Lesson 2 Credit Cards, Interest and Debt

Summary

In this financial literacy lesson, we explore the importance of understanding interest, both positive (earned) and negative (paid). The lesson highlights how credit cards, with high-interest rates, can lead to debt and financial strain. The dangers of credit card debt are discussed, emphasizing responsible spending. Alternative solutions, like Starfish, a digital payment platform that helps users avoid transaction fees and earn cash rewards, are introduced. The lesson encourages responsible financial practices, offering practical advice on managing credit and avoiding debt traps, while promoting smarter ways to pay and earn.

Takeaways

• 😀 Credit cards allow you to borrow money to make purchases, but if not paid off in full, they charge high interest on the remaining balance.
• 😀 Positive interest is earned when you deposit money into savings accounts, helping your savings grow over time.
• 😀 Negative interest, often associated with credit card debt, is something to avoid as it increases the amount you owe over time.
• 😀 Interest rates on credit cards can be very high, with average APR rates around 19%, making debt difficult to pay off once accumulated.
• 😀 Credit card companies make billions in profit each year from interest and late fees, contributing to widespread consumer debt.
• 😀 Debit cards are safer than credit cards because they only allow you to spend money you already have in your bank account, reducing the risk of debt.
• 😀 Debit and credit card transaction fees contribute to higher prices for consumers, with merchants passing these costs onto customers.
• 😀 Starfish is a digital payment platform that allows consumers to avoid credit card processing fees and earn rewards by using digital gift cards at participating merchants.
• 😀 Using Starfish helps consumers save on transaction fees, earn instant cash rewards (up to 20%), and avoid debt accumulation associated with credit cards.
• 😀 Managing your money responsibly, avoiding high-interest credit card debt, and using tools like Starfish can help you maintain better financial health and avoid falling into debt.

Q & A

What is the main difference between savings and checking accounts?

Savings accounts are designed to store money and earn interest over time, while checking accounts are used for frequent transactions like deposits and withdrawals. Both serve different purposes, but savings accounts are usually more focused on saving and earning interest.

What is interest in the context of finance?

Interest refers to the amount of money, usually in the form of a percentage, that is either earned or paid. In savings accounts, you earn interest as a reward for depositing money, while in loans or credit cards, you pay interest on the money borrowed.

What is the difference between positive and negative interest?

Positive interest is when you earn money on your savings or investments, typically from a bank. Negative interest, on the other hand, is when you owe money on borrowed amounts, like with credit cards or loans, where the interest charges add to the debt.

Why is it important to be on the 'correct side' of interest?

Being on the 'correct side' of interest means earning money from your savings rather than paying interest on borrowed money. This is crucial for financial fitness, as it helps you grow your wealth instead of losing it to debt.

What is debt and how does it relate to interest?

Debt is money that someone owes to a bank or another party. When you borrow money, whether through a loan or a credit card, you must pay back the original amount plus interest. This interest increases the total amount you owe over time.

How do credit cards work and what are the risks involved?

Credit cards allow you to make purchases without immediate payment, essentially lending you money to cover the cost. The risk comes from the high-interest rates charged on any balance not paid off in full. This can lead to accumulating debt quickly if not managed responsibly.

What happens if you don’t pay off your credit card balance in full?

If you don’t pay off your credit card balance in full, the remaining amount will accrue interest. For example, with a 19% APR, a $40 remaining balance will cost you an additional $7.60, making your new total $47.60.

How can high interest rates on credit cards affect your finances?

High interest rates on credit cards can quickly escalate the amount you owe, as they apply to any unpaid balance. This means you can pay for an item, but the longer you take to pay it off, the more expensive it becomes due to interest charges.

What is the Starfish platform, and how does it work?

The Starfish platform is a digital payment system that allows you to make purchases without the typical credit card processing fees. By using Starfish, you can transfer funds from your bank into a digital wallet, and then convert that into gift cards for use at participating retailers. This system also rewards users with cashback on their transactions.

Why should consumers consider using Starfish instead of credit cards?

Consumers should consider Starfish because it eliminates transaction fees and offers instant cashback rewards. Unlike credit cards, Starfish does not involve interest charges, which means you can spend without worrying about accumulating debt.