how do credit cards work?

[t-maxxracer32]

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.

[BrianG]

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 ().

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

[t-maxxracer32]

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!

[kulangflow]

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 :)

[kulangflow]

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

[MTBikerTim]

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

[lincpimp]

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"!??!!??!

Originally Posted by lincpimp

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?

[lincpimp]

Originally Posted by azjc

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...

[Arct1k]

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)

[magman]

I agree w/Brian...and others. Owning a cc can be v/dangerous, especially when it comes to this hobby 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.

[pb4ugo]

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.

[MTBikerTim]

Originally Posted by pb4ugo

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.