Mar 31, 2022
Do you know what “credit” means in the term “credit card”?
Credit is access to money that can be borrowed, with the promise to repay it — plus interest. That goes for credit cards and other types of loans, like college, car or home mortgages.
Credit is a big responsibility! Not knowing the ins and outs could lead to mistakes that hurt your credit — and finances — in the future.
Credit cards can help you build credit for bigger loans down the road. It’s important to only buy what you can afford and pay it off completely every month. That’s because interest can really add up!
Know the APR, or annual percentage rate, that will be owed on purchases. With a 14% interest rate, a $100 purchase now would end up costing more than that with interest. On top of the additional $14 in interest at the end of one year, there would be compounding interest, too. Would you rather earn interest on interest, or pay interest on interest?
Carefully consider all your purchases. For the major ones, like education or housing, try to get the best interest rate on your loan. Good credit will help with that.
Create a budget — your monthly money plan that includes income, expenses and savings. Overall, money going out must be less than money coming in. And don’t forget your emergency fund! Set aside money monthly for unexpected expenses. If something comes up that you need to use it for, start building again.
Before applying for a loan, make sure you can afford the monthly installment. Before using a credit card for any purchases, make sure you can pay it off. Otherwise, it may be best to save up for the purchase over time and avoid the interest charges.
With a plan in place, it’s time to apply for a credit card or student loan. However you choose to build credit, the two most important things are to keep your debt low and pay the bill on time every month. Missed or late payments are reported to agencies that track credit, and this will have a negative impact on your credit.
When you’re starting out, you can choose an existing expense or two to pay with your credit card each month. For example, groceries and gas. When you pay off your credit card bill with that budgeted money, you’re building your credit and maybe getting a few perks and rewards from your credit card company, too.
A credit card balance should never be at its maximum, because having too much debt can hurt your credit. In fact, it’s best for the balance to be below 30% of the credit limit, if not paid in full. For example, if you have a credit limit of $1,000, you should use $300 or less by your statement closing date.
A credit score is a measurement of how reliably you manage your credit, and that can affect many areas of your life. If you have a low credit score, you’ll likely have to pay much higher interest rates for leases or loans — or you might not be approved at all. Landlords, mortgage companies, car dealerships and even sometimes hiring employers will do a credit check. The higher the score the better, from 300 to 850.
The score is calculated from information that is in your credit report. This includes details like your payment history and the percentage of available credit you’re using (known as debt utilization). It’s important to review your credit card statements monthly and your credit report periodically to make sure all the information is accurate.
Alright, we’re ready to give you some ✨credit✨ for making it to the end. You learned a LOT about a complicated topic — standing ovation to you. Keep following our Future You series so you can achieve all of your financial goals and more! Insurance is next. For now, quiz yourself about Credit on Kahoot!
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