Credit Card 101: Key Takeaways
What is Credit?
Credit is the ability to borrow money from a lender, like a bank, and pay it back later. It helps you buy now and pay over time. A credit card is a powerful tool for building your credit history, provided it's used responsibly.
Benefits of Credit Cards
- Build a positive credit history for future loans or mortgages
- Earn rewards like cash back or travel points
- Fraud protection – safer than debit cards
APR – What Does It Mean?
APR stands for *Annual Percentage Rate*. It’s the cost of borrowing money over a year. For example, if you spend $1,000 and don’t pay it off for a year, a 20% APR means you’ll owe $1,200 by the end of the year. The higher the APR, the more expensive borrowing becomes.
Compound Interest
When used correctly, compound interest helps your money grow by earning interest on both the principal and the accumulated interest. The longer you let it compound, the more your savings can multiply over time, turning even small investments into significant amounts.
On the flip side, compound interest can increase debt quickly if you borrow money and don’t pay it off. As interest compounds on the remaining balance, your debt grows larger, making it harder to pay off over time. Missing payments or only making partial payments can lead to even bigger amounts owed.
TIP: Pay off your balance in full each month to avoid interest.
Credit Scores – Why They Matter
Your credit score (300-900) shows how well you handle money. A higher score means better borrowing options and lower interest rates. Build your score by:
- Paying bills on time
- Keeping credit balances low
- Avoid opening too many accounts at once
Good vs. Bad Debt
Good debt: Helps you build wealth (e.g., student loans, mortgages).
Bad debt: Wastes money (e.g., buying items on credit that lose value quickly).
Protect Your Credit Card
- Keep your card safe and secure
- Set up alerts for purchases
- Watch for fraud and report anything suspicious right away
- Avoid peer pressure – don’t spend more than you can afford!
Final Tip: Think before you swipe! Credit cards can be a powerful tool for building your financial future, but it’s important to use them responsibly.
