Credit Cards and Credit Card Debt

Key terms for credit cards

• Credit card issuer: Another name for a credit card company
• APR: The annual percentage rate (interest rate) for your credit card
• Credit limit: A set amount of money you can charge on a credit card. You cannot charge more than the credit limit on a card
• Annual fee: A special fee you must pay each year on some credit cards just to have the account open

Smart Money Tip: Decide if you really need credit cards

Most teens are excited about the idea of getting a credit card because it feels like a key step to becoming an adult.

But do you really NEED a credit card?

It’s risky to get a credit card just because you want one or because you’re thinking of it as “free money” to buy things you can’t afford.

Still, there are plenty of good reasons to get credit cards:

• They can cover you in an emergency
• You can earn rewards for purchases
• They offer great fraud protection

But you can get all those benefits without using credit cards, which is why plenty of people decide they don’t need them. If you have savings, you use it can cover emergencies. Some debit cards offer rewards.

So, think carefully about why you want a credit card and if you need it. If you do, the rest of this lesson can help you get and use a credit card in the right way.

Getting your first credit card

If you’re under 18, you usually won’t be able to get a credit card on your own. You can ask your parents or guardian to add you as an authorized user on their account.

Once you turn 18, you can get a credit card if you have a verifiable source of income. Otherwise, you have to wait until you are 21.

Then, you need to apply for a card, and this can be tricky. Credit card companies won’t approve you for credit unless you prove you can use it correctly. But you can’t do that until you get a credit card.

The solution?

Secured credit cards

What is a secured credit card?

A secured credit card is an account that you open using collateral. You make a cash deposit to the credit card company, usually of a few hundred dollars.

The credit card company gives you a credit card with a credit limit equal to the deposit you make. So, if you give a company like Capital One $500, you get a secured credit card with a limit of $500.

Secured cards require no credit check, so you can get them easily and start building credit. Then you can graduate to using normal, unsecured credit cards once you’ve used the card to build your score.

How credit cards work

1. When you first open the account, you will need to activate it so you can start using the card.
   1. For traditional cards, you usually need to wait for the card to arrive in the mail, then you can activate it.
2. Once it’s activated you can start using it to make purchases in a store or online.
3. Each purchase you make will be charged to your account. It’s subtracted from your credit limit, decreasing your “available credit” on the card.
4. About 15-20 days before your payment is due, you will receive a bill.
   1. It will show you the current balance on your account.
   2. It will also list the minimum required payment you must make by the due date.
5. Always pay your bill on or before the due date. If not, you’ll face late fees that average $40.
6. The payment you make will be credited to your account, increasing the available credit you have.
7. If you carry a balance on a credit card over to the next month, the credit card companies will begin to apply interest charges to your balance.
   1. They apply interest charges every day, so your balance gets higher by a few cents with every day that passes before you pay it off.

Smart Money Tip: Tips for using credit cards

• Always try to pay the balance off in full every month
• If you do and you start and end every billing cycle with no balance, you can avoid interest charges completely!
• If you can’t pay the full balance off at the end of the month, pay as much as possible
• Even though credit cards offer the option to withdraw money at an ATM (known as a cash advance), avoid this. The fees and APR for using the card this way are high, so you don’t want to do it
• Avoid credit cards with annual fees. They may offer better rewards, but you have to spend lots of money to earn enough to justify that fee. It’s usually not worth it, especially when you’re not experienced with credit