Grow your financial future.

One of the initial steps to financial adulthood is getting your first credit card. Knowing you are “approved” means you have money at your fingertips.

Before you rush out and start using it, let’s talk about how credit works and why it’s so important to be smart with your spending, and financially responsible.

The basics

First off, know whatever you do from the minute you get your first credit card, you are making footprints in the financial world that will be monitored and tracked for the next seven years, and in some cases, the rest of your life.

That is a good thing. If you are good with using your credit, it could help you if you need a loan to get a car, a house, better insurance rates, loans, and other perks down the road.

However, on the other hand, if you make some mistakes or do not use your credit wisely, it could hurt your ability to get a job, get an apartment, or even get other credit.

What is credit?

It means someone with money (like a bank, department store, auto dealership, etc.) wants to let you use their money and in return, they are going to charge you interest (extra money) to use it. That’s sometimes called the cost of money.

Credit is great for emergencies or short-term goals when you don’t have the cash on hand.

You will pay interest as well as paying back the money you are using in monthly installments, or in one lump sum, depending on your financial situation. Some creditors (the people who are letting you use their money) will tell you how long you’ll make the payments. Some will let you use and reuse the money indefinitely if you are making payments.

Paying on time.

Since creditors want you to take the repayment seriously, they will report your on-time payments to a credit reporting agency like Equifax, Experian or TransUnion. These agencies open a file based on your name and social security number. Every time you make a payment, they add that information to your file. Over time, these payments become part of your credit history.

Your credit history is assigned a number value from 300 to 850, and the higher the score, the better your credit rating is. A higher credit rating/score will get you all those benefits mentioned above.

Missing payments.

Every time you miss a payment or pay late, it is reported, too. Your credit rating takes a hit. Every time you apply for more credit, it is reported to the credit agency, too. This could also lower your credit score if you make too many tries in a short time. This makes creditors nervous. They wonder why you are trying so hard to get credit and if you are going to be responsible with it.

If you run into some financial trouble and can’t make payments, call your creditors right away and let them know. If you stop making payments, your accounts are referred to debt collectors whose sole job is to collect the payments from you. You’ll start getting charged late fees, and your credit score will drop.

If you are missing car payments, for example, the creditor may repossess it (take it back). If it’s a house, the lender will foreclose on it. These very serious life-changing credit events can prevent you from getting more credit for years.

Protecting your credit.

It’s your job to make sure you don’t let anyone else use your credit or accidentally get access to your credit, like leaving your credit cards where people can see them or take them. If using your credit card online, make sure you use strong passwords and usernames that no one can guess. If anyone ever asks you for your account numbers and you don’t know why they need them, don’t tell them.

Before you apply for your first credit card, car loan or even mortgage, it’s important to talk to a professional about your budget. They can help advise you on next steps. A good place to start is at your bank. Advisors will talk to you about what your credit looks like and if you should request credit.

Above all, take your new credit seriously. It is a path to financial growth and freedom but, when used incorrectly, can be hurdle to a secure financial life.

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