Spend Smart: How to Use a Credit Card the Right Way
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Saving up for something you really want takes time, right? It's a great feeling when you finally reach that goal, but sometimes you just want it now.
What if you could get it now and pay later?
That's what credit cards offer. If you don't have enough money to buy the thing you want, they let you borrow the money today and pay it back over time. Sounds like a good deal, doesn't it?
Not so fast.
Credit cards can be a helpful financial tool once you turn 18. But using them without understanding how they work could get you into serious financial trouble.
Let's break down what you need to know to help you learn to use credit cards the smart way.
The easy part: spending money
Picture this: You offer to buy pizza and sodas for you and your friends. You use your new credit card to pay the $24.50 bill, knowing that you can pay it off when you get your paycheck at the end of the month. That seems doable.
But then you start buying more stuff, like a video game, a couple of coffee drinks, and maybe even a rideshare home from a football game. Before you know it, you've racked up $175 on your credit card.
Schwab has credit card offers for clients.
The hard part: paying it back
When you get your first bill, you might notice that you don't have to pay back the $175 you borrowed. Instead, you see a minimum payment of $25. Great, right?
Wrong! If you make only the minimum payment, the remaining amount you owe ($150) will be subject to interest charges. That's in part how credit card companies make money.
And if you don't pay at least the minimum payment by the due date, you'll owe late charges, which are on top of the interest charges.
The worst part? If you don't pay back the late fees right away, they're added to your balance. That means you'll start to owe interest on the late fees, too! And your credit score will take a hit, too.
What's a credit score? We're glad you asked!
Getting good (credit) grades
A credit score is like your credit grade. It tells lenders how good you are at managing borrowed money. The higher your score, the better.
Source
MyFICO.com
Building your credit reputation
It makes sense when you think about it.
Say you lend your bike to a friend and they return it with scratches and a flat tire. Maybe you even had to ask them to return it multiple times. You're probably going to think twice about loaning something to that friend in the future.
Now say you loan your bike to another friend who returns it the very next day. Not only that, but they washed it and added air to the tires! You'd probably be willing to lend it to them again.
Banks and other companies think the same way. They want to know they can trust you to be responsible with the money you borrow. Your credit score helps them decide.
Room for improvement
So, what if you make a few mistakes and your credit score goes down?
Luckily, it's not the end of the world. There are plenty of things you can do to boost your credit score.
- The most important thing to do is to make payments on time each and every month. This counts for 35% of your credit score. Even making just the minimum payments on time each month will help improve your score.
- Paying off the balance in full each month is even better. That's because the second-most important thing you can do is cut down the total amount you owe, which counts for another 30% of your score.
- Keeping your credit card balances low is important, too. If you build up a large balance on a credit card relative to your total limit, that may be a sign that you are using too much borrowed money. This is called credit usage, and it also counts for 30% of your score.
Using credit the smart way
Using a credit card wisely isn't just about avoiding debt—it's about building strong financial habits. Credit can be a powerful tool or a serious trap, so be sure to play it smart.
Your next steps:
- Talk to your parents about their first credit cards. What mistakes did they make that you can learn from?
- Research credit cards, comparing interest rates, fees, and payment terms. Is there anything that surprises you?
- Not all debt is bad. Learn about how you can use loans to help pay for college.
Schwab has credit card offers for clients.
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This material is intended for general informational and educational purposes only. This should not be considered an individualized recommendation or personalized investment advice. The securities, investment products and investment strategies mentioned may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decisions.
All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
For illustrative purpose(s) only. Individual situations will vary. Not intended to be reflective of results you can expect to achieve.
Investing involves risk, including loss of principal.
This information is not a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager, Estate Attorney) to help answer questions about specific situations or needs prior to taking any action based upon this information.