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Credit cards are not just for adults anymore – in fact, one third of all American teenagers are cardholders. However, because it is so easy to get into financial trouble with that little piece of plastic, it is very important to learn how to use it before ever uttering those first magic words: “charge it!”
When you pay for something with a credit card, you are borrowing money from the issuer (bank, credit union, or other financial institution), with the promise that you will either repay it all or make the minimum payment requested when the bill comes. If you don’t pay it in full, the remaining sum will “revolve” – move onto the next month’s bill. Interest will be added to the balance, and will continue to rack up until the debt is paid.
Example: You charged $500 for school books and materials, but can only pay $25 a month. If the interest rate on your credit card is ten percent, it will take you one year and ten months to repay – plus $49 in interest. However, if the interest rate is 22 percent, it will take two years and two months to repay, plus $129 in interest.
How you use credit matters! If you want to finance a car, get a cell phone contract, rent an apartment, obtain a job, qualify for low insurance rates, and (one day) buy a home, you will need to treat credit right – not just now, but over the long term.
Getting started can be a challenge. After all, without a credit history to assess, how will a credit issuer be confident you will repay what you borrow? They can’t, which is why one of the best ways to begin is with a secured credit card. This type of credit card is linked to a savings account, and your credit line is equal to the amount of the deposit. Because the credit issuer may claim the funds in the account if you fail to pay, they assume little lending risk and so are more open to lend to a newcomer.
Store and gas cards can be another good option, since they often have less rigorous standards than unsecured credit cards. They may only be used at a specific store or service station though, and the interest rate is often higher than other forms of credit.
Finally, when you have proved your credit worthiness, you are ready for an unsecured credit card.
When shopping for any credit card, look for the following:
Once you have a credit card, use it wisely:
There are three major credit-reporting bureaus in the U.S.: TransUnion, Experian, and Equifax. These companies collect credit-related data, compile it into reports, and then provide it to businesses that need to evaluate lending risk and make other business decisions. Your credit and debt information will be on these reports in detail, including when you opened the accounts, if you’ve paid on time, how much you owe, if accounts have gone into collections, your credit limits, and if you have been sued for a debt.
Think being graded ends with school? It doesn’t. The way you treat credit is graded (scored) all your life. A credit score is a mathematical risk assessment based on the information on your credit report. A common scoring model is one developed by Fair, Isaac and Company. They issue a FICO score that ranges from 300 to 850. It is based on (in order of greatest weight) payment history, amounts owed, length of credit history, pursuit of new credit, and types of credit in use. High scores translate into cheaper loans an increased edge for employment and housing opportunities.
A credit card is not just a convenient payment method, but also a way of proving stability and responsibility. Always use credit wisely – your future depends on it!
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