Credit Information

What You Need to Know About Credit for Teenagers

What is Credit?

To start off, we must understand what credit is exactly. Credit is money that is borrowed by the credit card company in order to make purchases. The most important word in that sentence is "borrowed." It's necessary that the money is paid back. Especially if you don't want to have a bad credit score. Having a bad credit score determines your creditworthiness. So, if you have a bad credit score, it makes it harder to buy things like homes, cars, and to take out loans. Your credit score is determined using your credit history. This includes how much you spend, and how quickly you return the money. The more unreliable you are, the worse your score will be. A credit bureau will collect all of this information and make it known to different card companies and financial institutions.

There are different types of credit. Such as personal loans which must be paid with interest (for things like college tuition), installment loans which are made in fixed monthly payments (for mortgages), and credit cards which allow you to purchase as much as you want up to your maximum credit limit and you must repay everything you borrowed.

The benefits to credit are that you can buy things when you don't have all of the money for it yet and if your credit score is high, purchasing things of high cost using credit is much easier (companies will trust you to pay what you owe). Some disadvantages are that you are charged interest (money paid for being able to borrow money) by a lender, and if you mess up and your credit score becomes low, making purchases becomes more difficult (especially with homes).

Credit Cards

A credit card isn't just your mom's or dad's magic piece of plastic that swipes new clothes into your closet. A credit card is like getting a loan. The company is giving you money before you have it, and trusting you to pay it back. Yes, this does allow you to swipe your way to a new channel bag, but only if you can actually make the money to pay for it before your month is up. Not paying back your credit card company will hurt your credit score. Credit card companies do charge interest, which is their way of making money. Interest is a monthly addition to your credit card bill which is charged for letting you use their money. Interest rates can increase if your credit score drops dramatically, you're 60 days late on your payment, or you've had your card for at least 12 months.

There are different fees you may run into if you are a credit card holder. They normally charge an annual fee for using the card. A penalty fee can be charged if you are late with your payment. An over the limit fee will be charged if you spend over your credit limit.

You can use credit cards almost everywhere. Unless a store says "cash only." A credit card is likely to be taken.

Benefits to credit cards include not having to carry cash, building your credit score, creating records of your purchases, and consolidating bills into one payment. Some disadvantages to a credit card are the fees, losing track of how much you spend (which can cause major financial difficulties), and an increase in impulse buying.

Shopping for Credit

It is important to compare credit cards before rushing into a commitment with one. Each card has certain advantages and disadvantages. You'll want to make sure that the perks match up with what you want. Here are some examples of good cards for young adults.

Discover it for Students: This card has no annual fee. The card starts you off with no APR for a year, then you begin to pay 11.24%-23.24%. You will receive $20 cash back each year your GPA is a 3.0 or higher. You will receive 5% cash back on certain categories that change quarterly and 1% on everything else. Your APR will not be raised for late fees and there are no overlimit fees. You'll have an on and off switch to freeze your card and you will not be liable for fraud.

Citi ThankYou Card for Students: This card also has no annual fee and no APR, but only for 7 months. It will then be 14.24%-24.24%. Earn 2,500 ThankYou points after spending $500 in the first 3 months. 2 points per dollar spent on dining at restaurants or entertainment and one point for everything else. Citi will look for lower prices on items you purchased so that you can request a refund and get the lower price. Citi allows you early access and vip tickets to certain events. There is no overlimit fee and you are not liable for fraud.

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Smart Consumers: Don't Fall Into the Credit Card Trap

It is a good idea to get a credit card and start building credit. However, it is also very easy to mess your credit up. To avoid this, you must take precautions. First, budget. Create a budget for yourself so you know how much you can spend. This will help you avoid over spending. Second, think before you swipe. So many people forget that they'll have to pay their debts at some point. This results in a build up of money that can't be payed back. Third, keep receipts. Document your spending so you can keep track of it and make sure there are no mistakes. Basically, just understand that you will owe the company the money you spend. So be smart with it. Unpaid or late bills will quickly put you in debt.