Things To Know About Credit

It's not a secret that credit card debt is a problem for most people, but some who have debt don't even know how they got there. That's why it's important for young people looking to get credit to know as much about credit and debt as possible before they jump into that side of finances. There are a multitude of credit cards, credit companies, loan options, and financing options offered every day. If you aren't aware of what the terminology means or how credit really works, you just might put yourself in a tough position by accident.

Credit Isn't Free Money

The first and most important thing to know is that credit cards aren't free money. Even with a secured credit card, the whole idea of credit is spending you don't have now so you can pay for something later. This can get a little confusing for people who are just starting out or taking advantage of 0% APR offers and think they're getting a great deal. Everything you charge to a credit card has to be paid back at some point, and if you don't make the minimum payments on time, you'll get hit with high interest rates as well.

Credit Scores

You might hear a lot about good or bad credit scores, but not know exactly what that means. A credit score is basically your grade for paying back loans or paying off credit cards. It takes into account your payment history, payment amounts, how much credit you use of your monthly expenditures, and other factors. If you have a credit history, then checking your credit score is easy. Most banks include the option on their website or app so you can keep up to date with where you score. There are a few different score brackets ranging from excellent to poor. Excellent is tough to achieve and maintain, but good credit can take you just as far.

Now that you know what a credit score is, you should also know why it's important. Credit scores determine how far you can get in the world financially. They determine if you're eligible for a loan and what interest rate a company or bank can offer you. It's important to note that spending habits aren't the only thing that contribute to your overall score; so does credit history. This means the length of time you've had or been paying off a loan. Credit history is equally important when applying for a loan, especially a large one like to purchase a house, because it shows you can pay back a large sum over a number of years. Credit history helps you establish reliability.

Credit Cards

Not all credit cards are the same. Some offer low interest rates, some no annual fee, and some rewards in certain industries. It can be easy to get lured in by the promises of so many different rewards, but when choosing a credit card, you should keep in mind your personal needs. If you rarely use your card except for large purchases like furniture or appliances, a low-interest card might be your best bet. That way you can back the amount over time without worrying about accruing lots of interest. If you like to eat out more than cook at home, try to find a credit card with cash back options for eating at restaurants. Or if you like to travel, there are plenty of cards that offer rewards for flights and hotel stays. Think about your lifestyle and why you've decided to get a credit card, then find one that matches those dreams and needs. Also keep in mind there is such a thing as too many credit cards. Try to keep it to just one or two cards to make paying them off easier to manage.

Building credit is an inevitable part of being an adult, but knowing the basics of how it works is what makes credit a helpful tool.