Interesting Facts
Before you apply for a credit card, know how to use this tool wisely--or pay a hefty price.
Wherever you look, MasterCard, Visa, American Express, and Discover logos invite you to shop with a credit card. TV commercials and the Internet show you how you can use a credit card to take a trip, get that new cell phone, download iTunes, or have dinner out after a movie at the mall with your buddies.
As a first-year college student at Norfolk State University in Virginia, Sanyika Calloway Boyce learned the hard way how easy it is to get into credit card debt. "Being one of seven children, money was always tight, and there was something sophisticated about other students who used credit cards to pay for almost everything," says Boyce. For six months, she ignored the credit card-company woman with the clipboard offering the free portable radio. But one stressful afternoon, Boyce stopped to chat. After a quick look at the simple application, she convinced herself that it was OK to have a $500-limit credit card for emergencies.
"When my boyfriend's car broke down, that emergency cost $256, and soon a new outfit for a holiday party, movie tickets, and dinners out on weekends also became 'emergencies,'" Boyce admits. "And it felt great to be signing my name on the charge receipt."
Within a year, that one credit card was joined by four more, and Boyce owed more than $5,000. Every dime of the earnings from her part-time job was going to make small payments that left her broke. As she learned, shopping and charging when you don't have the cash leads to an agonizing nightmare of financial chaos.
THE HISTORY OF CREDIT CARDS
Credit cards were created in 1950 for business-people to pay for plane tickets, hotels, and meals when traveling. Each month, they paid the full amount owed and had one receipt for all their expenses. Visa, introduced by Bank of America in 1964, allowed individual credit card holders to use extended monthly payments for large purchases, to be paid back with interest.
Paying with cash is "the best way to stay out of unnecessary debt," says P. J. Gunter, a financial counselor for My Money Matters of Houston. "If you can eat it, drink it, or wear it, pay cash or don't buy it." Still, not everyone can make every purchase with cash, and that's where credit can be a useful tool--if you use it well.
KNOW THE FACTS ABOUT CREDIT
Buying a home, purchasing a car, starting a business, and getting a student loan for college are smart uses of credit. But most of us use credit cards for other purposes, as Boyce did. Before you sign on the dotted line and get ready to start swiping the plastic, know these key facts about credit cards.
1. Credit is about borrowing. Credit is a temporary loan that must be repaid with interest. With a credit card, a bank makes a loan to you based on an agreement you sign promising to repay the loan. Each plastic card represents an amount, from $500 to $25,000, that the bank has decided to make available to you. You borrow that money for a limited period of time and repay it all at once or in a series of payments. Think of credit cards as a temporary replacement for cash.
2. Pay on time or pay interest. When the monthly statement comes in the mail, you are billed for the full amount due. If you don't have the money to cover the bill, you might opt to pay the minimum due, or a portion of the full amount. In this instance, you pay interest on the balance of your loan until you pay off your debt. You agree to those terms when you apply for a credit card.
The cost of paying over time can be expensive. For a student with little income and no track record for payments, the interest rate may be as high as 21 percent. That means that if you pay a minimum payment of $23 each month on a $1,000 credit card balance with a 21 percent interest rate, it will take you 83 months (almost 7 years) to repay the total due. The final cost will be $1,897--nearly twice the original amount borrowed.
Do you want to be paying for a Friday night dinner date five years from now, when it will cost you twice as much and you won't even remember whom you were with or what you ate? Probably not. Visit http://www.youngmoney.com/calculators for more information about the long-term cost of paying the minimum amount due each month.
Late payments can cost you, too. Gunter compares making late monthly payments to turning in your homework late. "Eventually, the news gets out about your 'poor behavior' to all of the banks, credit card companies, and department stores, and you will soon lose the privilege of using a credit card," Gunter says. "You will also have penalty costs in the form of extra fees of $25 to $50 per month added to your debt."
3. Credit card use earns a performance score. Points are also given (or taken away) based on how you perform with your credit card, the same way you score points or incur penalties in a basketball game. In the world of credit, it's called a credit score, and it ranges from 250 to 850. Students usually start with a mid-range score of 620 points, but that figure drops rapidly if you miss payments or make late payments.
Banks and credit card companies regularly grade and evaluate how you use your credit cards and how dependable you are at paying them back. "Graduating from high school and college may seem like the end of the 'getting good grades' process, but it isn't," says Barbara Emery, financial educator at the University of Delaware Center for Economic Education and Entrepreneurship. "The focus changes from how you did on your history test to how you manage your bill paying, and [banks and credit card companies] rate your performance every 30 days."
Three major national credit bureaus--Experian, TransUnion, and Equifax--collect and record all payment information, including where you live and work, when and how often you use your credit card, and whether you pay your balance in full or make regular monthly payments before the due date. That becomes your credit history, which stays in their files for seven years and is used by banks, student loan lenders, and insurance companies to evaluate your money management skills.
4. Poor credit has lifestyle consequences. An employer or a potential employer is able to check your credit report to see whether you manage money responsibly, particularly if the position requires you to handle money. (An employer cannot check your credit without your permission, however.) After college, when that first career move appears, the job opportunity of a lifetime may vanish if your credit report says you have too much debt or if you haven't paid your bills on time. The same goes for getting an apartment when you leave home. Landlords check credit reports to see your bill-paying habits; they want to know whether you will be late with the rent.
CREDIT CAN BE A GREAT TOOL
Credit works best when you understand how to manage it. Using a credit card wisely is the beginning of establishing a good reputation with money. One universal card, such as Visa or MasterCard, is more than enough because it is accepted almost everywhere and the interest rate is much lower than department store cards, which usually start at 21.9 percent interest. As Mark Twain said, "Interest is something that should be earned, not paid."
Boost your credit card savvy at http://www.practicalmoneyskills.com/
Wherever you look, MasterCard, Visa, American Express, and Discover logos invite you to shop with a credit card. TV commercials and the Internet show you how you can use a credit card to take a trip, get that new cell phone, download iTunes, or have dinner out after a movie at the mall with your buddies.
As a first-year college student at Norfolk State University in Virginia, Sanyika Calloway Boyce learned the hard way how easy it is to get into credit card debt. "Being one of seven children, money was always tight, and there was something sophisticated about other students who used credit cards to pay for almost everything," says Boyce. For six months, she ignored the credit card-company woman with the clipboard offering the free portable radio. But one stressful afternoon, Boyce stopped to chat. After a quick look at the simple application, she convinced herself that it was OK to have a $500-limit credit card for emergencies.
"When my boyfriend's car broke down, that emergency cost $256, and soon a new outfit for a holiday party, movie tickets, and dinners out on weekends also became 'emergencies,'" Boyce admits. "And it felt great to be signing my name on the charge receipt."
Within a year, that one credit card was joined by four more, and Boyce owed more than $5,000. Every dime of the earnings from her part-time job was going to make small payments that left her broke. As she learned, shopping and charging when you don't have the cash leads to an agonizing nightmare of financial chaos.
THE HISTORY OF CREDIT CARDS
Credit cards were created in 1950 for business-people to pay for plane tickets, hotels, and meals when traveling. Each month, they paid the full amount owed and had one receipt for all their expenses. Visa, introduced by Bank of America in 1964, allowed individual credit card holders to use extended monthly payments for large purchases, to be paid back with interest.
Paying with cash is "the best way to stay out of unnecessary debt," says P. J. Gunter, a financial counselor for My Money Matters of Houston. "If you can eat it, drink it, or wear it, pay cash or don't buy it." Still, not everyone can make every purchase with cash, and that's where credit can be a useful tool--if you use it well.
KNOW THE FACTS ABOUT CREDIT
Buying a home, purchasing a car, starting a business, and getting a student loan for college are smart uses of credit. But most of us use credit cards for other purposes, as Boyce did. Before you sign on the dotted line and get ready to start swiping the plastic, know these key facts about credit cards.
1. Credit is about borrowing. Credit is a temporary loan that must be repaid with interest. With a credit card, a bank makes a loan to you based on an agreement you sign promising to repay the loan. Each plastic card represents an amount, from $500 to $25,000, that the bank has decided to make available to you. You borrow that money for a limited period of time and repay it all at once or in a series of payments. Think of credit cards as a temporary replacement for cash.
2. Pay on time or pay interest. When the monthly statement comes in the mail, you are billed for the full amount due. If you don't have the money to cover the bill, you might opt to pay the minimum due, or a portion of the full amount. In this instance, you pay interest on the balance of your loan until you pay off your debt. You agree to those terms when you apply for a credit card.
The cost of paying over time can be expensive. For a student with little income and no track record for payments, the interest rate may be as high as 21 percent. That means that if you pay a minimum payment of $23 each month on a $1,000 credit card balance with a 21 percent interest rate, it will take you 83 months (almost 7 years) to repay the total due. The final cost will be $1,897--nearly twice the original amount borrowed.
Do you want to be paying for a Friday night dinner date five years from now, when it will cost you twice as much and you won't even remember whom you were with or what you ate? Probably not. Visit http://www.youngmoney.com/calculators for more information about the long-term cost of paying the minimum amount due each month.
Late payments can cost you, too. Gunter compares making late monthly payments to turning in your homework late. "Eventually, the news gets out about your 'poor behavior' to all of the banks, credit card companies, and department stores, and you will soon lose the privilege of using a credit card," Gunter says. "You will also have penalty costs in the form of extra fees of $25 to $50 per month added to your debt."
3. Credit card use earns a performance score. Points are also given (or taken away) based on how you perform with your credit card, the same way you score points or incur penalties in a basketball game. In the world of credit, it's called a credit score, and it ranges from 250 to 850. Students usually start with a mid-range score of 620 points, but that figure drops rapidly if you miss payments or make late payments.
Banks and credit card companies regularly grade and evaluate how you use your credit cards and how dependable you are at paying them back. "Graduating from high school and college may seem like the end of the 'getting good grades' process, but it isn't," says Barbara Emery, financial educator at the University of Delaware Center for Economic Education and Entrepreneurship. "The focus changes from how you did on your history test to how you manage your bill paying, and [banks and credit card companies] rate your performance every 30 days."
Three major national credit bureaus--Experian, TransUnion, and Equifax--collect and record all payment information, including where you live and work, when and how often you use your credit card, and whether you pay your balance in full or make regular monthly payments before the due date. That becomes your credit history, which stays in their files for seven years and is used by banks, student loan lenders, and insurance companies to evaluate your money management skills.
4. Poor credit has lifestyle consequences. An employer or a potential employer is able to check your credit report to see whether you manage money responsibly, particularly if the position requires you to handle money. (An employer cannot check your credit without your permission, however.) After college, when that first career move appears, the job opportunity of a lifetime may vanish if your credit report says you have too much debt or if you haven't paid your bills on time. The same goes for getting an apartment when you leave home. Landlords check credit reports to see your bill-paying habits; they want to know whether you will be late with the rent.
CREDIT CAN BE A GREAT TOOL
Credit works best when you understand how to manage it. Using a credit card wisely is the beginning of establishing a good reputation with money. One universal card, such as Visa or MasterCard, is more than enough because it is accepted almost everywhere and the interest rate is much lower than department store cards, which usually start at 21.9 percent interest. As Mark Twain said, "Interest is something that should be earned, not paid."
Boost your credit card savvy at http://www.practicalmoneyskills.com/
posted by James at 6:45 PM
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