable bill. But if you’re not paying off your full balance each month, the interest you will be charged makes those monthly bills even more expensive.

Photo credit: Getty

#2: Cars 

Car dealers often don’t allow credit card purchases, or may limit the amount of the purchase price you can put on your card. Dealers don’t like credit card payments because they have to pay the 1 to 3 percent fee the card company charges to process the transaction.

You could exercise the cash-advance option. But you’ll pay a fee and a higher interest rate. Also, you won’t get a grace period on the interest — it will begin to accumulate right away.

Instead of using a card, go to a credit union or bank to get financing approved at a reasonable interest rate before shopping for a car.

Photo credit: Getty

#3: Student loans

If you can’t afford to pay your federal student loans, you have options. They include an income-based repayment plan, deferment, forbearance and possibly loan forgiveness. Take a look at “How to Get Free Help With Your Student Loans” to learn more.

Paying your student loan debt with a credit card increases the amount of interest you’re paying on the debt. Even if you have a zero-percent introductory credit card offer, it will expire in time.

And while the federal government will accept a credit card payment for loans in default, many student loan servicers won’t allow this form of payment.

Photo credit: Getty

#4: Retail therapy

Think a new purchase will cheer you up? Perhaps. But remember that cash is king if you choose this mode of “therapy.” Use cash, and you won’t let your credit card balance spiral out of control.

Photo credit: Getty

#5: Medical bills

If you use a medical credit card available through your health care provider’s office to pay bills, be careful to read the fine print about your obligations.

Also consider steps you can take to reduce health care costs. See “10 Ways to Fight High Medical Bills.”

Photo credit: Getty

#6: A night on the town

Handing your credit card to an unscrupulous waitperson equipped with a skimming device isn’t your only worry. If you’re out on the town throwing back drinks, it’s easy to run up a tab you can’t afford.

So when painting the town, it’s best to pay with cash.

Photo credit: Getty

#7: Big-ticket items you can’t pay off immediately

Credit cards offer great purchase protections and should be used for many big-ticket purchases. But buying something on credit when you can’t afford to pay it off right away isn’t smart.

Photo credit: Getty

#8: Credit card payments

You can’t charge your monthly credit card payment on another credit card. But perhaps you’ve been tempted to use a cash advance from a credit card to bolster your checking account so that you can pay other bills.

We’ve already explained the folly of cash advances. Your credit card is not an ATM and should not be used as one.

There are real benefits, however, to transferring high-interest credit card debt to a new card with a generous zero-percent balance transfer offer. Just be aware of the balance-transfer fee and find out how long the offer lasts.

Photo credit: Getty

#9: ‘Sale’ items

Convinced that you might miss out on savings if you don’t purchase a specific item on sale right away? That’s one of the warning signs of an impulse buy.

Wait a day and think about whether you really need the item. Nine times out of 10, the answer will be “no.”

You aren’t saving money by spending it for something you don’t need.

Photo credit: Getty

#10: Unsecured online purchases

When shopping online, make sure the web address has “https” at the beginning. If it doesn’t, that’s your cue to take your online shopping elsewhere.

In fact, do your homework before purchasing anything online to make sure a company is reputable and not the source of many consumer complaints.

Which purchases do you refrain from making with your credit card? Let us know in the comments below or on our Facebook page.

Photo credit: Getty


So what does it mean to have good credit?

A good credit score shows the bank you have good credit management, so you're in a better position when you're buying those big-ticket items in the future, like a car or a house.

The big takeaway? Both kinds of accounts have their advantages, but knowing which cards to use -- and when -- can make a huge impact on your financial future.

Read Full Story

Can't get enough personal finance tips?

Sign up for Finance Report by AOL and get everything from consumer news to money tricks delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.