Credit 101: Basics For New Credit Users
Updated: Aug 10, 2020
Spending money in your checking account wisely, making sure you set aside savings, and investing for the future are all part of sound money management. But so is getting and using a credit card. A credit card is very handy for when you need to make payments, and most Americans have them. But they need to be used wisely because they can easily rack up
debt that you could end up paying a lot of interest on in the long-term. And they could also hurt your financial reputation if you're not careful with your credit score, a topic covered later in the article. The Basics Of Using A Credit Card A credit card may be confused with a debit card every once in a while because there are some similarities between the two. Both have 16-digit numbers on them, the cardholder's full name, the 3-digit security code, the brand logo whether it's Visa, Mastercard or American Express, and of course the bank name. But that's where the similarities end. Debit cards are simply cards that are linked to a personal checking account and limited to the funds in that account. Credit cards are linked to what's known as a line of credit which is similar to a loan. The difference is when you take out a loan, you have to pay back the entire amount you borrowed plus interest. With a credit card, you only pay back the amount of your line of credit that you've used plus interest if applicable. Plus once a loan has been paid off, you would need to apply for a new one. With a credit card, your line of credit is ongoing until you close your account.
The Basics Of Credit Scores
When you obtain a credit card, you will now also have an active credit profile that can be summed up by what's known as a credit report, and a credit score. A credit report is managed by agencies known as credit bureaus that your credit card issuer will report to detailing your usage. The score is a number that indicates whether you are using your credit wisely and making payments on time, or struggling to make payments and are a high credit risk. The two main credit scores are FICO and VantageScore. They have slightly different numbers, but usually credit is ranged from 300 to 850 with 800 to 850 being exceptional credit, 740 to 799 being very good, 670 to 739 being good, 580 to 669 being fair, and anything below that being bad.
Building Credit With Your Credit Card And Score Since you want to keep your credit reputation in good standing, you should be attempting to build your credit up when you use it. Both consumers with no credit card history, and those with troubling credit history will usually have limited options for cards they'll be eligible for. Your first credit card will usually have a fairly low credit line, and it's important to try not to spend too close to that line because doing so can hurt your score. It's also best to keep the balance paid off in full each due date to avoid interest charges, late fees and high credit usage that would hurt your score. Usually over time, your credit line will increase along with your score if you are making timely payments and keeping the balance low. There are also ways for building credit if you're having trouble getting a standard credit card on your own. The first is through applying for a secured credit card which will require you to make a deposit on the account before you use it. But you can get that deposit back after a period of time. The second is to become an authorized user on someone else's credit card account such as your parents. When you do this, you can use the credit card and potentially build your credit and not be on the hook for the account since the cardholder is. But you should definitely make sure you pay the cardholder back according to any agreement you have with them, or agree to a limit if set so that you aren't a detriment to their credit history.