Thanks for checking in with us again here at School Smart, Money Stupid! Our topic this week was credit cards. Last week we talked about how credit works, so if you want to learn more about that, you can check out that episode. We wanted to remind you that credit is important! We will almost all use it at some point. Also, your credit score, which is like your GPA, and your credit report, which is like your transcript, are both affected by your credit card use.
Credit Card Lingo
APR: The Annual Percentage Rate is the interest rate you will pay on the money you borrow. This will usually be anywhere from 10-25%. There are two types of APR's you may come across. The first is a fixed rate, which is when your APR will stay constant for as long as you have the card. The second is a variable rate, which is when the rate changes based on the movement of another index, like the prime rate. Okay, non-gibberish talk now. Variable means if the rates of people with almost perfect credit increase, then yours will increase too.
Annual Fee: Stay away from these! This means just to use the credit card, you have to pay the company a fee each year which is typically close to $100 per year. The American Express Black Card you hear about celebrities having on TV has an annual fee of $2,500!
Cash Back: Many credit card rewards programs come in the form of cash back. A card with cash back pays you back a percentage of what you spend. Although it's often 1%, some cards offer up to 5% cash back depending on what you buy.
Use https://www.nerdwallet.com/ to filter through cards and find the one that's best for you.
Advantages & Disadvantages
Rewards - You can earn free money! When you spend money, you can often earn cash back. Just make sure the card you chooses has rewards that align with your lifestyle. If you only go on vacation once a year, maybe you shouldn't buy a travel rewards card.
Convenience - You simply don't have to carry cash with you for every purchase. Credit cards at portable and accepted almost everywhere.
Building Credit - This is an easy way to start building your credit with responsible spending. It helps diversify your uses of credit and gives you a chance to start borrowing and paying back money.
Online Purchases - Credit cards make it easy to make purchases online for things you can't find in stores. Be careful that you don't start buying things you don't need!
Overspending - When you have a card that allows you to spend money without affecting your bank account, it may become tempting to start buying too much.
Debt - Although credit cards help you start building credit, they also put you in debt. If you don't make your payments on time or only make the minimum payment, that debt will magnify.
Identity Theft - If you've ever seen the movie Identity Thief, you know how annoying someone using your money to buy things can be! It is possible to have your identity stolen from your credit card, but lucky for you there are some protections for credit card users.
Getting a Card
Secured Credit Card - You make a deposit up front that you eventually get back when your card is transitioned to a normal credit card.
Ask Your Bank - Your bank will be more lenient than a large credit card company when finding a card for you.
Cosigner - This means you have an adult sign onto your account, but if you fail to make payments, it will affect their credit.
Joint Card - With a joint card, you become authorized on your parents' account and they can control your credit limit and spending but you still build credit.
Tips for Effective Use
Auto-payments will save you from ever missing a payment because it takes money directly from your bank account. Make sure to check if your auto-payments are making the full payment or just the minimum amount.
Use it for a recurring expense that you have every week or month like groceries or gas
Use it for needs, not wants!
Get rewards that benefit you.
Debitize is an app and website that links your credit card and checking account. This way, at the end of the month your payment has already been taken out of your checking account each time you used the card. This lets you keep your money in a secure account in between the purchase and the payment deadline while you are still getting rewards. You can't overspend and you'll never miss payments!
You can check it out at: https://debitize.com/
Money Tip of the Week:
When you feel like your spending is out of control, you can call your credit card company and ask them to freeze your card
You can legitimately put your card in water and freeze it so by the time it thaws out, you won't want to use it anymore
1. Credit cards can be a wonderful tool, so do your research and compare cards before applying for one.
2. Control your spending and be realistic.
3. Pay it off every month on time so you don't occur any interest.