Debit, Credit, and Accounts
If you are buying something, chances are you are using one of two ways: Credit or Debit
Let's start with the simpler of the two: DEBIT
Debit cards are cards connected to checking accounts. When you put money into the account, you can spend that money with your debit card and it automatically takes the money straight out of your account. On the other hand, if you spend all of the money in your account, you won't be able to make any more purchases until more money is put into the account. Pretty simple, right?
If you don't have a debit card or checking account (and are interested in learning about your options), click this button. Otherwise, get ready to learn about credit!
Now let's move on to CREDIT
Credit cards are completely different than debit cards and definitely more complicated. In the words of Jake Cousineau, in his book How to Adult: Personal Finance for the Real World (a book that I very much would recommend to all teens) “Credit cards are like most financial tools: if you understand them, you can use them to your advantage; if you do not understand them, they can wreck your finances” (Cousineau, 88).
Credit cards aren't connected to your checking or savings accounts. Instead, they basically work as mini loans. When you spend money on your card, you are borrowing money from the bank, and at the end of the month, you pay back everything you have borrowed. Borrowing money can sound scary, but, as you will soon learn, using a credit card will really help you later in life.
Credit cards are costly only if you don't pay off the full balance each month. If you use it like a debit card, only spending the money you actually have, you will definitely see the benefits. If not, it will really hurt your future. You will be charged high-interest rates on unpaid amounts, which will mean you owe a lot more money than you spent.
While you can only apply for a credit card when you turn 18, it's important to start preparing before then. Once you reach 18, it's essential to apply right away. This is to help your credit score.
What is credit score?
Credit score is basically a grade that you get based on how well you are using your credit cards. While credit score might not feel important right now, it will 100% affect future you. Having a good credit score will mean that when you buy or rent things like a house or a car later in life, you get a much better deal than you would without a good credit score. Even future employers can look at your credit history to gauge your trustworthiness and ability to manage money and other important priorities. Your credit history defines whether or not the bank can trust you, and if they do, they are much more inclined to be easier on you with things like lower interest rates.
How do I get a good credit score?
There are three main things that affect your credit score.
1. How long have you had (and actually been using) a credit card?
Here's the big idea: the longer you have had a credit card, the better you look. If you get a credit card shortly after turning 18, (assuming you are also following points 2+3 correctly) this is going to really help your credit score, since you have much more history to look at. Remember that you have to actually spend money for this to help you, simply having the card but never touching it doesn't do anything.
2. How much money are you using?
Repeat after me: spending more money does not mean you are getting a better credit score. What is important is the ratio of your spending to your limit. Every credit card comes with a limit, which is the maximum amount of money the bank is willing to loan you per month. Many people make the mistake of assuming that as long as you stay under this limit, your score will be good, but that isn't the truth. In order to have a glowing credit history, you should be spending no more than 30% of your card's limit (20% if you want to be an overachiever).
3. Are you paying it all back on time?
At the end of each month, you will get your credit card bill. While you will always have the option to only make the minimum payment (a fraction of the money you spent) DO NOT do that. Instead, pay all of the money back in full every single month. If you don't, you will have to pay much more in the long run because of interest.
This brings me to an important message: only spend money on your credit card that you actually have. If you only have $50 in your checking account, do not spend more than $50 with your credit card. Pretend it's your debit card. ONLY SPEND WHAT YOU HAVE.