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Published byMaya Aldrich Modified over 9 years ago
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Credit Card Basics
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Getting the idea Debit cards can be used almost anywhere that credit cards can be used. But there is a big difference between them. The money you spend using a debit card gets quickly withdrawn from your bank account. In other words, it is almost like paying cash. One specific use of a debit card is for withdrawing money from an ATM. This withdrawal comes directly from your bank account. Normally banks do not charge a fee if the ATM withdrawal is made at a bank where you have an account. A fee may be charged if the withdrawal is made at a competitor’s bank.
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Credit Cards When you use a credit card, you are borrowing money from a credit card company. These companies charge you interest on your balances. The amount of interest varies from company to company and may depend on how you manage your credit card account. A cash advance is a service that allows a cardholder to borrow cash against the credit limit. Typically the interest rates used for cash advances are higher than interest rates used for purchases.
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Credit Scores Every consumer has a credit score that is managed by companies called credit bureaus. These companies provide credit reports to lenders. How you use your credit cards affects your credit score. A credit score is a number that predicts you ability to repay a loan. Lenders look at this score when you want to buy a house, a car, or take out a loan. Having too many credit cards that are at their limits may negatively impact one’s credit score. Typically, credit scores range from 300 to 900, and the greater the score, the better the credit.
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Credit Cards AdvantagesDisadvantages Easy to use Good for emergencies Can help establish and maintain a good credit score Easy to spend money you don’t have Can ruin your credit score if you don’t pay on time May have annual fees Late fees
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Debit Cards AdvantagesDisadvantages Easy to use Protected by your PIN (personal identification number) Spending is limited to what’s in your account
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Credit Reports There are several life experiences that negatively affect one’s credit score. A late payment is when credit card balances are past their due dates. A foreclosure is when the bank takes ownership of a house from someone who has failed to make mortgage payments. Bankruptcy is when a court gets involved because a person cannot repay debts he or she owes. A tax lien is a legal claim to a homeowner's property who is behind on paying taxes or other fees.
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Credit Reports ActionYears on Credit Report Late payments7 Foreclosures7 Bankruptcy- Chapter 137 Bankruptcy- Chapter 710 Paid tax liens7
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Example 1 Jasmine has a credit card. She usually does not make her monthly payment on time and is often charged large late fees. Jasmine thinks because she makes a payment every month, this will not affect her credit score. Is she correct? Explain
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Strategy: Analyze how Jasmine pays her bill Jasmine is always late on her payment. Credit card companies view this as irresponsible. By agreeing to the credit card terms, she is promising to pay her bill on time. Solution: Jasmine is incorrect. Not paying her bill on time will negatively affect her credit score.
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Example 2 Leo has a credit card. Whatever he charges during the month, he pays off at the end of the month and is never late with his payments. Will Leo’s way of paying his credit card bill increase or decrease his credit score? Explain.
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Strategy: Analyze how Leo pays his bill Leo pays his bill in full and on time every month. This shows that he is always able to repay what he borrows. Solution: Leo’s method of payment will increase his credit score.
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