What is a Credit Card?
A credit card is a card you can use to borrow money for a short time to pay for just about anything, up to a certain dollar amount—called your credit limit. It’s like having a revolving loan in your wallet or purse. We call it a “revolving” loan because every time you repay the credit card company, they’ll lend you the money all over again. This arrangement can be either a convenient tool or a dangerous trap, depending on how you use your credit card.
SCARY BUT TRUE
75% of college students say they’ve…
- maxed out a credit card,
- paid bills late,
- or used one card to pay another.
How can a credit card help you?
A credit card can be a great convenience. It makes it easy to buy expensive items (like a TV or couch), to buy something when you don’t have cash handy, and to buy online or over the phone. Using your card responsibly also helps you build a good credit score. This is your track record demonstrating you can be trusted with money. It comes in handy when you want a loan for a car or house, or to start a business. A credit card also helps you learn your spending habits. Your monthly bill gives you a great picture of where you’re spending. This will be helpful if you decide to go on a budget, because it will be easy to see where you should cut back on your spending.
Pay your credit card bill early, so you don’t damage your credit score.
Quick-list of credit card benefits
- You’ll enjoy convenience—money when you need it; the ability to buy online.
- You’ll build a track record—proof to future lenders (for a car, home, or business, for example) that you’re responsible with money and can be trusted with more.
- You’ll gain knowledge about your spending habits—a useful record to help you understand how you’re spending.
You want 21 percent risk-free? Pay off your credit cards.
– Andrew Tobias
How can a credit card hurt you?
Using your credit card irresponsibly will cost you.
That’s because cards have expensive penalties for dumb behavior. For example…
- High interest rate: the percentage they’ll charge for the money you’ve borrowed if you don’t pay off your bill.
- Interest-rate increases: higher interest payments for mistakes like bouncing a check or paying late.
- High late fees: penalties the credit card company charges if you pay even one bill late by even one day.
- Compound interest: the interest you owe on the interest you haven’t paid, which grows every month you don’t pay your bill.
Using your card irresponsibly can create even bigger issues—issues that can actually ruin other areas of your life.
SCARY BUT TRUE
45% of high school seniors have a checking account—and 30% of them have bounced a check.
Quick-list of credit card dangers
- Huge debt—If you don’t pay your full credit card bill each month, you will grow debt quickly – and you might never climb out of it.
- Being turned down for loans—Irresponsible credit card behavior (paying bills late, bouncing checks) can lead to a damaged credit score. This could keep you from qualifying for loans or even being able to rent an apartment.
- Not getting hired—When you apply for a job, one way the company learns about you is to check your credit. A bad score might make them think twice.
- Personal bankruptcy—Credit card debt can lead to bankruptcy. This awful situation creates inconvenience, embarrassment, and leaves you struggling for years.
- Stress-related illnesses—The stress of having credit card debt you just can’t pay off can be awful – and it can even make you sick.
SCARY BUT TRUE
45% of college students are in credit card debt.
How to use your credit card
Treat your card as a convenient tool, to let you pay for things when you don’t have cash handy or for items that are too expensive to pay for with cash. But use your card only for items you can and will pay off entirely when the bill comes. Then you’ll never get into credit card trouble.
Smart credit card moves—
- Make purchases only if you can pay them off when the bill comes.
- Pay your whole credit card balance every month.
- Pay your bill early, so you never worry about being late.
be tempted by a low minimum payment. It quickly leads to a pile of debt!
How credit cards can make you broke
Imagine you have a card with a $3,000 balance (the amount you owe).vLet’s say you decide that’s enough debt, so you stop using the card. But you can afford to make only the minimum payments. If your card’s interest rate is 19% (pretty normal), your minimum payment is about $75 a month. If you never make another purchase with your card and just make the minimum payment each month, guess how long it will take you to pay off your $3,000 balance.
Almost 25 years!
And get this: the average US family has $11,000 in credit card debt.
Be smart: never get yourself in debt in the first place.
The Debt Trap: what would you do?
Imagine you just got your first credit card. But no one has told you about the dangers of credit card debt. All you know is that you have a little plastic card you can use to buy anything, anywhere, anytime. You have only a few hundred dollars in savings, but your credit card lets you charge (borrow) $1,000! Cool, huh? You can buy a bike, telescope, TV… anything! So in that first month you spend $500. When the bill comes, you’re nervous. But you open it and see that you have options. You can pay the full $500 now, or a minimum payment of $10! Cool, huh? It’s your choice (wink, wink).
What would you do?
The Debt Trap 2: what would you do now?
You don’t have $500 when your bill comes, so you pay $10. Now you’re used to the good life—whipping out that credit card wherever you go.
You spend another $500 next month. Your bill is now almost $1,000 because you paid only $10 of the first bill. Plus, you’ve been charged interest for carrying a balance. But guess what? Your new bill has an option: Pay the full $1,000, or the new minimum of just $15. Phew! After a few months, you owe thousands of dollars, and the interest is always piling up.
You’re not sure how you’ll ever pay off this debt.
Now you can see how in just a few months, you can rack up so much debt it can take years to pay it back. You can also see why it’s so important to use your credit card responsibly—to buy only those things you can afford to pay for in full when the bill comes.
Why is a credit card called a revolving loan?
Credit Card Fine Print Video
Click here to view video.