5-WEEK FINANCIAL LITERACY BASICS BREAKDOWN

WEEK 2

As a young entrepreneur, embarking on your business journey brings excitement and challenges, including mastering financial concepts like credit and debit.

These terms might seem perplexing at first, but with the right understanding, you'll be better equipped to manage your finances and make informed decisions for your business ventures.

This week we'll break down the basics of credit and debit, for you aspiring business leaders and future moguls.

Credit: The Power of Borrowing Wisely

Credit is like a financial tool that allows you to borrow money with a promise to pay it back later. It's an agreement between you and a lender, such as a bank or credit card company, where they provide you with funds to use for your business needs or personal expenses. Here's what you need to know about credit:

1. Types of Credit:

   There are different types of credit, such as credit cards, loans, and lines of credit. Each serves a specific purpose, so it's essential to understand the terms, interest rates, and repayment schedules associated with them.

• Credit Cards: A credit card is a line of credit that can be used to borrow money to make purchases, transfer balances and get cash advances, with the agreement to pay back the money borrowed plus interest you owe on it at a later date. This credit can be used again and again as long as it’s being paid back as agreed and you don’t go over your approved limit.

• Loans: A loan is a sum of money that is borrowed by a person or a company from a lending institution which has to be paid back, with interest, within a given period of time. This loan is money that is given one time and is paid back monthly until the debt is paid in full.

• Line of Credit: A line of credit is similar to a credit card in that with both, you are approved for a certain amount but you don’t have to use it until you are ready and you will only pay interest on the amount that you borrow. However, with a line of credit, you may be approved for a higher limit and the interest rates are usually not as high as with a credit card. This may be better for large purchases that you will pay off over time. Lines of credit usually do not offer incentives that credit cards do and the application for a line of credit may be more complicated that a credit card application.

2. Credit Score:

   Your credit score is a numerical representation of your creditworthiness. It's influenced by factors like your payment history, credit utilization, length of credit history, types of credit used, and new credit accounts. A higher credit score makes it easier to access favorable loan terms and interest rates. A lower number will make it considerably harder to get loans, leases, and other things that are necessary to build a business

3. Responsibility is Key: While credit can be a valuable tool, it's crucial to use it responsibly. Avoid excessive borrowing and make your payments on time. Late payments and accumulating debt can negatively impact your credit score, making it harder to secure financing in the future.

Debit: Managing Your Own Money

Debit, on the other hand, is a direct link to your bank account. When you make a purchase using a debit card, the money is deducted directly from your account. Here's what you should know about debit:

1. Real-Time Spending: Debit cards offer the convenience of real-time spending. Since you're spending money you already have, there's no need to worry about accruing debt or interest charges.

2. Budgeting Advantage: Debit cards are excellent tools for managing your spending. You can only spend the money available in your account, which can help you avoid overspending and keep your finances in check.

3. Security Measures: Debit cards are generally more secure than cash. If your card is lost or stolen, you can report it and limit potential losses. Additionally, some debit cards offer fraud protection to ensure your money is safe.

Making the Right Choice: Credit vs. Debit

Deciding whether to use credit or debit depends on your financial situation and goals. As a young entrepreneur, it's vital to strike a balance between the two:

1. Build Credit Responsibly: Using credit cards and repaying the balances on time can help you build a positive credit history. This can be essential for future business financing or purchases, like buying computers or equipment, or personal purchases like a car or a home.

2. Day-to-Day Expenses: For everyday expenses and minor purchases, debit cards are a smart choice. They help you manage your spending and avoid unnecessary debt.

3. Emergency Fund: While building credit is important, it's also crucial to have an emergency fund. This fund can cover unexpected business expenses or personal emergencies without relying solely on credit.

Credit and debit are powerful financial tools that young entrepreneurs can leverage to achieve their goals. By understanding the differences between the two and using them responsibly, you'll be well on your way to financial success in your business endeavors. Remember, learning about finances is a continuous journey, so keep seeking knowledge and making informed decisions to secure a prosperous future.

Putting Knowledge into Practice: Examples of Credit and Debit in Action

Let's talk about some real-life scenarios to see how credit and debit play out for young entrepreneurs like you:

Scenario 1: Purchasing Business Supplies

Imagine you need to buy materials for your startup's first batch of handmade crafts. You have a choice between using a credit card or a debit card. Here's how each option would work:

• Credit Card: Using a credit card allows you to make the purchase even if you don't have the full amount in your bank account at the moment. You're essentially borrowing the money from the credit card company. Make sure you're aware of the interest rate and the due date for repayment. If you pay the full amount before the due date, you won't be charged any interest.

• Debit Card: With a debit card, you're spending the money you already have in your bank account. When you make the purchase, the money is immediately deducted from your account. This ensures that you're not spending more money than you currently have available.

Scenario 2: Funding a New Business Idea

Suppose you have a brilliant idea for a tech startup, but you need some capital to develop a prototype. You're considering whether to apply for a business loan or use your personal savings. Let's explore your options:

• Business Loan (Credit): Applying for a business loan involves presenting your business plan to a lender, who will evaluate your creditworthiness. If approved, you'll receive the loan amount with a predetermined interest rate and repayment schedule. Keep in mind that you'll need to repay the loan even if your business idea doesn't succeed, so ensure you're confident in your plan.

• Personal Savings (Debit): Using your personal savings means you're investing your own money into your startup. This eliminates the need to repay a loan, but it also comes with the risk of losing your savings if the business doesn't succeed. However, this option doesn't incur any interest charges.

Homework Assignment: Applying Credit and Debit Knowledge

For your homework assignment, let's apply what you've learned to your entrepreneurial aspirations:

1. Research Credit Cards: Investigate different credit card options available to young entrepreneurs. Look for cards with low interest rates, suitable credit limits, and benefits that align with your business needs. Compare at least three different cards and create a chart that highlights their features.

2. Create a Budget: Imagine you're launching an online clothing store. Create a monthly budget that outlines your estimated business expenses, such as website hosting, marketing, and inventory. Determine how you'll allocate funds using your debit card for day-to-day expenses and your credit card for larger investments.

3. Credit vs. Debit Decision: Think about a hypothetical scenario where you need to upgrade your business laptop to improve productivity. Analyze whether using a credit card or a debit card would be the wiser choice for this purchase. Consider factors such as the interest rate, your credit limit, and the urgency of the upgrade.

Remember, financial literacy is an ongoing journey. Continuously educate yourself, seek advice from mentors, and make well-informed financial decisions to set yourself up for success as a young entrepreneur.

Navigating the world of credit and debit is an essential skill for young entrepreneurs. By understanding how these financial tools work and making informed choices, you'll be better equipped to manage your business finances effectively. As you progress on your entrepreneurial journey, keep honing your financial knowledge and using credit and debit wisely to achieve your business goals.