Credit is so much more than a plastic card. Your credit record can help or keep you from getting ahead in life.
Establishing credit is a must if you plan to ever borrow money to buy a car or a home. Since credit cards are generally a youth's first exposure to credit, let's take a look at the basic facts about credit cards.
Credit cards are convenient and an easy way to establish credit-if you use them wisely. However, they can also get you into trouble. At best, credit cards can make it difficult to stick to a budget. At worst, they can tempt you to overspend to the point of not being able to pay your bills.
To enjoy the benefits of credit and avoid the potential pitfalls, you need to understand the basics of getting, using and managing a credit card.
Credit Card: With a traditional "credit" card, you charge items on your account and receive a bill later, which you have the option to pay in full or at least as much as the "minimum payment due". Whatever you don't pay carries over to the next month and you'll be charged interest on it. This is referred to as revolving credit.
Charge Card: A "charge" card doesn't allow you to carry a balance from month to month. You have to pay off the total balance when you get your bill. You get the convenience of plastic without the danger of getting into debt or paying high interest charges.
Debit Card: A "debit" card gives you the convenience of paying with plastic and not having to carry cash, but it does not advance you any money you don't already have. Debit cards are connected to your checking account, and the money will be taken out of your checking.
Gift Card: A "gift" card looks like a credit card but acts like a debit card. With a gift card, you can pay with plastic, but only the amount of money that the pre-paid card has on it. You may receive these as gifts for your birthday for the coffee shop, the music store, or the mall. Or you may choose to buy them for yourself so you can have the convenience of paying with plastic-without the temptation of going over your budgeted spending allowance when you're out shopping.
Your credit limit is the maximum you are allowed to charge on your card, and is based on your financial background and credit history. If your balance exceeds your credit limit, you'll be assessed an extra fee each month until you pay off enough of your balance to bring it back down below the limit.
To manage credit successfully, you need to make the distinction between the credit limit and the amount of credit you can afford. Just because the credit card issuer grants you a thousand-dollar limit doesn't mean you can afford it or should use it.