There has been much debate about whether debit or credit cards teach young adults about good financial habits.
Debit cards allow young adults to carry less cash and teach them to use only what is in their account. Credit cards, on the other hand, allow you to establish a credit history and increase your credit score. This is important if you later buy a high priced item like a home or car or start a business. However, both payment methods have drawbacks, so we asked experts to consider how best to use these tools for young people.
Edited an excerpt from a discussion with Lisa Bedell, operations manager for the financial expert team at Monta Group Investment Advisors LLC in St. Louis. Kelly Jackson, partner and financial planning director of Fish & Associates in Memphis. Alex Klingelhofer, wealth advisor to Executive Wealth Advisors of Oklahoma City.
where and what to use
WSJ: Is there anything that youth in particular should be using a debit card for, and how should they use it? They?
Jackson: With debit cards, young people can learn to process their cash flow, plan spending and budget. Getting started with a debit card is a good first step towards good long-term financial habits, as good cash flow provides a solid foundation for any financial plan. You don’t build credit that way, you only deal with cash, but I don’t think that’s a downside. More as a first step in the financial roadmap.
Mr. Bedel: Young people need to use debit if they are having difficulty managing their spending and need help keeping their budget. Unlike the higher credit limits offered by credit card lenders, if you don’t have cash available in your account, you won’t be able to use it.
Klingel Heifer: For things like rent and utilities, it’s probably best to debit these payments directly from your bank account. That way, you pay your bill before discretionary spending. For many people, the higher the balance in our bank account, the more we can spend, even if those dollars are allocated to invoices. Making these payments earlier makes it a little easier to know what you can use and resist the temptation to spend more than you can afford.
WSJ: Are there any drawbacks for youth using debit cards?
Mr. Bedel: Lack of credit history, little or no cashback benefit, and increased liability for users in the event of card theft and misuse. For debit cards, it’s also a good idea to set up alerts to keep track of your balance before Fancy Dinner Day. Similarly, checking account alerts like low balance notification and high transaction notification can help you understand potential cash flow issues. Also, pay attention to the check statement or set a security alert for all debit transactions.
Klingel Heifer: If you are using debit only, you will not be able to build a stable and good history of using your credit responsibly. This can be a problem when buying a home or making other big purchases. The lack of credit history means that the rates for these items that almost everyone has to lend are very high.
WSJ: What is the biggest misconception young people have about using debit?
Mr. Bedel: In my experience, there is concern that debit is not “safe” from the point of view of fraud. It is true that you are more responsible for fraudulent transactions. However, several security features provided by banks to validate transactions make it easier to use debit to prevent this from happening. Similarly, users need to pay more attention to checking available balances, but many banks offer an easier way to do this in mobile apps than credit cards. This has the advantage of being able to track expenses.
share your thoughts
How do you use credit and debit cards? Join the conversation below.
Klingel Heifer: Most people think that with a debit card, you can only use what you have in your bank account, so you won’t have any problems. But life is unpredictable. For months now, we have been really lucky and our checking account is well balanced. In other months the car’s A/C breaks down and needs to be fixed. Ultimately, having a backup credit line or other source of temporary liquidity is almost always a good financial decision, as cash-in is not the same as cash-out.
WSJ: Do you agree with the anti-credit theory for young people, and if not, how youth in particular should use credit?
Jackson: There are many setbacks that people can face with low credit score and bad credit history. More and more millennials are marrying later than previous generations and early families, but they still have many traditional economic goals, such as owning their own homes, and many of them. Has an incredible entrepreneurial spirit. If you don’t have the credit status to get a loan, this can be a big hurdle. You may find that you pay hundreds or thousands in interest some other way.
Klingel Heifer: Young people need to spend credit on almost everything they own. Establishing a system to make sure you spend on credit and pay invoices at the end of the month is a great way to build a great money habit. If excessive spending is an issue, it’s okay to ask the bank for a lower limit. They will almost always say so.
Mr. Bedel: Credits shouldn’t be the enemy as long as you know how to use them responsibly. Young people need to access credit by paying one card on each statement, primarily to build a credit history, ideally a good credit history.
where to start
WSJ: How should young people begin building credit and good credit practices?
Jackson: I recommend that you don’t use your credit card to exceed the amount you can pay each month, so if someone has the first card, they will have a small invoice (mobile). You call it, utilities , etc.) to ensure automatic payments, so that you don’t get late payments or get interest. Another option for young adults is to add them as authorized users to their parent’s credit card account. This creates open communication about best practices within the family and provides constant monitoring and guidance as the child learns.
Mr. Bedel: Store credit cards such as Macy’s and Target are generally more tolerant of lack of income and past credit history and often accept a smaller number of new users to begin with. This can be a component of starting your credit history before applying for a credit card with more comprehensive benefits.
WSJ: What is the biggest misconception young people have about spending credit?
Mr. Bedel: In my experience, the biggest misconception is that users don’t have to stick to their budget if they have a credit card. It can be easy to make big purchases with a credit card, forgetting that someday you’ll need to pay off the invoice. The concept is explained when Schitt’s Creek Millennial David Rose doesn’t understand that the expensive eye creams he receives from France will eventually come back into his credit card bill. ..
Klingel Heifer: The biggest misconception is that you have to spend a lot or focus on “building credit”. It takes time to build credit. Banks want to know that your book has a high risk of appearing for years. If you make a purchase on your card over the years and always pay off the full amount, you’ll get great credit much faster than you might imagine.
Vinokur Munk is a writer in West Orange, NJ. His contact information is [email protected]
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