Credit Cards: What are they and why do I need one?

By Max.

Credit cards seem scary!

Credit cards are a spooky concept, especially when we start talking about loans, debt, etc. To put it simply, a credit card is similar to a debt card, except that instead of using money you already have, you essentially ‘borrow’ money that you have to pay back later. Usually you pay that money back at the end of the month. There are some more complexities to it, but that’s the basic concept. Let’s dive in!

Why do I need a credit card?

Having an open credit card in good standing will give you a credit score, which can be helpful if you don’t have any bills or loans out in your name. Having a good credit score allows you to take out loans so you can buy more expensive items, most commonly houses and vehicles. You can also make take out smaller loans or use payment plans through some furniture stores to buy things like furniture sets. This also applies to rental furniture companies and such. In short, you would need a credit card in order to have a credit score to help you make big purchases.

What is a credit score?

Your credit score is essentially a number that has been calculated to determine how likely you are to pay back your debt. If your credit score is low, or if you don’t have a credit score, you may find that you have higher interest rates. You may not even be eligible for loans, because they have no way of knowing if you will pay them back. The higher your credit score, the more likely you are to get approved for loans. You’ll also have lower interest rates over time with a good credit score.

How do I get a credit card?

There are a few different ways to get a credit card. You can start by going online to research which card you want and which option best for you. I recommend using Credit Karma for this. Credit Karma allows you to see your credit score for free from your mobile phone, anytime. They will also tell you exactly which credit cards you qualify for. Another benefit I found to using Credit Karma is that it tells you what I can do to improve your credit score. Some examples include paying your cards down by so much % or paying off a loan.

Please note: you do have to be 18+ to obtain a credit card in the United States.

What about debt and interest rates?

Your debt will essentially be whatever money you’ve charged to your card, plus whatever the interest rate is for your card. It varies for different companies and cards, but it’s usually below 14% APR (annual percentage rate). Your interest rate can also change, depending on your credit score.

Will I end up in debt?

Yes and no.

You will have debt as long as you use your credit card, but if you make your monthly payments on time, it is considered to be good debt, which is part of how you get your credit score to go higher. If you are responsible and cover your card’s minimum payment every month, you won’t have to worry about any adverse debt.

In today’s age, you unfortunately need a credit card to get a credit score, as paying bills won’t help you to develop a credit score as much. It’s incredibly frustrating, but the cards are super manageable if you understand how they work!

Are there other ways that I can build my credit score?

Aside from opening a credit card, some places encourage you to open up multiple credit lines. Do not do this, please. As a young adult, you really only need one credit card. The longer you have the card, the higher your credit card limit raises.

A few other things that affect your credit are:

• Repaid and currently-paying loans
• Phone bills
• Utility bills
• Small personal loans or credit builder loans (I do not recommend those)

From the community:

Bun asked, “what exactly is an ‘interest rate’?”

Think of an interest rate as similar to a tax, almost. Most loans and credit cards have an interest rate, the same way a savings account also gains interest. If you have any charges on your credit card they will accrue a little bit of interest each month, until it’s paid off. Say you buy $10 worth of snacks at the gas station. If you wait to pay that $10 back, it’ll turn into more money over time that you owe. It’ll basically be a small portion of your yearly interest that will be added to your total each month.

Bun asked, “is the debt that comes with having a card expensive or does it vary from person to person?”

Debt really varies from person to person, depending on what you buy, how much you use your card, and how late you are to paying it off.

Anne’s simple breakdown on how interest works:

In January you go to the store and you want to buy snacks, worth $10. But, you don’t have $10 on you! Your friend says “hey, don’t worry, I have you covered,” and they pay for you. But, you both agree that you’ll have to pay your friend back, of course. You make a deal that going to pay them back this month. If you can’t pay them back this month, as incentive to make sure you get their money back to them, the deal is that every month that they go without that $10 back in their pocket, you’ll pay them an extra 5 cents. Let’s say you can’t pay them back until March. That’s two months you borrowed that $10 for (if you’re not including March in this calculation). So, you pay them back $10.10. Easy! That extra 10 cents you paid them on top of the $10, is called “interest”.

It’s also good to know that banks run on their clients’ money. So, when you’re borrowing that money from a friend in our scenario above, it turns out that your friend was also borrowing that money from their friend, sometimes! That’s a major contributor to why banks can collapse and crash sometimes. Hence, why you hear a lot of people talk about “not trusting banks” and sometimes even keeping their money in cash.

Anne answers, “so, what if I don’t want to put my money in a bank?”

Often times people who distrust banks will keep their money out of any bank all together. The main downside to this is that your money is still not entirely safe. Natural disasters, theft, and all kinds of things can happen to your money. Other people keep valuables like gold and jewelry in a safe for a rainy. In the end, it all has risks. There is no one “safe” way to store your money, you just have to make the best call that you can for yourself and your needs.

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This post was originally created by Max, on October 6th, 2022 in The Homeschooler’s Chat Discord server, edited by Anne, with community input quotes from Bun and Anne. Learn more about Max, Bun, and Anne on our About Us page. Cover photo by Stephen Phillips – Hostreviews.co.uk on Unsplash.