The Power of Plastic: What to Know about What You Owe

Credit cards can be invaluable resources in the world of personal finance because they help you make important — often emergency — purchases. But at what cost? Credit card loans can bring debt – and a whole lot of headaches if you’re not careful.Read More

by Lew Goettner

Ever open a birthday card from your grandparents and a crisp $10 or $20 falls out? Cash in the card is always a good thing. Kelsey Miller, a high school senior in Bloomington, Ind., got one better from her grandparents as she prepared for a trip to Chile this past summer – a credit card. She can use it only for special circumstances, like on her birthday. “If I didn’t need their permission, I would use it more than I should,” says Miller. “I usually only spend the cash I have on me. If I did have free use of the credit card, I would definitely spend more.”

Restricted credit card use makes sense for most teens, many of whom have yet to experience what can be the darker side of personal financedebt. Debt is when you end up owing a person or a company a sum of money that you have borrowed from them. Debt has a habit of growing faster than one expects if the full amount is not paid back on time according to pre-specified conditions. Credit cards are often to blame for getting people deeply into debt. When you use a credit card, you are borrowing money from the credit card company, and you are expected to pay it back to the company. Most borrowers receive monthly statements from their credit card companies indicating how much money they have spent and thus how much they owe.

But not all debt is bad. Credit cards can help pay for emergency expenses. Before you sign up for credit cards you should do some investigation, says Laura Levine, executive director of Jump$tart, a financial education group. “It seems simple to sign up for a credit card, but that’s not all there is to it,” she says.

The 411 on Credit Cards

The No. 1 thing to know about plastic is that it’s not free money. Eventually, you will have to pay for what you are charging.

When you use a credit card and don’t pay everything you owe each month, the bank will charge you interest on the balance. When it comes to credit cards, the power of what is called compound interest works against you. Each month, the interest your credit card company charges on credit card debt becomes part of the debt principal for the next month. So, you’re paying interest on your interest. The less you pay each month, the more interest gets added and the longer it takes to pay off. If you have a $200 balance and only pay $20 a month, it will take almost a year to pay the whole bill. If your balance gets up to $1,000, it will take 11 years to pay it off. That $1,000 will end up costing $1,732 with interest charges.

It’s hard to get a credit card if you are under 21, but some high school students, like Miller, have them. Bryan Ryherd, a high school senior in Terre Haute, Ind., has had a Visa card for about two years. He uses it for just about everything, including gas and clothes, and pays his own bills. He tries to limit his spending to $100 or $200 a month. “I try to keep track so I don’t overuse it,” he says. “Most of the time I pay it off.”

If you don’t keep track of your bills, it can mean big trouble for years. Late payments, especially over several months, will lower your credit score, a number that predicts how credit-worthy you are. If your score is low, it can make it hard to do a lot of things, including get a cell phone, buy a car, get insurance or rent an apartment. “It’s all about reputation. Companies want to see responsible use of credit,” says Heidi Berardi, vice president of Family Credit Management in Rockford, Ill. “They don’t want to see that you can’t pay your bills on time. Why would they lend you more money?”

Proceed with Caution

A new law requires anyone under 21 who wants a credit card to prove he or she has money to pay the bills or have a parent co-sign on the card. Getting a parent to co-sign on a card can be a good idea for teens who need a credit card for emergencies, but remember that if you don’t pay the bills, your parents will have to. “If you co-sign, you’re both responsible for that debt,” Berardi notes. “Everyone should understand what they’re signing before they make that commitment.”

The same advice goes for the freebies that credit card companies will offer, even once you have received your card. Perks like no interest charges for six months are great, but make sure you don’t spend so much that you can’t pay off your balance when that period is up. Credit card companies may give you cash back based on how much you spend, but it’s usually just a few cents for every dollar – hardly worth racking up big bills that you can’t pay just to earn a few dollars at the end of the year. The bottom line, says Berardi, is not to sign up for every card offer that comes along. “Pick a low-limit card, pay it off and build your credit history,” she says.

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8 comments on “The Power of Plastic: What to Know about What You Owe

  1. I read an article about credit cards and how sometimes its not so good to have a credit card as a teen, The article taught me alot about how credit cards work. Its important to be smart and watch what you spend on because the last thing you want is to go in debt. I am really happy i read this article due to the fact that it is going to help me tremendously in the future.

  2. The article taught me a lot about how credit cards work and how it is sometimes not a good idea to have one as a teen. In order to avoid going into debt, it is important to be smart about what you spend your money on. The information in this article will be immensely helpful for me in the future, so I am glad I read it.

  3. This article taught me how credit cards work and why sometimes its not the best thing to own as a teen. To avoid things like debt we have to be smart with our money. This article has taught me to better control how much I spend and what I spend it on.

  4. This article taught me how credit cards work and why sometimes its not the route to take as a teenager. To avoid things like debt we have to be smarter with our money and control our spending. This article has taught me to better control my spendings in the future.

  5. When I needed to pay for my summer school tuition, my mother bought me a credit card accessory card and advised me to use it reasonably; Credit cards can help me cope with short-term cash shortages; But if used improperly, it will cause me to consume without restrictions and fall into debt difficulties. This article also tells me how to use credit cards reasonably. I have benefited greatly.

  6. This article taught me how to use credit cards. It is extremely important to use a credit card carefully because if you spend more then you are able to, then you will have a lot of debt and negatively affect your credit score.

  7. This article provided me with guidance on utilizing credit cards effectively. It emphasizes the importance of responsible credit card usage, as overspending can lead to accumulating significant debt and adversely impacting one’s credit score.

  8. This article provides the key elements of using a credit card efficiently. It demonstrates the power of responsibility on spending your money the correct way. Overspending can lead to debt, which will lead to a negative affects on your credit scores.

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