how do credit cards work?
 

hey guys im 18 and have zero credit and i think its time to get that show on the road... im thinking of the easiest way of doing it and a credit card seems to be the way. maybe?

how exactly do they work?

im thinking of getting an unsecured one if that makes any difference?

really looking for low apr and no annual fee.

here are some questions i have.........

lets say i go out and buy something for a couple hundred dollars. my minimum payment is 50 bucks a month. if i only pay 50 and my apr is 10% does that mean that the bank gets 5 dollars? so really im only paying 45?

how do people get in credit card debt?

if i go to the store and buy something for 20 dollars and then pay it right away when my monthly bill comes will it charge me anything for it?

basically what i plan on doing is buying things with it then paying them off by the end of the month.

will this build credit? ^^

there is this card through B of A and it allows you to get a check advance with no interest for the first year. http://www3.bankofamerica.com/credit...&router_flag=y

how would that be for a first time card?

id use the check advance to pay off my parents and help them out a bit.

sorry for all the questions... i just like to be informed.

This is really a loaded topic.

Most CCs are unsecured debt. Meaning, the CC company is giving you a line of credit without any kind of collateral they can nab (reposses) if you don't pay. Basically, they are gambling on your "honor".

Also, even though you don't carry a large balance, the potential debt can hurt your credit score. So, even though you only have a $50 balance on a $5000 card, there is still $4950 of potential debt.

APR works like this. Let's say you have a 10% APR. That means 10% of the balance is interest, but that is annual percentage rate. The bank figures out the monthly finance charge (interest) by taking the APR, dividing by 12 (months), then multiplying that by the balance. So, for a 10% APR CC with a $500 balance, the monthly interest would be $4.17 (10% / 12 months X $500).

You also have a minimum payment, which is usually around 2% of the balance. So, for that same card, your min payment would be $10.

However, since your min payment is $10, and your interest was $4.17, only $5.83 goes towards the principle, and the balance only goes down to $494.17.

This is where some people get caught. They have a high interest card and only make the min payment. If the APR was 24% and the min payment was 2%, the whole payment would go to interest and the balance would never go down! That's extreme, but some cards are up there.

If you have no or poor credit, most low APR cards have an annual fee. The amount varies, but it's usually $50 or less. Whether you get this type of card or not depends on how you plan to spend. If the CC is only for emergencies (and that's it), it's not a good deal. It's just a matter of doing the numbers to see what works best for you.

People get into CC debt because most people don't have the self-control to have a CC and not max it out. They usually say "Oh, I'll pay for it next month", then next month comes around and they don't. It's an easy trap to get into. Then, they get another one because their car broke down and needs to be fixed, or the new STRX layer came out that they had to have (:smile:).

There is a lot to this that I just touched on., but it's late and I don't feel like typing anymore.

dang that's a lot of info
ok well the one im thinking has no annual fee.
if I don't ever use it then it would not charge me for anything correct?
also, if I bought something for 500 then paid 100 a month would that help building credit?

thanks!

The way I did it when I turned 18:

I got a secured CC from my credit union for $500. Basically they took $500 out of my savings account and put a hold on it to use for collateral. The interest rate was only 11%.

Anyway, I used that card only for putting gas in my car (a necessary and consistent expenditure) and set-up an auto payment from my checking account to pay off the entire balance every month. This way I was never charged a dime of interest and it built up my credit score.

Eventually I changed it to a $2000 unsecured CC with the same credit union and I still have the auto payment making sure I never get charged interest. It's nice to have it in case of emergency. They always want me to increase my credit limit, but I always decline the offer to keep myself out of trouble. :-)

Another way to do it is to get an auto-loan for a car that you already own outright. Put that money in a CD to help offset the interest charged. This is a nice consistent payment that helps build your credit score.

Anyway, just a couple of ideas ...

Nah, you dont want to get a credit card. You dont want to get in debt either unless you want to be in debt for the rest of your life. Head to http://www.daveramsey.com/ and go get the book called The Total Money Make Over. You will thank me later :)

He won't be in debt if he borrows against his own money or his own car. :-)

Credit cards are a dangerous thing. If you do not have a stable job DO NOT GET A CREDIT CARD! Shift work which you are not guaranteed shifts is not a stable job, I have had friends get themselves into trouble this way. You also need to know exactly how the card works. It will save you money if you do.

For example:

Some cards allow you to put the card into credit. Say you have a card that has a $200 limit. If you then dump $1000 onto the card you can then spend $1200. Sounds silly but normal debit cards here have a maximum daily limit so buying a fridge isn't possible on your debit card unless you go into the bank and get you limit raised in advance which is a pain. The only catch with this is I know one bank here which will allow you to put the card into credit and it will raise the limit by doing so but you still have to pay the full purchase off after the purchase which is crazy. Where does the money you put on the card go? How do you get it back?

When you pay money off on some cards, it pays off the most recent purchases first. This isn't a problem on normal interest cards but it is on cards where there is an interest free period. It means you have to get the balance down to 0 before you stop paying interest so the interest free period is really useless.

Some cards also charge interest on the original purchase price no matter how much you have paid off. So if you buy a $2000 fridge (I like fridges) and pay off $1000 you still get charged interest on the $2000 which can be a lot of money on the sorts of dodgy cards that do this. I have the terms for a card that does this sitting on my desk. It's good for a laugh. The interest rate after a certain interest free period is 30%. Some cards are dodgy and designed to screw people for every thing.

my advise is you need to build your credit, many thing in life now revolve around your credit rating including insaurance, potential jobs, and when you want to purchase a house or car. I started out when I was your age with store CCs. recently I bought about $6000 at the Maytag store a fridge, washer, dryer water, softener and I got 24 months same as cash which ment as long as I didnt miss a payment and payed it off within the 24 month time I got charged no interest(I actually paid it off in 12 months) the interest savings was over $1000, I did this when I bought a bunch of furniture and a $2500 TV from Best Buy...also you want a higher limit because your credit rating is based on your total limit on all your cards versus what you owe and you could cancel a card you dont use any more and your issac score will go down

I find the humor in credit. I am 28, own ALL of my cars and my house, outright. I have NO credit. If someone wanted to lend money to somebody, it would be me, cause I can pay it back, no questions asked.

So I look like a person who could get credit anywhere? Wrong. I cannot get any credit. So it is a good idea to get a bunch of credit card, with high limits. The "rub" is that you have to be smart with them. Never buy something you can't pay for, ever. Pay you cards off every month, or pay a larger part off every month. It takes the average person 42 years to pay off credit card debt if they pay the minimum every month.

If you are smart you can have a bunch off cards, and never really have any debt. I am sure that there are many books that can tell you what to do better than I can.

I will say that my wife has mediocre credit, and she has owed alot in the past. However her credit score is still better than mine, and that is handy if I wanted a home eq loan, or something similar,

It is all BS if you ask me, and I do all I can to get around it. Can you say "fraud"!??!!??!

I think you just need to prune your money trees....lol.....Hows the orchard doing?

HAHA, I love cash, and will never buy something that I can't buy outright. My recent motor sales have helped the r/c fund. Although I had to divert some of it to modding my street bike. I will have to start a thread on that here...

I would say get a credit card - Amex blue cash is nice - No fees and cash back....

My tip! Never spend more than you can afford to pay off EACH month... Basically never ave need to of the vredit but hay they give me 5% of gas (yes 5% what doesn't everyone have one)

I agree w/Brian...and others. Owning a cc can be v/dangerous, especially when it comes to this hobby:yes: I had one and only one for 15 yrs (got rid of it during divorce so ex wouldn't leave me in the poor house) I have one of the best credit scores you can get,,,w/one card. Moral of the story, as Lincpimp said, if you can't afford it ]DON'T buy it. Best of luck to you and just be smart about it. :lol:

I disagree with most of the above.

Lack of responsibility is the bad part, not the credit cards.

I earn cash (or other) rewards on all of my credit cards and don't pay a dime in interest or annual fees.

In response to the credit score comment, available credit is one of the largest factors in the Fico scoring algorithm. All these people that reduced their limits because they saw some quacky advice to do so ended up suffering from a lower credit score. Now that so many people are having their limits cut by CC issuers due to the "credit crunch", they are facing the same scenario.

My advice to OP: start with a small card by a major bank. Citi student card could be a good first choice. Let the balance report ONE time (to show usage) and pay immediately after the statement cuts. This will show usage without having to pay interest. Now, when there is a balance on the statement, the balance reports to the credit report. That will lower your score (available credit issue again). Know when your statement cuts and pay your bill in full before it does. If you don't have the discipline to do this, then the others are right and a credit card should probably be avoided. If you get good at doing this, you will be earning up to 5% of wour spending back in the form of rewards while being afforded the protection paying by a CC gives you.

As it comes time to finance your first car or home, you will pay through the nose if you don't have comparable high credit amounts on your report. A good credit card will get you the comparable credit in short order without paying ridiculous interest (if you follow the pay in full advice).

There are also very active forums on the web discussing credit and usage. Fatwallet is one and creditboards another.

I honestly didn't put much thought into increasing credit rating. Thinking about the credit rating thing I think I am with linc. Stuff it.

A credit rating IS important and something to manage - Most people at some point will need some credit - House purchase etc

Starting early and building it up slowly is sensible. Just don't go overboard - live within your means - credit is just that credit you have to pay it back and why pay interest to a back - This is just part of being an adult and taking responsibility.

Good luck with that. Paying cash for big ticket items isn't always possible, especially when it comes to a house. Most folks looking to buy a home don't have $100's of thousands available to buy outright. For probably 99.9% of people, no credit = no house.

Wow - I am amazed at how many people have responded to this thread.

My suggestion is to get the credit card, you may not be able to get a low APR with no past histroy, but that's okay. When you start out just use the credit card to pay for what you know you can pay off every month.

One suggestion is that things you would normally pay cash for (ie: gas, food shopping, etc) you save the cash and pay with CC and then pay off each month. When the bank see you charging and paying off each month they will continue to give you higher credit limits.

I royally f'ed up when I got my first CC and maxed it out when I was in college. My parent started getting calls at 8 in the morning from collectors and it was very shameful for me. My limit was $2000 and I was at $2500 with interest compounding - i couldn't keep up at the time with very little income. Luckily my parents bailed me out - but that was a serious lesson learned - and ever again I said would I hold a CC debt I couldn't afford to pay.

Another thing I learned was that it's very hard to get a loan if you've never had one before either, even with a CC. So getting a car with a loan for part of the purchase (even if the interest is higher) and paying it off on time (or even early) look great on your credit report.

We live in a credit/debt society right now - I've heard that it is almost the norm for people for to have up $20000 in CC debt at most times - and think of the interest being paid out for that.

To build credit over the time (expecially if you are thinking of buying a house and getting a mortgage with a good rate) it is good to work yourself up to having 2 CC's and going through a few loans (car or personal) and paying them off over time to help build your credit.

This may sound ignorant and stupid but I know people who have gotten home loans and have never had a loan or CC. They did have to do other things though to show they could repay the loan. The best thing about that is that it showed that they really could repay the loan. Sure things are changing at the moment and it isn't going to be that easy any more but that is probably for a good reason at least for a while. I see and know too many people who get them selves into trouble then someone else has to get them out of trouble.

You don't live in America though. If you don't have a good credit score here, you're screwed with trying to buy a home without paying cash in full.

This is my situation, I have no credit to speak of, but my wife does have credit, so we should be ok. I am planning a new house, and own the property it will be built on. I also have 100% equity in my current house, so I can sell that and have quite a bit toward the new house. I will still need some sort of loan, but I am trying to save as much as possible to limit the amount I will have to borrow.

I'm sure being able to pay cash for everything is a great feeling but it's not possible for the vast majority of people. If you want to be able to use credit you have to have viable proof you can handle credit. I pay cash for most small ticket items. House, equity loan for the garage and car are on credit. Use credit card for online purchases but pay it off every month.

Last credit score was over 800:rules::yipi:

im gonna have to say that this was definetly the best/simplest advice ive read through this whole thread.

alot of what you guys said was far too advanced for what i know:lol:

recently i had bought a tv and all that stuff from best buy and have 18 months to pay it off with no interest. that would have been a great thing to build my credit... problem is my dad only put his name on it. didnt put me as a join person or however that works.

i think when i finish paying that off i may go and do it again with a laptop and put it in my name. that way i can build credit from that with no interest while using a CC and get credit from that.

soon i will be buying a new car (in the next year i hope) and that will definetly help me alot.

i do know my own limits and i am very good with spending my money, so getting a CC wont hurt me in that area. i wont spend more than i can afford.

right now i do have a steady job. although it is a "shift" job i still get around 30-40 hours a week plus tips.

i probably wont get one untill i finish paying off my debts that way i can start fresh without working about anything.

i appreciate all your help! i didnt realize everyone here was so smart with credit and all that fun stuff.

Before you do anything, watch this program online by Frontline on PBS. Secret History of the Credit Card. Frontline is awesome and has great documentaries. Interesting program, but also illuminates a lot of the traps and pitfalls CC setup to get the most $$ out of you through fees and interest. As said, CC's are very dangerous if you use them carelessly and stupidly.

Also, never ever pay the min amt. 1st off, between the low min and high int rates, you will take years to pay off the balance, and that's if you don't ever buy more on the CC. 2nd, making a min actually goes on your credit rating as a ding. At worst pay a few $$ more. People who have to make min payments are in financial trouble, so assumes the credit raters.

CC help build credit, but only a bit. They are a good 1st step if you are careful, but having an auto loan and paying it on-time is much better. Anyone can get a CC, and credit raters know this.

Lastly, don't get a BoA card. They suck. They make payments online tough, meaning you have to pay several days in advance of the due date. Even to pay the day before, you have to pay a $12 "express payment" fee to be counted before the due date. Late charge is like $45. BS. I've heard Citi is not that great either, but IDK first hand. I hated my BoA card and will never get one again.

I now have a card from Barclay's. They don't do the stupid crap BoA does, and you can make payments upto 7pm that will count the next day w/o fees. They also send out email reminders for payments. Also they are not constantly raising credit limit like BoA does (which can hurt credit as well... you can only have so much credit to your name, and if CC take up a large portion, other loans factor those amts in.)

BoA
 

Well I have BoA as my main bank of choice, and we have a few credit cards in use right now. All of our pay goes into BoA accounts, and transfering money around to pay things off is the easiest thing in the world. I never have to write a check for anything, because the bank sends checks to anyone I tell them to within 24hours, or if the establishment is in thier circle of associates they do a wire transfer instantly, and most importantly it is absolutely free as long as you never go over limits or are never late. When I have a credit card payment due I can either have it paid automatically by the bank, or I do a wire transfer (FREE). Either way I never pay any fees, or interest payments on anything as they are paid before any interest is applied. LIke it has been stated the safest way to deal with CC's is not to make purchases that you cannot pay for within 30 days. Yes a home or a car may be the exception, but anything else is purely a luxury. It may take a person some time to get to this point in life, but anything else will cost you dearly in the long run.

I used to have 800 scores as well, until I got married the 2nd time around, and she drove me to the poor house in credit debt. It took me a few years to clean all of that up, but I am back on top of the world again, and finally paying balances off every month. Any other way is just dangerous. Seeing people out there with CC debt of tens of thousands of dolllars is just rediculous. We have become greedy as a society, and want everything NOW instead of being smart about spending our money. If you cannot afford it, then don't buy it. This is a simple stratagy that has been around for 100 years. You need a CC to gain credit, but you also need to save money so you can pay for the things you wish to charge and pay them off every month plain and simple. That is the only way to avoid the demons of credit card debt. Good luck with that.:lol:

I think everyone is saying the same thing - A credit card is fine credit card debt is not! Get a low limit and bank on paying the whole thing off at the end of the month...

The credit card company will hate you but thats the game...

All true, but you're not going to get that car loan at anything less than 18% without prior comparable high limits. That's where the CC comes in.

I honestly almost never check the interest rate of a credit card I want, because I don't pay them interest. ONLY PAY IN FULL.

ya thats one thing i didnt understand.

for me i would not be stupid with it 100%. i do not NEED anything so its not like i HAVE to charge things.

i always have money in the bank anyways so the CC would be only for building credit.

i think if i do get one my first purchase would be an erevo.

in 1 month i can easily get enough money for it.

but why not get it now if it will help build credit.

i may buy 1 big thing a month with it. then gas and other things like you said.

thats the way to go about it, things you would nornally pay cash for put on a cedit card and than when the bill comes pay it....

Pay the bill before it comes so the balance won't report on your credit!

That is true, but that why you get someone to co sign a loan, like a parent. When you make ontime payments, that will really build the credit. Even after a couple years you could refinance w/o cosigner.

I had a CC for a while, but my 1st auto I had to get a cosigner. CC credit helps only a little.

Even with a co-signer (if one is available) you will face rates and terms not as favorable as just having good credit to begin with. This is approx. 7500 car deals' worth of experience talking.

As a F&I manager, I could get a first time buyer bought all day long at top tier rates as long as they had a year of responsible credit repayment and equivalent high dollar amounts. A kid buying a 12k car with a 10k credit card limit as comparable amount was golden. When buyers got stars in their eyes looking at the 40k truck is when re-enforcement was required.

If you're gonna start out, I'd recommend taking the hit and paying some interest for at least 6 months. Nobody (creditors) likes a balance payer. Be smart about it, you'll most likely end up having to get a secured with annual fee credit car. After establishing yourself for a few months, then start paying it off every month if you wish. Just budget yourself X amount of dollars to pay twoards the card every month and stick with it. Do not ever pay just the minimum. Credit is very important to have, buying whatever you want with actual cash is a very stupid train of thought to have. Bad credit is better than no credit. Just cause you don't agree with how the credit system works, doesnt mean that you shouldnt play by their rules.

It's always better to use someone elses money.

bad credit is better than no credit? that doesnt make sence.

your basically saying being negative is better than neutral.

unless your saying little credit is better than none?

Wow, that's good to hear. When I went to get my first car i couldn't get great rates (not bad, but at least 4-5% above the best rates) w/o a co-signer. This was a cheap new car and having good credit, a fulltime good job for two years, and a CC for 5 something years always paid on time and in full. OTOH, my wife (but still not married at the time, so GF) had our mortgage in her name and she had no problem getting the best market rate by herself. Even though I had been paying half the mortgage for a couple years, the bank didn't know that and my credit was still fairly weak as it was just CC debt, etc. The rate she was quoted was 5% less for no other diff than the loan history really. Once I had established good credit w/ the car loan, I had no trouble getting other loans later on, like mortgages etc.

^^^^

One of the best things to do to build up a good credit report for you in the future for this credit card. Save the money first leave it in your checking or saving account. Then when you are ready to buy use your credit card. When bill comes you have no problems paying it off. That what I did when I was 18yrs and I am 35yrs now and still doing same thing with great results.
hope this helps..

Yep, any credit is better than none...

I have no credit, while my wife has decent credit.

If you have no credit, lenders have no idea what you will do. Even mediocre credit shows some sort of history, and they will raise the interest rates for people with less than ideal credit.

Exactly!

The crazy thing is, no credit is a bigger risk than not so good credit to creditors. Lincpimp is probably more than capable of paying back a line of credit, but will get passed up whereas someone who just got done filing for bankruptcy would have a much higher chance of getting a credit card. They know you can't file again for another 7 or so years so they will get their money. I'm not saying someone with bad credit history will get good rates or anything, but they stand a better chance of getting it than someone with no history. I think it should be mandatory for responsible money/credit management classes in high school the way things are going these days. It would save alot of hassle and learning the hard way like the way I had to learn. I started off bad with a student loan and realized that if I wanted something better, I gotta take care of it and pull through all the really high rates and bad deals to get to where I'm at today (754 :D ) I'm not condoning bad credit, just merely pointing out the importance of establishing credit in today's society.

i applied for a secured card yesterday 29 dollars annual fee and i would deposit 500.

im not sure how my credit line will be or anything but they said a card would be sent to me in a couple days so ill check it out when it comes.