Credit Cards and Interest Rates

Credit means lending money to someone. Credit card companies don’t offer their services as an act of kindness or as a tool for you to learn how to manage credit. It’s a business. As soon as you’ll reach age 18, credit card companies will target you like a hawk. Before age 18, parents can cosign for you or they can get a prepaid credit card for you. Of course you can also get a prepaid credit card over the age of 18. Neither one of those scenarios helps you establish credit history. If you want to look further into that information, I have added a link on website tips at the end of this chapter. 

When you turn 18 and are able to acquire a credit card in your own name, stores will offer you their credit card and tempt you with a first time discount off your purchase, your bank will offer you their credit card, the mall will have places with some free stuff like a backpack if you fill out an application, restaurants may offer you a free pizza if you get their card, etc.  It’s going to be tempting. Someone else is letting you use their money to buy something. It’s not free though. You will have to pay back the bank/credit card company over time.

Creditors make money by getting you to spend yours which is practical, but if you are not aware of their usage fees, interest fees or late fee charges, you can become victim to credit card debt very fast. If you’re aware of all things above, you can use a credit card to your advantage. 

The card itself is usually a hard piece of plastic containing a magnetic strip on the back, with your account number, name, and expiration date on the front. Have the phone number of the credit card company written down somewhere. If it gets lost or stolen, immediately call and cancel your card so you don’t incur any charges done by someone else. 

Depending on your income and credit history (aka FICO score) - basically your money management - if you’ve paid your bills on time every month, how many times you have gotten your credit checked...more on that later - you will get a set limit for your card. The more you earn and the higher your credit score, the more money the credit company will loan you. For your first time you might get a limit of $300 or $500 for example. 

The interest rate for a credit card company is different from a savings account. Since credit is a type of loan, the card company charges interest on the money you borrow in order to make a profit. If you don’t pay back your bill in full at the end of the month, you will incur whatever annual interest rate (APR) they charge which can be anything from 16%-20% or higher. Currently, the average APR is 17.3% in the USA.

Let’s break that down. If you buy a nice pair of boots for $200 and can only pay the minimum payment (every credit card requires you to pay a minimum amount every month in order to avoid extra fees; this minimum amount depends on the overall amount you have outstanding) of $30 when the bill arrives, you will get charged 20% interest on the remaining $170. Next month you will have to pay $204 (unless you’ve charged something else to the credit card which will increase your debt). Again, you can only pay back $30 which leaves you at a remaining $174. Next month you’ll have to pay $208.80. If you pay $30 again, you are left with $178.80 which will turn into $214.56 by next month and the spiral continues.

Ideally you want to pay off the balance on your credit card in full to avoid having to pay any interest. 44% of people forget to pay their credit card bill on time and then get hit with a late fee. It's best to set up automatic payment if you tend to forget paying on time. The minimum monthly payments are usually too low to pay them off in a reasonable period. If you cannot pay it off in full, you should at least make a much larger payment than the minimum required amount. 

I mentioned credit card fees earlier. Besides the interest fee they charge for remaining balances, you have to check if the credit card company you’re choosing is charging a monthly usage fee and/or annual fees, application fee, transaction fee (for getting cash from your credit card instead of using the card for purchases for example) and/or fees for speaking to customer service representatives when you call, how much they charge for late fees and penalty fees if you overcharge your account (if your purchase is $225 and your credit limit is $200, your purchase might still go through, but you will probably be charged another penalty fee for going over your limit). 

It is true that you can help establish a good credit history by having a credit card and always paying your bill on time as well as paying all other bills on time. Credit cards often use establishing credit as one of their marketing tactics to  convince you that you need their card. Once you do get a credit card in just your name and not your parents name, don’t max out your card to its’ spending limit every month even if you can pay back the whole amount at the end of each bill cycle. Stay within a third of your card limit. That way you will increase your credit score. You will seem more of a risk taker to banks if you max out your card on a repetitive basis.

Again, think twice or three times when you make a purchase with a credit card. Do you really need this? No need to feel guilty about wanting nice things, everybody does. But giving in to impulse decisions can become an instant problem.

It’s best to pay every bill on time and in full. As we go into our twenties and get first jobs we will slowly build our credit history (FICO score). Your FICO (short for Fair Isaac Corp., which was founded in 1956) credit score is a number from 300-850 that lenders use to get an overall idea of the state of your credit history. This number is based on the information in your credit report from one of three national credit bureaus - Experian, Equifax and TransUnion. The FICO credit score comes together from the following criteria: payment history, amounts owed, length of credit history, credit mix and new credit.  You can check your credit score at Experian or Credit Karma.

If you keep all payments on time, your credit score will slowly rise overtime. It is the most important criteria of your FICO score. Credit scores don’t just affect the ability to get another credit card, they also help you being able to rent an apartment, lease or buy a car and buy a home. Even employers sometimes check credit scores for potential employees. If you have a bad credit score, that could be a red flag for them. 

Website tips:

Muller, Chris. “Credit Card Basics - A Guide For Teens.” Money Under 30,

“Understanding Your FICO Score.” U.S. News & World Report, U.S. News & World Report,

Mercadante, Kevin, et al. “Understanding Your Credit Score: What's The Difference Between Your FICO Scores?” Money Under 30,

Fowles, Deborah. “Should Teens Have Credit Cards?” The Balance, The Balance, 30 Oct. 2019,

“What Are the Best Credit Cards for Teens?” Experian, 20 Mar. 2020,

Butts, Mason. "Question of the Day (Update): What is #1 reason that people give for paying their credit card bill late?"21 Aug. 2020,

Butts, Mason. "Question of the Day (Update): How Do People Decide What Credit Card To Get?", 8 June, 2020.

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