This video is a follow on from the previous video which dealt with cash and digital currencies. If you haven’t seen that video, I would recommend you doing so before watching this one.
In this video, the focus is going to be on Debit cards and Credit cards and the Money Supply.
Debit cards
Debit cards can be regarded simply as a means of paying for products – they are a payment system. You buy a product online, or in a store, and the funds are debited directly from your accounts - hence the name. It’s all fairly straightforward stuff.
Debit cards are convenient and relatively safe. They are easier and safer than carrying around cash – especially with regard to big transactions. And the new contactless system now in operation makes paying for products even easier.
Credit cards
Let’s turn our attentions now to Credit cards.
Credit cards and debit cards might appear the same, but they operate in different ways.
Both Debit cards and Credit cards can be regarded simply as a means of paying for products – they are each payment systems. According to Investopedia a Credit card is … “a tool to use in place of a cheque or cash”. But, Credit cards are not just another form of payment system. There is more to them than this.
Debit cards enable people to pay for goods by debiting the funds directly from their accounts. By contrast, when you use a Credit card, you are basically borrowing currency from the Credit card company – be that a bank, or otherwise.
The Credit card company is essentially extending a line of credit to the customer. Maybe I’m wrong in saying this, but my guess is that this is the reason why they are called Credit Cards.
The amount borrowed, the Credit card balance, can therefore be regarded as a short term loan made by the Credit card company to the holder of the card.
And importantly, with Credit cards, there is interest attached to the balance. Annual Percentage Rates (APRs) vary, but can be fairly steep. Interest rates are the primary driver for company revenue.
So, Credit cards can also be considered as debt instruments. The holder of the card is given a debt facility - an ability to get into debt.
This debt will obviously have to repaid at some point. If you’re wealthy, you can repay the debt without any real problem. The debt will not be of much concern to you. But, if you’re not wealthy, you might struggle to repay the debt. And for many people who can ill-afford it, credit card debt can be a real problem.
The other point to make with regard to Credit cards is to do with personality, or how you chose to use them. If you are a sensible, prudent and cautious person, and if you use them wisely, then credit cards can be very useful. If, on the other hand, you are not a sensible, prudent and cautious person, and if you don’t use them wisely, then credit cards can be problematic. Those people who are not so disciplined, might find themselves in financial difficulty.
It stands to reason then that Credit card company don
