Part 2: Building Good Credit

Just because you have a credit card does not mean you are free to charge it to the max. You still have to pay for what you buy, and depending on your interest rate, this could take a long time.

For example: Say you spent $150 on a shirt at the store, credit card is 22% interest, $10 month minimum payments – which go down as your balance goes down.

$150 x 22% interest – only making minimum payment will take 18 months to pay off. Plus $28 total interest paid. $150 + $28 = $178 total. This doesn’t sound too bad.

Another example: Let’s say you build your credit and get a Best Buy Card with a $3000 limit. They are having a sale and you go nuts! You buy a big screen TV, high def, Wii console, DVR, all the cables etc. etc. Total = $3000. They tell you your minimum payment is only $75. A month and will go down as your balance goes down. So you make only the minimum payment, and after a couple of years you are wondering why you are still paying on that TV. This is why:

$3,000 x 22% interest = only make minimum payment will take 374 months to pay (31 years)

PLUS – $7,476.99 in interest to pay off that TV.

$3,000 + $7,477 = $10,477 total for TV and stuff.

If you can make more than the minimum payment on your cards – or on any loan, the total interest you pay will go down a lot.

In the case of the TV, instead of starting with $75 each month, pay $100. The extra $25 goes direct to the principle – the amount you borrowed at first – in this case it’s $3,000. Just that little extra brings your total time down to only 44 months, (3 1/2 years), and your interest is only $1395. If the $100 is too much every month, pay it when you can.

If you can afford the $75 a month, keep making it, don’t go down when they lower the minimum payment, and it will take you 73 months (6.1 years) and $5020 in interest.

IF you make your payments late, this is what will happen:

1. Your credit score will be affected, it will go down.
2. Your interest rate can/will go up. You may already be paying 22% (or higher) and they can raise it. Additionally, your other credit cards will raise their rates too!
3. You will be charged a late fee – $15.00 or more every time you are late. Don’t throw away your hard earned money.

One last word, a good credit score will affect your ability to rent an apartment, and now your car insurance rate.

Also, if you are a 3.0 student, be sure you talk to your car insurance people and see if they offer discounts for good grades!

For more information on credit cards and credit scores, you might be interested in Money – Personal Financial Literacy for High School Students.

Happy Credit building!