A Beginner’s Guide to Using Credit Cards

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Credit cards can be useful financial tools, especially when you need to borrow money or make large expensive purchases. They also can put you in debt if you don’t manage them properly. Here is a quick guide to understanding credit cards.

1. Why It’s Important to Own a Credit Card

Credit cards can help you pursue financial opportunities in your present and your future. They allow you to borrow money for large expenses; they can even help you in an emergency. Credit cards can also help build your credit history — that is, if you consistently make payments on time and keep your debt levels low. If you build a good credit history, you can find yourself less stressed and more financially literate. You’ll also have a better chance of receiving other loans, like a mortgage or auto loan, with reasonable terms and lower interest rates.

2. How Credit Cards Work

A credit card is an agreement between you and a bank or financial entity. First, you have to apply for the credit card. Then, if your credit history meets their standards, you will most likely be approved. Depending on the card’s issuer, you may have an annual fee for the card. Each month, you will receive a bill for your credit card along with a credit card statement asking for a minimum payment on your balance. If you choose to pay only that minimum amount, you may find yourself accumulating more debt due to the card’s interest rate. To avoid paying interest on your card, you might want to consider clearing your balance before the end of the month. (Remember, too, it’s wise to keep an eye on your credit as you work to beef up your score. You can view two of your free credit scores, updated every two weeks, on Credit.com.)

3. How to Properly Use a Credit Card

It is important to use your credit card carefully and responsibly. First, make sure you pay your credit card on time every month. This is crucial. If you miss a payment, you may get hit with a fee. And if you continue to miss your payments, know this will negatively impact your credit history, which could hurt you in the future when you try to secure a loan.

So pay off your charges in full every month, if you can. This will boost your credit score, ensure you always have a positive credit history and most importantly, keep you out of debt. If you do choose to carry a balance on your credit card after making your monthly payment, then I recommend using less than 30% of your available credit. (For best scoring purposes, you may want to aim to keep your credit utilization below 10% of your available credit.) This way you will never be too in over your head.

Remember, if you rack up charges on your credit card and can’t afford to pay them off, then you will likely continue to get hit with interest rate charges until you pay those balances down, leaving you more in debt than you’d planned. (Some cards offers 0% introductory or balance-transfer annual percentage rates that let you avoid interest for a period of time.)

Lastly, it is okay to own multiple credit cards, but it’s important to treat each card with the same care. Each month, try to pay more than the minimum or maintain a $0 balance. And if you are looking to open more credit cards, it’s a good idea not to do so all at once, as having too many inquiries in a short period could raise a red flag to lenders that hurts your score.

Image: Antonio_Diaz

The post A Beginner’s Guide to Using Credit Cards appeared first on Credit.com.

3 Ways Parents May Accidentally Harm Their Child’s Credit

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It’s possible, and sometimes common, for teens and young adults to unknowingly damage their credit, as they aren’t fully aware of how their spending habits are truly affecting them. But sometimes it can go a step beyond youthful mistakes and parents are the ones ultimately prompting the damage to their child’s credit. (You and your child may both want to discover where your credit currently stands. One way to do this is by viewing your two free credit scores, updated monthly, on Credit.com.)

If you’re a parent, you may want to consider these three ways you may be harming your child’s credit without even realizing it.

1. Not Encouraging Them to Work for What They Want

If you give your child everything and they never have to work for anything, they likely won’t know what it takes to earn a dollar. Or how many hours at minimum wage they would have to work to buy that $280 handbag (that you paid for) or that it is equal to someone else’s monthly car payment. Not understanding that you have to work for money may cause your child to not understand how to responsibly use credit cards. Swiping a piece of plastic at the register is easy, but paying the statement that comes at the end of the billing cycle may not be. It’s a good idea to teach them how much things cost and how to save for what they want. It’ll be good for them to learn how to budget for needs versus wants as well.

2. You Helped Them Take Out Too Many Student Loans 

If your child wants to go to a school that is more expensive than what their scholarships, federal student loans and grants will cover, another consideration may be private student loans. While having student loans on their credit profile may add diversity (and that can be a good thing, as types of accounts make up 10% of your credit scores), it can set your child up for dealing with paying back an immense amount of debt. You may want to read up on evaluating college costs and look for the least expensive route to get a college education while avoiding unnecessary student loans.

For example, your child may be able to live at home and attend the local community college for the first two years of school and then transfer the credits to a four-year school they want their degree from to help cut back on potential debt. During this time they can also save up money to help pay for living expenses which average around $10,000, whether you live on campus in the dorms or off-campus in an apartment, according to the College Board’s most recent figures. Out-of-state and private schools are typically most expensive, but may also offer significant grants (free tuition) to attend, based on special talents or high grades and test scores. The trick is to see if it would be cheaper to stay in-state or not, depending on the offers and total cost of admission. No matter what you decide, it’s a good idea to take the time to talk to your teen about ways to save money on college costs.

3. You Share Your Bad Credit

It’s hard to teach good credit behaviors when you don’t know them or practice them yourself. It may seem easier or smarter to add your child to your credit card account as an authorized user, but you need to consider this carefully before doing so. When you put them on one of your accounts as an authorized user, there’s a good chance that account will appear on your child’s credit reports. And, while this move can sometimes help a young adult build credit, if you’re making late payments or are carrying a high balance on the account, it will have the opposite effect. In other words, your child’s credit may suffer so long as they stay on the account. (Note: Since your child is not the primary accountholder, they should be able to call the creditor, get taken off the account and ultimately have the negative information removed from their credit reports.)

Before adding your child to any accounts, you may want to make sure your own credit habits are in line. You can generally build good credit by making all your loan payments on time, keeping debt levels low and keeping credit inquiries to a minimum.

Image: LuminaStock

The post 3 Ways Parents May Accidentally Harm Their Child’s Credit appeared first on Credit.com.