STANDARDS

CCSS: 6.RP.A.3.B, MP1, MP2, MP3

TEKS: 6.14B

Cash vs. Credit

What’s the best way to pay?

October 2023

By Jenny Morber

THE CONTENDERS

BANK ACCOUNTS
Checks and debit cards take money directly from a bank account. The account balance is the amount of money available. It will get bigger when you deposit money, and smaller when you withdraw money. You can’t spend more than you have.

CREDIT CARDS
Credit is like a loan. For each purchase, you are borrowing money from the bank that issued the credit card, with a promise to pay it back. The longer you take to repay, the more fees you pay the bank.

THE CONTENDERS

Although you can’t get your own credit card until you’re 18, some parents add their kids as users to their accounts. But is it a good idea?

The main benefit of credit cards is that they offer flexibility. If you want to buy something today but don’t have the cash for it yet, credit cards make that possible. Some banks that issue credit cards encourage people to use their cards by offering rewards, such as sign-up bonuses, airline miles, or cash back for every dollar you spend.

But credit can create problems if you can’t—or forget to—pay your bill. “When I got my first credit card, I didn’t know that I had to pay anything back,” says Ben-James Brown, a financial health expert at Wells Fargo bank. He learned his lesson fast when he got his first bill!

Banks do not require you to pay the full amount owed each month, but you must at least make the minimum payment. Any remaining balance after the first 30 days will be charged a fee called interest. Today, most credit cards have an interest rate of 18% to 25%. And late payments are charged extra fees!

You can’t get a credit card until you’re 18. But some parents add their kids to their accounts. That allows the kids to use the credit cards. You may be wondering: Is that a good idea?

The main benefit of credit cards is flexibility. Say you want to buy something, but you don’t have enough cash for it. If you put it on a credit card, the bank that issued the card pays for it. You pay them back later. Some banks even offer rewards to encourage people to use their cards. They might give you airline miles or cash back for every dollar you spend.

But credit can create problems too. “When I got my first credit card, I didn’t know that I had to pay anything back,” says Ben-James Brown. He’s a financial health expert at Wells Fargo bank. He learned his lesson fast when he got his first bill!

Banks bill credit card users for what they owe every month. They don’t require you to pay the full amount. But you must at least make a minimum payment. After 30 days, anything left unpaid will be charged a fee called interest. Today, most credit cards have interest rates of 18% to 25%. And late payments are charged extra fees!

HOW TO GET MONEY FROM THE BANK

CHECKS are paper notices that tell a bank to take a certain amount of money out of one account and transfer it to another account or to convert it to cash.

DEBIT CARDS electronically take money directly out of your bank account.

CASH is paper money you get from a bank by cashing a check or withdrawing from an ATM.

HOW TO GET MONEY FROM THE BANK

CHECKS are paper notices that tell a bank to take a certain amount of money out of one account and transfer it to another account or to convert it to cash.

DEBIT CARDS electronically take money directly out of your bank account.

CASH is paper money you get from a bank by cashing a check or withdrawing from an ATM.

When you pay your credit card bill in full every month, you build what’s considered good credit and increase your credit score. A credit score is a number that represents how trustworthy you are as a borrower. A higher score is better and 850 is perfect. To a bank, someone with no credit is like a total stranger who asks to borrow money. Someone with good credit is like a trusted friend who always pays you back. Building good credit can help you borrow money to buy a car or a house someday.

But just as good credit is important to build, bad credit can be harmful. If you don’t pay your bills on time, your credit score can drop. A low credit score signifies that you are a risky borrower. Financial institutions may refuse to lend money to people with low credit scores—or lend money at high interest rates.

Bank accounts, on the other hand, limit your spending to the money you have: You won’t be able to buy something you don’t currently have the funds to cover. This means less flexibility. Which would you choose?

When you pay your bill in full every month, you build what’s known as “good credit.” Your credit score goes up. That’s a number that represents how trustworthy banks consider you. To a bank, someone with no credit is like a stranger who asks to borrow money. Someone with good credit is like a friend you know will pay you back.

Building good credit can help you borrow money to buy a car or a house someday. But if you don’t pay your bills on time, your credit score can drop. A low credit score tells financial institutions that it’s risky to lend money to you. They might refuse to do so—or give you a very high interest rate.

Bank accounts, on the other hand, don’t affect your credit. You can only spend the money you currently have, so you never owe anything later. But that also means less flexibility to buy things exactly when you want them. Which spending method would you choose?

CRUNCH THE NUMBERS

THE SITUATION: The phone you want costs $700.

OPTION 1: You use your entire savings to pay for it in cash.
OPTION 2: Your parents sign up for a new credit card and make you a user. It has a $100 sign-up bonus and a 20% interest rate.

Here’s how to calculate a credit card’s monthly interest (write the interest rate as a decimal):
Monthly interest = Card balance × (Interest rate ÷ 12)

CRUNCH THE NUMBERS

THE SITUATION: The phone you want costs $700.

OPTION 1: You use your entire savings to pay for it in cash.
OPTION 2: Your parents sign up for a new credit card and make you a user. It has a $100 sign-up bonus and a 20% interest rate.

Here’s how to calculate a credit card’s monthly interest (write the interest rate as a decimal):
Monthly interest = Card balance × (Interest rate ÷ 12)

For help crafting a mathematical argument, go to scholastic.com/math. Record your work and answers on our answer sheet.

If you use the credit card and make only the minimum payments of $25 per month and get the sign-up bonus, what will you still owe after 6 months? Use the chart above to calculate the interest each month. Use the remaining balance from the previous month as the next month’s balance. We did the first for you.