Sunday, November 14, 2010

Parents Failed Me, Can someone explain Credit, Credit Cards, APR, and how they all work together?

So my parents failed raising me as a child, now I'm a 19 year old male working part time at college and I have no idea what credit is, how I get a credit card, what APR and all that stuff is.

My idea behind it was originally, I apply for a credit card, get one, am able to purchase things with said credit card then pay back over time. But I don't understand what a credit score is, nor what good/bad credit score mean.Parents Failed Me, Can someone explain Credit, Credit Cards, APR, and how they all work together?
A credit card is not a good idea if you do not have the money to pay it off each month. Paying back over time and revolving a balance from month to month will cost you lots of money. At 19 you have not yet established a credit history so you are likely to get declined when you apply for a card. You have a limited employment history, little income and are generally not considered a good risk to lenders.

It can take years of using credit cards to understand just how they work. Even after you understand the basic credit card features, you might not know how they affect you. Your credit card has a credit limit. During a billing cycle, you can charge up to your credit limit without receiving any penalty. If you charge more than your credit limit, you will be assessed an over the limit fee each billing cycle your balance is over the credit limit.

As your balance increases, your available credit decreases. If you have a credit limit of $300 and make a $100 purchase, your balance is now $100 and your available credit is $200 ($300 - $100).

At the end of each billing cycle, a billing statement will be mailed to you. Billing cycles typically range from 29 days to 31 days, but can be shorter or longer depending on your credit card.

Your statement will include the balance at the beginning of the billing cycle (what was carried over from the previous month). It will detail credit card charges and payments as well as credits and fees in the current billing cycle. Fees and charges are added to the balance from your previous billing cycle, while payments and credits are subtracted to come up with your current balance.

If you carry a balance from the previous billing cycle, a finance charge will be applied. The finance charge is calculated using the annual percentage rate and one of six methods: average daily balance, double billing cycle, previous month's balance, adjusted daily balance, ending balance, or daily balance. Note that after June 30, 2010, new credit card rules prohibit credit card issuers from using the double billing cycle method to calculate finance charges.

If you did not carry a balance from the previous billing cycle, you should pay your full balance within the grace period to avoid a finance charge. Your next billing statement will include a finance charge, if you don't pay your balance in full.

You must make the minimum payment listed on your billing statement before the payment due date to be considered current. Current means you are not late on any credit card payments.

Typically, the minimum payment is calculated as a percentage of your credit card balance. If you make less than the minimum payment or you make the payment after the due date, your payment is considered late and you will be charged a late fee. When you are more than 30 days late, the late payment is placed on your credit report. Unless you've made other arrangements with your credit card issuer, you must make at least the minimum payment to avoid late payment penalties.

When you make a payment on your credit card, the amount of the payment is subtracted from the balance. Your balance decreases and your available credit increases. So, if your balance is $200, your credit limit is $300, and you make a $50 payment, your balance goes down to $150 and your available credit increases to $150.

A $150 purchase can end up costing you $400 if you make the minimum payment each month. APR is annual percentage rate. You are likely to receive a high APR since you have no credit history and are young. Credit card companies make more money the longer it takes you to pay off your balance. When you pay the minimum amount due you are paying off the interest on the card and very little of the principal balance. It can take years for someone to pay off a $1000 balance if making minimum payment each month.Parents Failed Me, Can someone explain Credit, Credit Cards, APR, and how they all work together?
Your parents failed you? How about you? Are you going to go through life blaming others for your shortcomings/mistakes? If so, don't ever expect to make anything of yourself.

Taking responsibility for your shortcomings/mistakes is a huge part of a successful life. Start now.

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I don't think your parents failed you, just because they didn't teach you this. Maybe they don't even know.

Here's a book that will help you. Maybe they have it at the library.
Credit score is basiclaly how credit-worthy you are as a person; how serious do you treat your debts and how likely you are to repay them.

It has multiple factors: how much debt you have vs. amount of credit you have, how promptly have you repaid your debts, (any overdues), type of debt, and other stuff. All that is somehow quantified and a score is calculated, kinda like the SAT score.

A ';good'; credit score would qualify you for bigger / lower interest loans. A ';bad'; credit score would make you pay VERY high interest rates or would not qualify for a loan at all. This is important when you want to make bigger commitments, like auto loan or home loan. At 550 or below, you likely won't qualify for a home loan AT ALL, where as 720 or above you'll qualify for like 5% interest home loans.


Kasey C, PC guru since Apple II days

Life is sexually transmitted... and terminal!
When people talk about your credit, credit score or credit report, they're talking about your reputation and payment history. The score is just a number calculated from items listed in your credit report, from the number of loans you have or had, to the length you've had them, and how reliable you've been. The higher the score the better your chances of getting a loan and/or a better deal on the interest rate you'll be paying.

A credit card or credit line represents automatic permission to borrow money up to a certain amount. A purchase creates an instant loan for the amount of the sale, and then you are expected to repay it and your other purchases under the terms of the card agreement. You can pay it back all at once or at least the minimum amount they ask for.

The Annual Percentage Rate is the interest (rent) you pay on the borrowed money. For example, if you owed $1000 for a whole year and the APR was 20%, you would owe $200 in interest as well. The interest you are charged for a given month is calculated on the amount you still owe that month.

To apply for a card, ask for an application at your bank. They will check your credit history (if you have any) and consider your income, and if you're approved you'll get a card about a week later. If not, apply elsewhere once in a while, you could get a hit. In the meantime it's no loss if you don't have a credit card, a debit card buys the same stuff with real money.
LOL I hear ya on the vocabulary and grammar skills - that paragraph needs a translator. I'm not sure what that person was trying to get at, but here's my attempt for you:

Credit card companies are basically loaning you money. You borrow it by using their credit card to make a purchase. You'll be paying them interest any time you carry a balance from one month to the next - i.e. if you pay your full balance due on your statement by the due date each month, you won't pay them anything extra. Consider that your ';good boy'; pat on the head, for not coming anywhere near to being delinquent on your account.

All right, let's look at APR - that stands for Annual Percentage Rate, I'm sure. We'll use an example APR, 20%. If your Average Daily Balance (basically take the average amount your balance is over the entire month), and multiply it by your APR, you get the amount you'd be paying annually. To find the monthly amount, you'd divide that by 12 (simple way). For a good example, think of this: you start the month with a $0 balance, and then halfway through the month, you buy something for $500. You don't do anything else with the card - so the average daily balance is going to be $250. To calculate, you'll do this: $250 x .20 / 12 = $4.17, the amount you'll be charged that month if you don't pay the whole $500 in full by the due date.

It doesn't sound like much, but if you have a larger balance, say... $5,000, then your interest would be more like $83 a month. $5,000 sounds like it would take a long time to get to, but trust me... when paying for something is as easy as whipping a credit card out of your wallet, it will seem like such a simple thing you won't even think about how high your balance is getting. It goes way faster than you'd think.

Another thing you may encounter, since you are just starting out, is annual fees, sign-up fees, maintenence fees, etc. These fees are costs the credit card company charges you simply for taking a chance with someone with no credit history. I would suggest to stay away from any credit card company that's going to charge you these fees, although sometimes it can't be helped. Also watch out for fees charged for closing the account while there is still a balance - that one might kick you in the rear later on.

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