Credit Cards
What is a Credit Card?
It is a plastic or metal card that allows you to borrow money from the bank in smaller increments (compared to a loan) everytime you make a purchase.
A lender (bank) extends a line of credit (small loan) to you which you will have to pay back later (end of each month).
This differs from a debit card which uses your own money from your bank account to pay.
Credit cards have benefits if you use it correctly and drawbacks if you don’t.
These benefits are a main reason people use these cards.
Another significant reason is the importance of a good credit score.
Above is a labeled example of a credit card.
What Is the Minimum Payment on a Credit Card?
The minimum payment on a credit card is the lowest amount of money the cardholder can pay each billing cycle to keep the account’s status “current” rather than “late.” A credit card minimum payment is often $20 to $35 or 1% to 3% of the card balance, whichever is greater. (If the dollar amount is higher than the actual balance charged to the card, then the full balance is the minimum payment. The exact details differ from issuer to issuer.)
What Happens If You Only Pay the Minimum Payment on Your Credit Card?
If you make at least your credit card’s minimum payment by the due date, you will avoid late fees and penalty Annual Percentage Rates (APRs). However, any unpaid balance carried between months begins to gather interest — from the date you made the purchase.
It can be tempting to just pay the minimum every month. But in the long run, it will cost more money and it could snowball into serious credit card debt if you’re spending more than you can pay off every month. It’s best to always pay your credit card balance in full, if possible.
Above is an example of the consequences of not making any payment and the consequences of only making the minimum payment.
Credit
Today’s economy runs on credit.
Credit scores influence many aspects of your life like your insurance rates, what apartment you’ll be approved for, and even whether you get that job.
Good credit can be the make-or-break detail that determines whether you’ll get a mortgage, car loan or student loan.
Even if you’re not in the market for a loan, good credit can have a major impact.
Landlords, insurers and employers frequently use credit information as a preliminary test to see if the people they are dealing with are reliable and responsible.
Bad credit can suggest you’re a risky bet.
Good credit can signify that your financial situation — and the rest of your life — is on the right track.
While your credit technically only shows the details of how you deal with debt, this is often extrapolated to other situations.
What is a credit score?
A credit score is a three-digit number, usually on a scale of 300 to 850, that estimates how likely you are to repay borrowed money and pay bills.
It is the key to your financial life.
Credit scores are calculated from information about your credit accounts. That data is gathered by credit-reporting agencies, also called credit bureaus, and compiled into your credit reports.
The three largest bureaus are Equifax, Experian and TransUnion.
A higher credit score can give you access to more credit products — and lower interest rates.
What factors affect your credit score?
The two main credit scoring models, FICO and VantageScore, consider much the same factors but weight them somewhat differently. For both scoring models, the two things that matter most are:
1) Paying bills on time. A misstep here can be costly, and a late payment that's 30 days or more past the due date stays on your credit history for years.
2) How much you owe = Credit utilization (how much of your credit limit you are using) is weighted almost as heavily as paying on time.
It's good to use less than 30% of your credit limit - lower is better - because this shows the credit card company that 1) you know how to responsibly manage you money and 2) if you are borrowing a significant percentage of your available credit it looks bad from the companies perspective because they don’t know why you are taking out more credit so you might be relying on the borrowed money which means you won’t pay it back. You can take several steps to lower your credit utilization. Scores respond fairly quickly to this factor.
Much less weight goes to these factors, but they're still worth watching:
Credit age: The longer you've had credit, and the higher the average age of your accounts, the better for your score.
Credit mix: Scores reward having more than one type of credit — a traditional loan and a credit card, for example.
How recently you have applied for credit: When you apply for credit, a hard inquiry (when a bank looks at your credit) on your credit report may result in a temporary dip in your score.
Fast Facts
Auto and housing loans require having good credit — 2 very significant parts of living.
Nearly one-third of Americans pay the minimum due on their credit card each month, according to FINRA's National Financial Capability Study.
About 77 million Americans, or 35% of adults with a credit file, have debt in collections reported in their credit files, according to the Urban Institute.
The average credit card holder in the U.S. had $5,668 in credit card debt in Q2 2021.
The average household with credit card debt pays a total of $1,292 in credit card interest per year, according to NerdWallet.
Only 8% of U.S. parents have children with credit cards.
$2,319 is the average amount of credit card debt Americans have by age 20.
How to start as a Teenager
Even before your old enough to get a credit card or apply for a loan, you can get a head start on developing a strong credit history.
Obtain a secured credit card with your parents or guardian.
These cards can be put in your name. Make the initial deposit with your parent, which is the credit limit for the account.
Then you charge essentials on the card and pay the card off in full each month, in order to demonstrate to the credit agencies that you can make payments on time.
Have your parents monitor your activity as you get into the credit habit, and discuss allowing more flexibility as responsibility is demonstrated. (you have to prove yourself).
Once several months of purchases and payments are under your belt, review your credit report with your parents and make sure everything is correct.
