Many people view credit cards and cash as one in the same. After all, both can be used to make purchases. However, there are some key differences between the two that everyone should be aware of.
What is money?
In order to understand the difference between credit and money, it’s important to first understand what money is. Money is a unit of account, meaning it can be used to measure the value of goods and services. Money is also a store of value, meaning it can be saved and used later. Lastly, money is a medium of exchange, meaning it can be used to buy goods and services.
Now that we know what money is, let’s take a look at credit.
What is credit?
Credit is an arrangement in which a borrower receives something of value now and agrees to repay the lender at some later date with interest. In other words, credit allows you to borrow money that you will need to pay back with interest over time.
Your credit limit will depend on several factors, including your income and employment history, your current debts, and your payment history. If you have poor credit, you may be offered a lower limit than someone with good or excellent credit.
If you carry a balance on your credit card from month to month, you will be charged interest on the unpaid balance. The interest rate on your credit card will vary depending on the type of card (e.g., standard vs. rewards) and your personal financial situation.
There are many different types of credit, but the most common type is revolving credit. This type of credit gives borrowers a set limit that they can borrow against and repay over time. Credit cards are an example of revolving credit. Other types of credit include installment loans (i.e., auto loans, mortgage loans), lines of credit (i.e., home equity lines of credit), and student loans.
The Difference between Credit and Money
Now that we know the definition of both money and credit, let’s take a look at how they differ:
- Money is a unit of account, meaning it can be used to measure the value if goods and services. Credit is not a unit of account because it cannot be used to measure the value of goods or services.
- Money is a store value, meaning it can be saved ad used later. Credit cannot be saved because it must be repaid with interest over time.
- Money is a medium of exchange, meaning it as can be used to buy goods or services. Credit cannot be used as a medium exchange because it must be repaid with interest over time.
- Credit allows you to borrow money that you will need pay back with interest over time. Money does not have to be repaid.
Credit cards are not considered money because they cannot be used as a unit of account, store value, or medium of exchange. Instead, credit cards are considered revolvingcredit because they give borrowers access to cash that must be repaid with interest over time. Understanding the difference between money and credit is important for making sound financial decisions.