From the time the tooth fairy left her first quarter under my pillow, my parents have been teaching me to be careful with my money. I always paid tithing first on everything I earned and put at least half into savings for college.
By the time I met my husband, I was pretty sure I had done everything right when it came to managing my money. I didn’t have a credit card or a car loan, and I had worked part time during college so I didn’t have to take out a student loan. I had followed my parents’ advice about money to the letter.
So I was shocked when my husband and I sat down to open a joint bank account and get our first credit card. The bank clerk came back and told us that our application for a credit card had been rejected. I couldn’t understand what I had done wrong.
As it turns out, there is a lot more to credit than I realized. I set out to learn the basics, and I now understand why our first credit card application was denied. What I learned will help you prepare to handle credit wisely in the future.
You use credit anytime you borrow money that has to be paid back. This can be in the form of a credit card or other loans, such as a car loan or mortgage. Of course, to get something now and pay for it later, you’ll have to pay the lender a fee, called “interest.” Interest is a percentage of the amount you originally borrowed, called the “principal.”
Here’s an example: if I used a credit card to buy that $500 stereo system I’ve had my eye on, the interest would be around 18 percent of the $500 principal—$90 for the year. But interest isn’t a one-time fee. You’re charged interest every month on whatever amount you owe at the time. That’s why quickly paying off debt saves money in the long run.
If I only paid the minimum monthly payment of $20, it would take me almost three years to pay off the debt, and that $500 stereo would end up costing me $631. Using credit can mean you pay a lot more for something than if you had just saved up your money and bought it with cash.
Why Use Credit?
I knew that using credit usually ends up costing you money, so I avoided credit cards. But I didn’t understand that there are some times when using credit might be necessary and beneficial.
It’s always better to pay cash for things if you can. But most young adults don’t have enough money in savings to pay for the entire cost of a house up front. Using credit can be an investment if it’s for things that increase in value the longer you have them, like a house or your education. You’ll usually earn back more than you spent, even with the interest on the loan.
Elder Joseph B. Wirthlin of the Quorum of the Twelve Apostles said, “Some debt—such as for a modest home, expenses for education, perhaps for a needed first car—may be necessary. But never should we enter into financial bondage through consumer debt without carefully weighing the costs” (“Earthly Debts, Heavenly Debts,” Ensign, May 2004, 41).
Consumer debt usually refers to credit cards and similar loans. These are often used to purchase wants, rather than needs. Using credit to buy things that lose value over time is a waste of money. For example, if you use a credit card to buy the latest style of clothes, those clothes will probably be outdated before you even finish paying for them.
Credit card debt is expensive. Unlike home loans or student loans, the interest rate on credit cards is very high, and late payments result in fines and higher interest rates. Credit card debt is easy to get into but hard to get out of. No wonder we’re so often warned to avoid it.
Getting Credit without Getting into Debt
Despite the dangers, credit isn’t all bad. Using a little credit wisely now will help build your credit history for when you need it in the future. And you can do that without ever going into debt.
It turns out my credit card application was rejected because neither my husband nor I had a credit history. This is a record kept on any person who has ever used credit before (whether a car loan, a credit card, or even a store card). A credit report lists all the lines of credit you have, what the balances are, and whether you’ve made your payments on time. All of this information is combined to create a credit score—a number usually between 300 and 850 that tells lenders how likely you are to repay a loan. The higher your score, the more lenders will trust you to make your payments on time. Plus, you’ll get better interest rates and terms on loans.
Because my husband and I had never used credit before, lenders had to assume we weren’t a safe investment. When we bought our first car, we had to make a large down payment and pay a high interest rate until our credit score improved. It was an expensive mistake. By getting a credit card earlier and paying off the bill in full each month, we could have built a good credit history without ever paying interest. This would have allowed us to get better terms on our car loan and saved us money.
There are other reasons it’s important to have a good credit history besides getting lower rates on loans. Your credit report is referenced when you apply for a job or when you rent an apartment. Cell phone and utility companies may charge you a deposit before giving you service if your credit score is low. Your credit report even influences how much you pay for car insurance.
Modern-day prophets have been clear about the dangers of consumer debt. Some debt may be necessary, such as for a house, car, or education. But excessive debt can lead to marital problems and feelings of helplessness. It can also limit your opportunities and cost you a lot of money.
Consumer debt is on the rise. The temptation to “Buy now! Pay later!” has never been stronger. But you don’t have to be credit clueless. When the time is right, you can begin to build a good credit history by using credit wisely. The sooner you take control of your financial situation, the less chance there is that it will control you.
Friend or Foe: Tips for Building Your Credit
It’s never too early to learn how to handle your resources wisely. Here are some tips for getting a first-class credit report.
Talk to your parents. Before getting a credit card or any other kind of loan, talk the decision over with your parents and make sure you both think you’re mature enough to handle it. You could start with a debit card, which takes money directly from your checking account. If you use this wisely, your parents might be willing to co-sign on a low-limit credit card for you. Then, go over the bill with them every month to show them you’re handling your card responsibly.
Get one credit card and pay off the balance every month. Be sure to use your credit card only when you have enough money in your bank account to cover the purchase. It doesn’t help your credit score much if you have a credit card but never use it, but it’s even worse if you use a credit card irresponsibly.
Stay away from store credit cards. You may be tempted to open up an account at a store to save 10 percent on your first purchase, but store cards don’t help your credit rating much and can even hurt it if you have too many or forget to close an account you’re not using.
Open new accounts only as you need them. Don’t open a lot of new credit accounts at once. The more new accounts you have, the lower your credit score.
Find the best deal. When shopping for a credit card, look for one that has a low, fixed-interest rate. Be wary of “introductory rates” that start off very low but jump after a few months. Try to get a card that has no annual fees and that offers some kind of reward, like cash back, for using it. Then ignore any offers for “pre-approved” cards you receive. One credit card is plenty.
For more tips on managing money like a pro, check out the following Web sites*:
The “Resource Management” section of www.providentliving.org is the Church’s Web site on managing finances.
The National Endowment for Financial Education has a fun and helpful Web site just for teens at www.ntrbonline.org.
At www.annualcrediteport.com you can see your credit report for free if you live in the United States. (You are not obligated to buy any other services offered.) In Australia, Canada, and the United Kingdom you can get your credit report by mail. Just fill out the form on one of the credit bureau’s Web sites. Compare your credit report to your own records to make sure there are no errors.