One way to begin establishing your credit history is by using credit cards. So let’s fast-forward a few years. Let’s apply for a credit card!
Okay, so imagine old enough to get your own credit card. What will you need to do to show the bank that you can pay their money back?
First, they’ll want to know the income from your job, and second, they’ll want to see that you have a history of paying your bills. This information helps the bank determine whether you’re responsible enough to pay back your debt.
Let’s say you have a job and pay your bills — and you get a credit card! Life is good, right? But here’s your first surprise — credit cards have spending limits! And for your first card, the limit won’t be much, say, a $300 limit. So you only can spend to your limit.
And remember — with credit cards, you’re borrowing money. Each month you’ll get a bill for everything you spent. The bank or credit card company will ask you to pay a certain amount, which is called the minimum payment. Usually, if you pay the total amount, that’s fine, and you’re done. But if you don’t pay it, well, here’s the second surprise about credit cards — you’ll owe the bank interest.
Remember that word? With credit, interest has another side to it. Interest is a fee the bank charges you for borrowing their money. If you’re borrowing money, interest works against you. If you’re saving money, interest works for you!
The interest rate for credit is expressed as an annual percentage rate, or APR. The bank may also charge an annual fee or yearly charge. And there’s another charge you may have to pay. It’s called a late fee, and you may have to pay it if your payment doesn’t arrive on time. Late fees can get very expensive!
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