Please explain credit cards to me the way you would to your teen
August 1, 2015 2:18 PM   Subscribe

I am in my late twenties and beginning to realize I don't understand how credit cards work and that they kind of matter.

I didn't have adults in my life to explain this stuff when I was a growing up, and my credit is pretty low through a combination of not using much credit, some unpaid medical bills from my late teens (they got lost in a haze of depression, moving often, and general teenageness), and a parent using my name irresponsibly. Can you explain the basics of credit to me?
Bonus: Any suggestions for improving my credit score in the next few years?
posted by Otis the Lion to Work & Money (25 answers total) 11 users marked this as a favorite
Make a Credit Karma account. It's free and they have amazing tools and explain how each item impacts your credit. They also have your credit score and credit reports. I found it very useful. I'm sure others will have some amazing tips and explanations too, but this is interactive with your actual information.

On Preview: Once you sign up select Credit Factors on the left.
posted by Crystalinne at 2:26 PM on August 1, 2015 [1 favorite]

There's no tricks or anything, credits scores are pretty much the reflection of consistent, responsible payment history and credit usage.

First is to take care of any outstanding collections or unpaid bills on your credit score. Got to (the ftc site) and pull your credit report (though it won't have your score) to see what's on there. Call up your creditors one-by-one and see if they can remove the negative reports from your report or at least pay them off to be marked as 'settled'.

Second is to have a few open lines of credit, probably some credit cards. Use these as your day to day spending (i.e. as cash if you can handle it) and then pay them off completely each month (i.e. down to a $0 balance each month). You can usually set this up to be automatic. You typically don't want to utilize more than 20% of all your available credit on any given month, i.e. if you have a $10,000 credit limit across all your cards you want to have less than a $2,000 balance across all them each month.

Pretty much once you have anything negative removed, have some revolving credit lines (i.e. credit cards), use them, and then pay them off consistently, your scores will go up over time. Won't be immediate, but it'll happen.

I'd use a site like or or credit karma to get a sense of what your score trends are, though the score they give you there should only be used very directionally. You can check those sites once every x number of months for free so take advantage of that.

Good luck!
posted by jourman2 at 2:29 PM on August 1, 2015 [1 favorite]

Credit cards are the answer not to "how will I pay for this" but "when will I pay for this".
posted by DanSachs at 2:38 PM on August 1, 2015 [18 favorites]

The FTC offers tons of info that's easy to digest.
posted by Cool Papa Bell at 2:47 PM on August 1, 2015 [1 favorite]

So, there are three main ways of paying for things:
  1. Cash
  2. Debit/Check
  3. Credit
1 is accepted everywhere and has that tangible sense of "loss" when you have to hand it over to pay for a thing. Some people love this. However, getting to an ATM can be a pain, and most people don't like the inevitable accumulation of change.

2 is accepted piles of places and you can't spend more than what you have--in most cases a purchase will be declined if you don't have enough money. However, there's a danger of overdraft or bounced check charges if you do accidentally spend more than what you have. Also if someone fraudulently uses your debit card, that money is gone from your bank account until you can get your bank to give it back, which can take some time.

3 is accepted slightly fewer places than 2, and acts as a buffer between your charges and your bank account. This is a blessing and a curse. It's great because if someone fraudulently uses your credit card, you have time to tell the credit card company that it's not your charge without them taking your rent money away from you. However, that buffer also makes it a lot easier to spend more than you actually have in your bank account, since by the time you have to pay the bill you might have more money from a paycheck or whatever. And if by some chance you can't pay for it, they'll keep letting you buy stuff (up to your limit), but then they'll charge you extra money (interest) for the convenience. And this extra money can be a huge pile (upwards of 25% is not uncommon). Many also have perks like cash/point rewards that can be used for travel etc.

If you think of credit cards merely as another way of accessing your cash (like a debit card), they can be super convenient and give you some benefits while you're at it. If you have a credit card and pay it off completely each month your credit score will gradually improve.
posted by that girl at 2:56 PM on August 1, 2015 [10 favorites]

A credit card gives you access to a set amount of money that you don't have. It's meant to be for convenience; sometimes you have to buy something you don't have the money for right now, but you will by the end of the month, and that's where credit comes in. It's is an open loan arrangement where you can borrow from the bank, whenever you want, without additional approval or vetting, as long as you don't go over a set amount at any one time and you keep paying it back in increments.

Banks love credit cards because they love having their clients in debt. They make money from us when we're in debt. They'll tell you how much you must pay a month, but it's only enough to keep you on the hook and to keep charging you interest on your loan. They don't really want you to repay it all. They want you to keep paying the minimum so they can keep you in debt, keep you donating to their bottom line, and keep you spending. In fact, when I was paying off the last of my credit line a few years ago, my bank tried to convince me to divert the money that was going into debt repayment into savings in order to keep me in debt longer than I needed to be. If banks know you're basically good for it, they can't resist giving you more credit!

The best way to use a credit card is to use it frequently and then pay it off as soon as possible, at least once a month. If you pay the full balance on your credit card regularly, you don't get charged interest. Don't use a credit card to extend your available cash and improve your standard of living. Credit is not cash. It's a loan, and you will have to pay it back. Think of credit as an emergency loan, not as another savings account.
posted by Hildegarde at 3:01 PM on August 1, 2015 [3 favorites]

The tricky thing about credit cards is that they are for two things, and it's easy to confuse the two and get into trouble.

The first thing is as a convenience, to spend money that you have. Get a bank account, save up some money in it. Then, have a credit card and use that to pay for things up to the amount you have in the bank. Pay the credit card bill to zero every month. It's easier than checks/cash, plus you can earn bonus points and whatnot. The key here is that you are not spending money you don't have, you're just paying at the end of the month instead of immediately.

The second thing is as an emergency buffer. If your car dies and needs $2000 to repair, but you need the car for work and need to get it fixed right now, you're not screwed. You can pay for it with the credit card and pay it off as you get the money. You have to do that as quickly as you can, though. Credit card interest is the worst thing you can do with your money. Plus, you need to get that balance back down to zero so your credit card can function as an emergency buffer again. A maxed out credit card doesn't help with an emergency expense.

Do NOT use a credit card to buy a large thing just because you want it and you don't have the money yet. That's how you get in credit card trouble, along with letting the emergency expenses roll over unpaid.

If you use your credit cards like this, and pay your other bills reliably, your credit score will take care of itself.
posted by ctmf at 3:03 PM on August 1, 2015 [5 favorites]

I use credit cards solely as a convenience. In other words, I use them so I don't need to carry lots of cash to make purchases, or to buy things over the internet. The good thing about a credit card (as opposed to a debit card) is that you can dispute the charges (e.g. if someone steals your card). In other words, it doesn't directly hit your bank account like a debit card.

I always pay off my credit card bill in full. I have also only ever had one credit card. Some people claim that you need to open multiple credit cards and carry a balance in order to build a credit score; this is untrue in my experience since I only ever had the one card and always paid off the balance.

Where people get in trouble with credit cards is when they use them to buy things they don't have the money for. People have a very hard time understanding interest and you see it all the time on AskMe. I honestly think it just boils down to people being bad with money. If you only have $1,000 in your bank account, do not use a credit card to buy something that costs $2,000. In fact, you should probably not buy something that costs $800 even though you have the $1,000. But credit allows people to magnify their problems with money (with cash at least you can't spend more than you have).
posted by pravit at 3:25 PM on August 1, 2015 [4 favorites]

There is good debt and bad debt. Credit cards have a bad reputation because they frequently get used for bad debt, not because it has to be that way.

Good debt is about borrowing money in order to solve a problem or enhance your life such that NOT borrowing money is the more expensive option or the one involving more real privation. So, mortgages and student loans and fixing an emergency crisis problem are frequently listed as good debts. That doesn't mean all student loans or mortagages are actually a good idea.

Bad debt is basically about digging hole you likely won't ever get out of. It is easy do this with credit cards because they are convenient, give you easy access to borrowing (ie once you have one, you do not have to fill out a loan application every time you want to borrow) and it is typically expensive debt charging high interest rates. If you don't have much financial savvy or self discipline, use of credit cards can be alluringly painless up front but really come back to bite you when you end up with more debt than you can comfortably carry or readily pay off and it turns out to have not really reduced your expenses or improved your earning capacity.

If you just have a cash flow issue -- extra money is coming next month, Thing is on deep discount this month -- credit cards are a good way to solve that problem. But if you just have the self discipline of a three year with ADHD and you just want everything you see and you want it now, this is a very bad use of them.
posted by Michele in California at 3:52 PM on August 1, 2015 [2 favorites]

dont think of a credit card as a way to borrow money. Don't think of a credit card as a way to spend more money than you have now. Think of a credit card as a way to avoid having to carry lots of cash. Never charge more than you have in the bank. Pay off you full credit card bill every month.

Do that and you'll develop a good credit score over time.
posted by alms at 4:26 PM on August 1, 2015 [2 favorites]

In a math class once the teacher took a week out of the normal curriculum to force us to get really familiar with compounding interest. It's still one of the more useful things I've learned.

Credit card interest rates are ludicrously high, compared to most other sources of credit (like home or auto loans). It would really be worth playing with this interest rate simulator to get an intuition of how these things work.

Be aware that if you have a low credit score or other factors working against you, your interest rates will be somewhat higher. This is because if you go bankrupt, the creditor risks losing all of the money they gave you -- so if this risk is relatively high, they want their potential upside to be higher as well.

Interest rates for credit cards can also be somewhat confusing. Based on your credit score, they'll assign you an interest rate. Sometimes this is just your interest rate, and that's the whole story. Usually, though, they assign you a rate of something like "prime plus 9.12%". This refers to the national prime rate, which is set by the Federal Reserve and is changing all the time, so your interest rate is changing with it.

I also see that nobody here has mentioned secured credit cards. If your credit score is so low that you can't get any kind of credit card, you can sometimes get a "secured" card. You give them a sum of money to hold on to -- say $1000. Then you get a credit card with a $1000 limit. You can then use it and make payments regularly, improving your credit score. If you fail to pay, they just keep the money you gave them and cut you off. Eventually you can close the account and get your money back, or sometimes transform it into an unsecured card, using your security deposit as a credit to pay off your balances.
posted by vogon_poet at 4:39 PM on August 1, 2015

First is to take care of any outstanding collections or unpaid bills on your credit score.

Be careful with this. It sounds like some of the debt on your credit report is quite old and might be aging off your report already. You don't want to pour salt in the wound by reopening really old debts, especially as it might re-age the debt and start the clock all over again. Here's another article that might be helpful as well.
posted by zachlipton at 4:47 PM on August 1, 2015 [1 favorite]

Response by poster: Wow! Thank you for all the great responses. I've been pretty anxious about all of this and I'm feeling much more hopeful now.
posted by Otis the Lion at 6:11 PM on August 1, 2015

I found Suze Orman's "The Money Books for the Young, Fabulous and Broke" very helpful
posted by radioamy at 7:01 PM on August 1, 2015 [1 favorite]

I will add these points that I have made to my children on the responsible use of credit cards. On the assumption that you are not making enough money to pay off the charges each month, follow these rules:

Never charge more than 10% of your net monthly income on the card in any month.
Always pay at least 10% of the card balance each month. If you cannot do that, stop using the card until you can.
Whenever there is extra money, use it to pay additional on the card. If the interest rate on the card is 16%, making that payment is the equivalent of investing your money at 16%. Where are you going to get a return like that in today’s economy?
posted by megatherium at 7:14 PM on August 1, 2015 [2 favorites]

Credit cards aren't really the same thing as your credit score or credit rating. Your credit score can be affected by more than just credit cards.

But one thing I didn't know until recently that may be worth sharing is this: opening new credit cards hurts your credit score. I opened like four new cards for promotional reasons when I moved, thinking it was just an easy way to get free discounts, and it temporarily really hurt my credit score. I guess on paper, it looks like you are out of cash and need credit cards to buy anything.

That said, once you have a credit card, don't cancel it or close it. Accumulating months of good standing and no late payments, etc. looks good. As long as the credit card has no annual free, keep it open once your balance is paid off.

You can check out to see if you have any accounts not in good standing and fix them.
posted by AppleTurnover at 7:52 PM on August 1, 2015

I think megatherium's last point is a huge deal that a lot of people don't understand about paying down debt versus saving and investing money. However, I don't necessarily agree with the first 2 rules, I think how much you can afford to charge as a percentage of your net monthly income depends on your personal budget, as does how much you can afford to pay off of the balance monthly. Obviously since credit cards are generally very high interest, you probably ought to be putting as much as you possibly can afford towards the balance each month, whether that's 5% of the balance or 25%. There's no magic number, basically at a minimum you've got to be paying more towards the card balance than the interest that's accumulating each month or you're not gaining ground and you'll never get it paid off. Sometimes you'll see cards listed as having 0% interest rate - that's generally speaking an introductory/promotional rate that will expire after some period of time and the rate bumps up to something ridiculous like 15 or 20%. Some people try to deal with their credit card debt by transferring balances onto zero interest cards and just continuing to transfer the balance each time the promotional interest rate of zero percent is going to expire, but that's definitely not part of 'credit card use 101' and I wouldn't encourage you to do it until you've read and learned more on the subject.

It makes sense to keep an emergency fund of a few months' expenses that is easily accessible to you, and there might be few other investments you would still make despite having credit card debt you could otherwise be paying, but generally you want to pay as much as you can off, even if that means short term sacrifice in spending on non-necessities like entertainment, eating out, etc. because of the huge rewards you can reap by saving on future interest payments.
posted by treehorn+bunny at 10:07 PM on August 1, 2015

Credit card interest rates are ludicrously high, compared to most other sources of credit (like home or auto loans).

This is because a credit card gives you an instant line of credit with flexible repayment terms.

You pay a higher APR for speed and flexibility.
posted by mr_silver at 1:46 AM on August 2, 2015 [1 favorite]

I have a bunch of credit cards and I pay them off in full every month. I have a credit score over 800. To me they allow the convenience of not having to carry a bunch of cash and to be able to pay for things online and that's basically it. Some people use them for "float" as Michelle in CA says, you use them because you don't have the money right this instant but you will soon. This works when it works. When it doesn't work you wind up having bought (for example) a twenty dollar meal that turns into a $26 meal by the time you've paid it off. So a few things that will be helpful to you, from my perspective

- Open and read your mail or email from the CC company. Know when payments are due and the penalties for late payments. Paying late can sometimes mean that you have to pay extra above and beyond whatever you owed and this can be punishing. If you are on a CC that has a "trial" APR (i.e. a low rate for a short period of time that then rises to the higher rate) a late payment can also sometimes mean they jack you to the higher rate immediately. Many CC companies will text or email you if you haven't made a payment, see if your company offers an alert feature. Also if you do make a rare late payment and you have a good track record with a company you can sometimes call and get that amount reduces and penalties removed. I've had to do this maybe once a year but it's saved me $$ with just a short phone call.

- Cash advances (depending on the specifics of your cards) sometimes start accruing interest immediately. So if you paid for a $20 meal on a CC one month you'd owe $20 on that month's meal but if you got out a $20 from the CC's cash advance feature you might owe $22 by the time the bill was due. Make sure you understand cash advances. Often a CC company (in the US at least) will send you "checks" that you can use and these are treated as cash advances. Getting cash back at a grocery store, for example, is not treated like a cash advance.

- New CC offers - there are websites where people just talk about CC offers and whether you're better off getting a card that offers "points" or "miles" or whatever. A lot of CC companies want you to transfer your balance from one CC to another and will offer incentives, there is often a fee associated with these transfers. Many airlines have cards that tie into mileage offers. Some of these cards come with fees associated (and are often free for the first year) make sure you are reading the fine print.

- Paying the minimum balance on a credit card is sometimes, depending on the card and the interest rate, not actually enough to eventually pay off the balance. You will pay forever. If you have a running balance and can afford to pay more, this is usually a good idea.

There's a lot of handwavey talk about what exactly matters to your credit score but if you are in the US you are entitled to free credit reports from all the major bureaus once per year and you can check to see what is still on your report (not what your score is) and what is not. There are a lot of websites trying to upsell you various nonsense along with this but you can go to and get your reports. You can also fix erroneous stuff on your reports, though it's a bit of a slog. I also have a credit tracking thing that is free with my AAA membership so I can see if there is activity on any of my credit reports (usually not). It's called ProtectMyID Essential (they will try to upsell you to the deluxe version, ignore them). is also a good resrource for reading up and getting started. Good luck, I know it feels like a lot of bad things have already happened but improving credit over time is definitely a thing that you can do.
posted by jessamyn at 7:23 AM on August 2, 2015 [1 favorite]

I always pay off my credit card bill in full. I have also only ever had one credit card. Some people claim that you need to open multiple credit cards and carry a balance in order to build a credit score; this is untrue in my experience since I only ever had the one card and always paid off the balance.

Same here. Only have had one credit card, paid off in full every month and I currently have a very high credit rating. Curve ball came with the first mortgage approval I submitted. Although I had a huge credit rating and enough cash on hand for a 20% down payment, they still came back with a request for proof of additional lines of credit. Oh well. Bank down the road was happy with only one so they get my money instead.
posted by kpraslowicz at 8:23 AM on August 2, 2015

Here's what I would add. I never used a credit card because I used my debit card. Debit cards are like cash -- they take money right out of my account. But I realized I could use a rewards credit card to earn free flights, and pay off my credit card in full every month, and it's almost the same thing as a debit card. So I've started doing that and I've already earned a free flight by using my credit card for all my purchases in the last couple months. I wish I had done this sooner. Don't use a credit card and pay minimum amounts when the bill shows up. If you can't afford something, you can't afford it. Look out for fees on reward credit cards, but they may be worth it.
posted by AppleTurnover at 11:46 AM on August 2, 2015 [1 favorite]

Something I learned fairly late in life is that you pay interest on the entire bill unless you get your balance to $0. (This may be different in the US -- can anyone confirm?)

Say you get a credit card bill of $1000 and the interest payment for the month is $40. If you pay $500 on the bill, leaving a balance of $500, you'd think your interest would be halved ($20) but it's actually still $40. If you pay $990 on the bill, your interest payment for that month is still $40.
posted by Frenchy67 at 1:26 PM on August 2, 2015

No, it's average daily balance (here). So it depends when you pay. They take all your daily balances for the month and add them up, then divide by the number of days. That's what you pay interest on. Paying late in the month just before the bill is calculated won't have much effect on the interest until next month's bill.
posted by ctmf at 2:02 PM on August 2, 2015

Which I believe used to be a pitfall: if you pay to zero halfway through the month, you would still get an interest charge that month because the first half of the month will give you an average daily balance for the month. So you couldn't ignore the bill "knowing" your balance is zero.
posted by ctmf at 2:13 PM on August 2, 2015

I'm also in my late twenties and have a good credit score. Others have mentioned this already but I'm just going to add another voice to reinforce this: pretend your credit card is a debit card and pay it off completely every month so that you have a $0 balance.

If you're a forgetful person (I am), then do it at the same time that you do other monthly things like paying rent/bills/etc. Set up an alarm--I have one set up bi-monthly on my phone. Don't EVER spend more than what you have (which means you need to keep track of what's in your bank account).

If you do this, then over time your credit score will improve.

There might be times in your life where you are down on your luck (e.g. between jobs, get in an accident, something expensive gets damaged, etc...) and you'll think "well, I'll have more money in just a few months, maybe..." but DO NOT use your credit card to make it through that period. It will result in debt, and that debt can snowball into a huge burden. Try every single avenue available to make it through hard times. Ask your friends/family for money. Look for charity orgs or govt programs that can help you. Do odd jobs on craigslist or TaskRabbit. Sell your things. But don't use your credit card (or anything else involving loans/debt).
posted by picklenickle at 3:44 PM on August 2, 2015

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