What is Credit and Debt

What is “Credit” and “Debit”?

A Financial Literacy Guide to Managing Your Funds and Credit Score

August 1, 2024 | by HC Mutual

In today’s fast-paced world, financial literacy is crucial for managing your personal finances and securing your future. Whether you’re just starting your financial journey or looking to refine your money management skills, this guide will help you understand key concepts like the difference between credit and debit, and how to responsibly manage your credit score.

Understanding Credit and Debit

First, let’s clarify the basics: credit and debit. Knowing the difference is very useful for when you’re accounting your budget and expenditures. What does it mean when money is “credited” or “debited” from your account?

A debit from your bank account occurs when you utilize funds from it to purchase something or pay someone. When your bank account gets debited, money is taken out of it. A credit, on the other hand, is when money is added to your account. For instance, “your refund has been credited into your account” means that the money was put or added back into your account.

Debit Card vs. Credit Card

Now that we have learned how debit and credit are defined in financial literacy terms, let’s move on to the two types of cards you probably have in your wallet.

Debit Cards

When you use a debit card, you’re spending money that you already have in your bank account. The transaction amount is deducted directly from your available balance. It’s like paying with cash but in digital form.

Debit cards help you avoid debt since you can’t spend more than what’s in your account, making them a great tool for everyday purchases and budgeting. But since debit cards are as good as cash, make sure that your cash flow is properly managed. One way to do that is through credit.

Credit Cards

A credit card allows you to borrow money from the card issuer up to a certain limit (also known as the “credit limit”) to make purchases or withdraw cash. You’re essentially taking a short-term loan that you need to pay back, either in full or over time. Credit cards offer flexibility and convenience, especially for larger purchases or emergencies.

However, they come with the responsibility of paying back what you owe, usually with interest. Always take the interest fees into consideration when planning your credit spend and payment schedule to avoid overshooting your budget.

Another type of revolving credit is a credit line. This type allows you to borrow only the amount required while avoiding paying interest on a huge loan. A credit limit is set, allowing funds to be used for various needs. Interest accrues at regular intervals, and payments can be made at your convenience.

A credit line is also suitable for short-term financing requirements, such as day-to-day operating expenses or temporary cash flow difficulties.

The Importance of Your Credit Score

Your credit score is a critical aspect of your financial health. It’s a three-digit number that represents your creditworthiness: How likely you are to repay borrowed money. In the Philippines, credit scores range from 300 to 850, with higher scores indicating better creditworthiness.

Why Your Credit Score Matters

Loan Approvals

Banks and lenders use your credit score to decide whether to approve your loan applications. A higher score increases your chances of approval.

Interest Rates

A good credit score can help you secure lower interest rates on loans and credit cards, saving you money in the long run.

Rental Applications

Some landlords check credit scores to evaluate potential tenants, so a good score can make renting easier.

Job Applications

Certain employers may review your credit history as part of their hiring process, particularly for positions involving financial responsibilities.

How to Build and Maintain a Good Credit Score

Pay Your Bills on Time

Consistently paying your bills on time is one of the most important factors in maintaining a good credit score. Set reminders or automate payments to avoid missing due dates.

Keep Credit Utilization Low

Credit utilization is the ratio of your current credit card balance to your credit limit. Aim to keep it below 30% to show lenders you’re managing your credit responsibly.

Avoid Applying for Too Much Credit at Once

Each time you apply for credit, a hard inquiry is made on your report, which can slightly lower your score. Limit new credit applications to when it’s necessary.

Review Your Credit Report Regularly

Check your credit report for errors or signs of fraudulent activity. In the Philippines, you can get a free copy of your credit report from the Credit Information Corporation (CIC) annually.

Practical Tips for Financial Health

Create a Budget

Track your income and expenses to understand where your money is going. A budget helps you prioritize spending, save for future goals, and avoid debt.

Build an Emergency Fund

Set aside three to six months’ worth of living expenses in a separate savings account. This fund acts as a financial cushion for unexpected expenses.

Invest in Your Future

Consider various investment options like stocks, bonds, mutual funds, or real estate. Investing helps grow your wealth over time and can provide financial security.

Seek Financial Education

Continuously educate yourself about personal finance. Attend seminars, read books, or follow trusted financial blogs to stay informed.

Where you can start

HC Mutual is here to help you achieve your goals every step of the way. Our offerings are designed to empower beginner families to own their first home, be prepared for financial emergencies, and save in more efficient ways.

Start your journey to financial stability and a fruitful family life with our savings plans, which come with loan benefits to support your financial goals.

Secure your future through saving.

Start saving for as low as PHP 101 per payday.
Flexible savings plan of 3, 5, or 7 years.
3% earnings from your savings per annum.

Be prepared for financial emergencies.

Start saving for as low as PHP 1,212, PHP 2,424, or PHP 3,636 per payday.
Fixed 5-year savings plan.
5% per annum after 5 years upon completion of the plan.

Be on your way to owning a home!

Up to Php 20M loan amount per member for purchasing or home renovations
Fixed interest rates
Access to our partner developers and a wide range of brand-new homes OR the flexibility to choose your own property
Flexible payment terms with payment holidays in case of emergencies
Welcome gift upon moving in and 1-year Accidental-Life Insurance coverage worth Php 500,000

Be prepared for financial emergencies.

Loan release within 24 hours of approval
Interest rate as low as 0.99%*
Flexible payment terms of 12, 18, or 24 months

Financial literacy is an ongoing journey, and understanding the basics of credit, debit, and credit scores is a crucial step. By managing your credit responsibly and adopting healthy financial habits, you can achieve financial stability and build a secure future. Remember, every small step towards financial literacy brings you closer to mastering your money and achieving your financial goals.