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The Real Deal on Credit Cards
How to avoid the debt trap
Chimore Mack
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“Ooooo, I want a credit card, they can help you buy anything.”

“A credit card can build up your credit.”

“They’re good for emergencies.”

“They are a waste, they are tricky, and you’ll end up in a lot of debt.”

These are things I hear all the time when people talk about credit cards. Some people like credit cards because they provide a sense of freedom and stability. Credit cards give people the power to buy things even when they don’t have money, and it gives them the feeling that they can afford things that they actually can’t.

We all know what credit cards look like, but what exactly are they? Credit cards are a type of loan issued by either a store, bank, or a credit card company. That’s right, a credit card is a loan. Unlike a debit card, it’s not money coming straight out of your bank account. Instead, it’s a way to buy something if you don’t have enough money to pay for it immediately.

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But with credit cards, you not only pay back what you spent, you pay some additional money, called interest. And sometimes you have to pay other fees, too. That’s one way credit card companies make money: by charging you extra for loaning you money you didn’t have.

Ask Questions

I recently talked to a bank representative about credit cards. Let’s call him Hamlock.

“Do you want a credit card?” he asked.

I laughed and declined. I told him why I didn’t want one, mainly because of the high interest rates and also because I’ve had several family members end up with a lot of credit card debt. They are still paying it off because of the interest.

“Wow, ma’am, you should get a credit card because they can build up your credit so that you can buy a house or a car,” Hamlock said.

“That’s not true,” I replied defensively. “I know people that don’t have credit cards, but they have nice houses. Credit cards are just traps.”

“I have three credit cards and I use them wisely.”

“Don’t you only need one?” I questioned.

“It’s OK to get more than one if you use them wisely,” he said with a smile.

I laughed at him because I thought he was trying to show off his three credit cards, but I also knew he was telling the truth. My grandmother had even told me that you need credit cards to build up your credit.

“So what if you have a credit card with a $300 spending limit, and you do good with that one—is it true that you can get a bigger credit card with a higher credit limit?”

“That’s true, but it depends on your credit history as well as the credit score on your credit report.”

I wanted to ask him more because I was very interested in getting a $500 credit card with a low interest rate. But I wanted to think it all over first.

Rewards or Risks?

Here’s the thing: Don’t just rely on a bank or credit card representative to answer your questions. I found out how tricky credit cards can be when I started working for a big retail store that offers credit cards to their customers.

Our job wasn’t just selling clothes—it was selling customers on the store’s credit card, because that’s a big moneymaker for the store. We had to make it seem like we were doing customers a favor by offering them a credit card.

Sometimes the store credit card gives great offers that a lot of customers can’t resist, like 30% off on your next purchase. Or you can get “reward” points every time you make a purchase with your credit card. If you earn a certain number of points, you can get cash back or coupons. But the catch is, you have to pay with your store credit card in order to use the coupons. And that’s how some people run into trouble.

Some people have credit cards because of these deals that the store or the bank offers to people. They like that they only have to make the minimum payments every month instead of paying off the entire amount they owe. Again, it seems like the store is doing the customer a favor, when it’s really just setting a trap.

Do the Math

Store employees aren’t encouraged to tell a customer the small print when they let a customer apply for a credit card. But before you get a credit card, you need to read all the paperwork, especially the interest rates. In some retail stores, the interest rates can be very high, more than 20%. That’s how the stores make their money: When you don’t pay off the entire balance on your credit card every month, you get charged interest on what you still owe.

Let’s say you spend $200 on an outfit. If the interest rate is 22% and you only make the minimum payments of $15 per month, it will take you almost a year and a half to pay it off. Worse, with all the interest, you end up spending $231—and your clothes are already out of style.

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How do you get a lower interest rate on your credit card? That often depends on how good your credit score is. Your credit score is based on how responsible you’ve been with credit cards in the past—whether you’ve made your payments on time, how much debt you have, etc.

Sometimes it’s good to have a credit card because you can build up your credit. Also you can buy things you need like furniture, clothes, and cars. But sometimes it isn’t good because you can become financially irresponsible by feeling like you have more money than you really do.

Let’s say you maxed out your credit card (hit the spending limit) and the amount is $5,000. Not only do you have to pay that off, but you have to pay off the interest on that. Twenty percent interest on $5,000 is $1,000. Now you are screwed.

So remember: A credit card is just a loan with a high interest rate. If you can’t pay, you could end up with a black mark on your credit report. That can stop you from getting a loan to buy a house, a car, or even open a bank account. Sometimes it can even stop you from getting a job; some employers check your credit report.


Credit Card Tips

$$$ Only buy what you can afford. If you can’t pay off your credit card within a month, you could end up with a serious problem. Don’t fall into the trap of just making minimum payments each month.

$$$ Know your payment due date, interest rates, and late fees. Late payments not only trigger a big penalty fee, they’ll damage your good credit.

$$$ Always look over your monthly statement. Sometimes, the credit card company makes mistakes or ends up adding extra charges for things you didn’t know you’d be charged for.

$$$ Don’t spend just to earn points or rewards from the credit card company. They wouldn’t offer those “rewards” if there wasn’t something in it for them.

For additional information on credit cards, banking, budgeting, and more, check out these websites:

www.themint.org/teens/your-credit-history.html

www.teensguidetomoney.com

New Credit Card Rules

There are new laws about credit cards that you should know. President Barack Obama signed the Credit Card Act of 2009 last year, and many of those rules went into effect this past summer.

One of the goals of the Act is to make sure credit card companies won’t take advantage by hiking up your interest rates or charging fees without telling you. And if you have credit card debt, the credit card company must now say right on your bill how long it will take for you to pay off the card if you’re just making minimum monthly payments.

The credit card companies are now required to give you 45 days notice of interest rate, fee, and finance charge increases. They also have to mail you your bill at least 21 days before it’s due so you’ll have enough time to pay it.

If you’re under 21, there’s something else you need to know. To be approved for a credit card, a young person must now get the signature of a parent, guardian, or other individual 21 or older who will take responsibility for the debt if you can’t.

You won’t be able to get an increase on your credit limit unless that responsible adult who signed your application approves the increase.

While this should cut down on credit card companies taking advantage of teens who aren’t ready for credit cards and end up in debt, it can make things hard for responsible youth in foster care who could benefit from having a card but don’t have a parent to co-sign. Talk to your foster care agency or lawyer if you have questions about how this may affect you.

(FCYU-2010-10-22)