Credit Cards

Credit Cards

Poll

On a scale of 1-5 how much do you already know about credit cards?

• 1 (Nothing)

• 2

• 3

• 4

• 5 (Everything)

Credit Limits

Credit cards buy things without paying for them right away. When you pay for something with credit, you are borrowing money and promising to pay it back. If you have an emergency or need to buy something expensive, they can be a big help. They let you build good credit if you pay your bills in full and on time. Credit cards come with limits. If your card’s credit limit is $2,000, you won’t be able to use it to buy something that costs $2,500.

When you buy something with a credit card, you don't necessarily need to pay that amount of money back that month, or even that year. Each month, you’ll get a bill from your credit card company with a required minimum payment. It will likely be a small portion of the total amount that you owe. Only paying the minimum might be tempting, but it’s a bad idea.

Multiple Choice

Which of the following statements is false?

• Credit cards let you spend unlimited money.

• Credit cards have minimum monthly payments.

• Credit cards give you the chance to build good credit.

• Credit cards let you spend money that you don’t have.

How to avoid paying interest

Credit card companies make money by charging interest on the money you owe. Interest is determined by the annual percentage rate (APR) for that particular card, and it applies to every purchase you make. Remember Melvin? If he only paid the minimum monthly payment, $25, it would take him over 7 years to pay off that $1,000. And that’s not all he’d owe. His credit card had a 25% APR, so at the end of 7 years he’ll owe more in interest than the amount he borrowed in the first place!

The bigger the payment that you make each time you pay your bill, the less interest you have to pay. If you pay the whole amount, you don't have to pay any interest at all! If you pay the minimum, though, you're going to rack up a lot of interest, so avoid doing that whenever you can.

Multiple Choice

How can you avoid paying interest on your credit card purchases?

• by only paying the minimum each month

• by only using your credit card for big purchases

• by having a credit card with a high APR

• by paying off your whole bill each month

Avoid cards with fees

In addition to interest, credit cards often come with assorted fees. There may be an introductory fee (to sign up), an annual fee (a yearly fee to have the card) and additional fees if you make a late payment or miss a payment altogether. It may be tempting to make large purchases and put off payments for later, but with interest and fees, your debt can add up quickly.

Some credit cards come with low introductory costs. This could be as low as 0% APR the first year, with no annual fee. If you see an offer that seems too good to be true, it probably is. Make sure to read the fine print so you know what the APR and fees will be after the introductory period.

Multiple Choice

Eduardo needs a credit card to a buy a computer that will probably take him a year to pay off completely. Which of these cards should he apply for?

• a credit card with no introductory fee, no annual fee and a 45% APR

• a credit card with a $100 introductory fee, a $25 annual fee and a 10% APR

• a credit card with no introductory fee, a $25 annual fee and a 10% APR

• a credit card that gives you $10 for signing up but charges a $30 annual fee and has a 15% APR

Credit Scores

How you use and pay your credit cards will determine if you have good or bad credit.

If you make the full payment every month, you won’t have to worry about accruing interest or fees for late or missed payments, and you’ll end up with good credit. If you have good credit, you're more likely to be approved for a credit card because lenders will know you’re reliable.

If you are irresponsible with your credit cards and fail to make payments, you’ll end up with bad credit, and possibly in debt. Bad credit will affect many aspects of your adult life. It makes you much less trustworthy in the eyes of creditors, so you'll have a hard time getting approved for loans, apartments or anything else that involves making significant payments on time. It might even make you less attractive to potential employers.

Multiple Choice

Why do lenders look at your credit?

• to know what your income is

• to know what you pay in rent

• to know if you’re a reliable friend

• to know if you’re financially responsible

Can credit cards be good?

With all of the dangers of bad credit, you may be wondering why you'd ever want to get a credit card in the first place. Why spend money you don't have? Well, while bad credit can hurt your chances of getting approved for loans or apartments, good credit does exactly the opposite. If you don’t establish any credit, it can be hard for you to get a loan because banks won’t know anything about your financial history. And there are some purchases--like buying a house--that are nearly impossible to make without getting a loan. If you build good credit now, you'll be able to borrow money when you need it in the future, and you will be able to do so at lower interest rates.

Multiple Choice

Without establishing good credit, it would be most difficult to

• find a job.

• buy lunch.

• buy a house.

• make a minimum payment.