Smart Spending

It is a good idea to develop smart spending habits.  Be sure to shop and compare before purchasing an item or service.  Try to identify deceptive or misleading advertising so you don’t fall for it.  Read the terms of a contract or warranty carefully, and ask questions or seek help before signing anything if you don’t understand it.  Ask for any additional promises in writing. Never sign a contract with blank spaces, and make sure to fill in the blanks or draw a line through them.  Finally, keep good records, such as receipts, copies of contracts and warranties, and records of payments, maintenance, and repairs.

Credit Cards and Credit Ratings

When you are 18, you will likely start receiving offers for credit cards, and the agreement for these cards will come with a lot of fine print.  A credit agreement is a contract that details your total credit limit, when you will pay fees, and how much interest you will pay to borrow. Don’t agree to anything you don’t fully understand!  Some fees that you can expect in your agreement include annual fees, late fees, cash advance fees, and over-the-limit fees. These fees may be flat (for example, $35.00 for an annual fee), or they may be based on a percentage of your transaction or how much you spend.  If you pay the balance in full every month, you will pay no interest. Keep in mind that credit cards aren’t free money and should only be used if you have the ability to pay off the balance in full every month.  You should avoid high credit balances and try to manage your credit so that your debt balance on each credit card is as low as possible.  If you must use credit to make a purchase, try to utilize the card with the lowest interest rate first. You should also know that applying for multiple credit cards at the same time may negatively influence your credit.

Paying It Back.  Always pay your balance off every month, or as much as you can as quickly as possible. Credit card issuers set minimum payment requirements at very low levels. There will typically be a minimum fixed amount or a percentage of the balance, whichever is greater. Some cards will require you to pay only the 1% or 2% of the balance each month plus any fees and accrued interest. Paying only the minimum balance means you pay more than the cost of your purchases.

What is a credit rating? Your ability to buy on credit will depend on your credit rating or score, which is a number between 300 and 850.  If you have a history of paying your bills on time and/or have dependable income source, then you are more likely to have a higher credit score.  Having a healthy credit score will make it more likely you will be able to get a car loan, apply for a credit card, or buy a house. Private companies called credit bureaus or credit-reporting agencies develop credit ratings.  Your credit report will tell a business whether you are a good credit risk, so it is important to use credit wisely and build your credit rating over time.  

The factors that credit-reporting companies use to determine whether you have a good credit rating are payment history, amounts owed, length of history, new credit, and credit mix.  Things that can negatively affect your credit rating include late payments, foreclosures, civil judgments, tax liens, garnishments, loan defaults, bankruptcy, or having your account placed into collection because of a failure to comply with the terms of your credit agreement. 

How do I check my credit rating?  The law allows individuals to check their own personal and financial information contained in their credit report.  Consumers can request and obtain a free credit report once per year from each of the three nationwide consumer credit reporting companies – Equifax, Experian, and Transunion.  Several credit card companies also offer free credit score and credit monitoring. Try Credit Karma to access your credit report anytime. If you dispute in writing any of the information in your file, the credit bureau must investigate and correct the mistake if an error is found.  You are also entitled to the names of persons and/or companies who have requested and received your credit rating.

What is bankruptcy?  Bankruptcy is a legal process that happens when a person or an organization doesn’t have enough money to pay all of its debts. Obviously, you should try to avoid this very complicated legal proceeding. At this point in your life, the best way to do so is to develop a good budget and keep credit card spending to a minimum.

What about debit cards?  Debit and credit cards have roughly the same fees and interest. By using a debit card, you are using your own money. By using a credit card, you are borrowing money and going into debt, and you will only avoid interest fees by paying the balance in full every month.  Remember that our brains play tricks on us about spending money: People who are offered the option of paying with credit instead of debit or cash are often willing to pay almost twice as much.