How do credit cards work?
When you use a credit card, someone lends you money to buy something. Here is how it works:
- You want to buy groceries.
- You pay with acredit cardfrom a bank.
- The bank pays the store for your groceries.
- The bank sends you the credit card bill, including charges for the groceries.
- You pay your credit card bill.
How do I get a credit card?
You must apply to get a credit card. The company you apply to will check your credit history. The company uses your credit history to decide:
- if you will get a credit card
- how much you will pay for the card
Before you apply for a card, be sure you compare at least three cards. You want to get the best deal you can.
How do I compare credit cards?
Credit cards offer different deals. Before you get a credit card, find out these things:
- What is the annual fee? This is what you pay to use the card for a year.
- What is the APR? APR means annual percentage rate. This is how much interest you pay every year. A lower APR means you pay less interest. That costs you less money.
- Are there other fees? How much will it cost if a payment was late? What will it cost if you go over your credit limit?
- What is the grace period? This is the time between when you spend money and when the card charges you interest. A longer grace period is better. Look for one that is at least 25 days long.
What if I can’t get a credit card?
You might be able to get a secured credit card. Many credit unions, banks, and some other companies offer secured credit cards.
Using a secured credit card can help you build or improve your credit history.
What is a secured credit card?
A secured credit card is a card that you pay for in advance. You put money in an account. Then you can use the card to spend that much money. It works like a regular credit or debit card. It is different from a prepaid card:
- A secured credit card usually has lower fees than a prepaid card.
- A secured credit card should give information to the three credit reporting companies. Most prepaid cards do not.
How do secured credit cards work?
Here is how secured credit cards work:
- You apply for a secured card from a credit union, bank, or credit card company.
- The credit union, bank or company checks your credit history.
- If your application is approved, you pay a fee to use the card for a year.
- You deposit money in the bank. The deposit usually is $300-$500.
- Sometimes the amount you deposit is your credit limit. But sometimes your credit limit is less than the amount you deposit. Your credit limit means the amount you can spend on the card.
- You use the card to buy things. You can spend only up to your credit limit.
- You deposit that amount back into your account. You can spend that money next month.
- The secured credit card company gives information to the three credit reporting companies about the way you pay for your card.
How do I choose a secured card?
Before you apply for a card, find out these things:
- Is there an application fee? Look for a card with no fee.
- What are the other fees? Look for:
- a low annual fee
- a card with no processing fees
- a low interest rate
- Does the card company send your information to the three credit reporting companies? You want them to. Your credit history might improve that way.
- What interest does your deposit earn? It should earn interest like any other bank account.
How should I use my credit card?
Using your credit card is like getting a loan. When you use your credit card to buy something, you are borrowing money.
Some people use a credit card to buy things they cannot afford right now. Some people use a credit card to help build or improve their credit history. Sometimes it is just easier not to carry cash. Sometimes it is easier to pay once a month for the things you buy.
You pay less for your credit if you pay everything you owe every month.
Should I pay the whole bill every month?
You can pay your whole bill every month. That means you probably will not pay interest. That makes credit less expensive for you.
You might not pay your whole bill every month. You might pay only the minimum payment. That means you will pay interest on the amount you did not pay back. That amount is called the balance. Credit is more expensive if you pay the minimum amount due.
If you do not pay the minimum amount due, also called the minimum payment:
- your interest rate might go up
- you might have to pay fees
- your credit will cost you a lot of money
For Example
Here is an example of paying the minimum:
Your credit card interest rate is 18%.
You owe $1,000.
Your minimum payment is $50 each month.
If you pay only $50 each month, and you never spend another dollar on that card, it will take you 5 years to pay the full bill.
During those 5 years, you will pay $360 in interest.
The $1,000 you borrowed will cost you $1,360.
How can using credit help my credit history?
Do you want to help your credit history? Here are some ways to help yourself by using credit:
- Use your credit card a few times a month.
- Buy things you can pay for that month.
- Pay the whole credit card bill every month.
- Do not leave a balance on your card.
This is how to improve your credit history. But it takes time.
How do loans work?
You borrow money, maybe from a bank or credit union. You agree to pay back the money in a set amount of time. You also agree to pay a certain interest rate. The interest rates for loans usually are lower than the interest rates for credit cards.
Where can I get a loan?
Most banks and credit unions offer loans. To get a loan, you must apply. The bank or credit union will check your credit.
The bank and credit union use your credit history to decide:
- if you will get a loan
- how much you will pay for the loan
You might have a bad credit history, or no credit history. That means you might not get a loan from a bank or credit union. It might take time to improve your credit to get a loan.
Sometimes, you can apply to a store for a loan. You can use a store loan to buy something from that store. These loans sometimes are easier to get if you have bad credit.
Stores also check your credit history. And store loans sometimes have higher interest rates. A store loan might cost you more money than a bank loan.
What if I can’t get a loan?
You might need to buy something small. You might use a credit card to buy it, even if you have to pay interest.
But maybe you cannot use a credit card. Or maybe you need to pay for something bigger.
Some people go to a payday lender. Some use their car title to get a loan. Some pawn things.
These are expensive ways to get money. Fees and interest rates are very high. These lenders also are not good if you need a big loan or if you need money very fast.
The truth is that there might not be a good answer to this question.
