Have you ever run short of money and asked your parents for a loan? They may have charged you interest as a lesson. We all borrow money in life — to buy a car, home, or to pay for college, for example. Even companies like laboratories may take out a loan to help buy microscopes or to get a bigger building to do their research or testing.
Borrowed money is called a debt. You've made a promise to pay back the amount you borrowed (the principal) with interest. This way whoever loaned you the money earns something while they do not have use of their money.
Your first experience with a loan outside of the Bank of Mom or Dad may be through a credit card. Credit is borrowing. And using a credit card is really taking out a loan. Credit card companies and banks that issue credit cards are letting you borrow their money when you use their cards.
Learn all about credit now, before you start using it to decide if the convenience will be worth the price.
|Credit Card Advantages||Credit Card Disadvantages|
|May be safe alternative to cash||Are very tempting|
|Help build a good credit history||Encourage you to carry a balance|
|Can help with emergencies||Can have expensive finance charges|
|Can give you a little extra time to pay||Can be hard to get out of debt|
Credit Cards give you a few advantages:
- May be a safe alternative to cash
When you have your card in your wallet, you don't have to carry cash that can be lost or stolen.
- Help build a good credit history
If you use your card responsibly, you can begin to build a good credit rating for yourself. Later in life, when you need a loan, a lender will want proof that you pay your debts. A good credit card history will help you get your loan. A poor credit history will work against you.
- Can help you with emergencies
If you suddenly have to put $400 of repairs into your car, a credit card could be very useful.
- Can give you a little extra time to pay
Depending on when you make your purchase and when your monthly bill is due, you can get extra time to save up and pay for what you just charged.
But they also come with several disadvantages:
- Are very tempting
It is so easy. It hardly feels like you're spending money. If you don't pay attention, that credit card balance can add up quickly.
- Encourage you to carry a balance
You may want to always pay your bill in full and on time. The fact is that most people carry a balance (owe money) from month to month.
- Can have expensive finance charges
If you don't pay your balance completely, you get charged interest, which keeps adding up the longer it takes you to pay. In the end, you pay more for what you bought than the item's original price.
- Can be hard to get out of debt
When you charge too many purchases and don't pay more than the minimum balance each month, it can take a long time to have your debt cleared.