Well, I’m probably not much older than you – but I’ve gained some wisdom from experience making bad choices with credit cards. I also work for a credit counseling agency.
Start with some basic credit 101.
Your credit score, which basically determines how much money you will save over the course of your life, is extremely important. It is calculated mathematically based on a variety of factors. This number ranges from 300-850.
This score is based on the following:
- Credit repayment history – 35%
- Length of your account history. – $15%
- Total debt-to-income ratio. (Utilization) – 30%
- Number of accounts/diversity of accounts – 10%
- Inquiries – 10%
Since you are young, you can’t do jack shit about #2 except start establishing credit ASAP.
The ones that are directly in your control, however, count big – Utilization and Credit Repayment History.
Credit Repayment History means, pay your bills on time. That’s all. Just do it. This is the number one most important thing for your credit.
Utilization is your debt-to-income ratio. You ideally want to keep this between 2% and 9%. If you have a $1000 credit limit, this means you don’t want to ever carry a balance over $90. That’s not to say you can never charge more than $90 on your credit card – just make sure you pay down every month whatever you charge.
Diversity/Inquiries aren’t really nearly as big a deal as the two listed above. If you focus on those you should really have no problem.
The higher your credit score, in general, the lower your interest rates will be when you take out a loan for a car, a home, or virtually anything else. You want low interest rates. Interest adds up FAST.
As far as the APR on credit cards, I am going to be perfectly honest and tell you that my tiny brain still has trouble gathering the mathematical complexities of how interest works. Basically Annual Percentage Rate of 7% means that if you carry a balance of $1000, you’ll end up coughing up $70 extra when you repay the debt. I think. Paging all accountants!
Sufficed to say, if you get a credit card with a 0% introductory interest rate, please be advised that if you miss a single payment, that interest rate will skyrocket and you will find yourself coughing up way more than you budgeted. Also be wary of ‘‘hardship’’ programs that credit cards offer. This means you might get a lowered interest rate or suspension of payments for a fixed period of time because you are experiencing financial difficulties. But at the end of that period of time, your interest will skyrocket.
Credit card companies will do everything in their power to make money off you. They will charge late fees, hike your interest and keep giving you more and more credit, tempting you to spend, spend, spend. Please remember they are loaning you money, and that loan comes with a very high price. There is not currently a legal limit on how much interest they are permitted to charge. I have spoken to clients who have 30% interest on balances with thousands of dollars because of a couple missed payments. You don’t want to be those clients.
I would advise you not to ever put anything on a credit card you can’t pay off immediately before the grace period. Don’t charge things like vacations, clothing, or things you really don’t need but rather very much would like. It is going to be very tempting to do otherwise. You have to be strict with yourself. Remind yourself that anything you buy with a credit card isn’t really yours until you’ve paid it back.
That’s all I’ve got for now. You are talking to someone who used to have serious money management issues. I learned all these lessons the hard way. Hopefully you won’t have to.
ETA: One last thing… the Universal Default Clause. If you miss a single credit card payment, your interest rates can go up across the board–on other credit cards, personal loans, you name it. It can hit you like a wall of flame if you aren’t careful.
