Understanding Credit Cards and Interest Rates
Last updated August 17, 2023
For many teens, credit cards and interest rates can seem like complex financial concepts. However, understanding these terms is essential for managing your money and building a strong credit history. Having a strong credit score and practicing positive money management habits will help you apply for loans, sign leases, and even get jobs. The more you understand about credit cards and interest rates, the better you’ll be able to make them work for you. Be sure to check out all of Get Schooled’s free Money Management resources to keep learning about your financial future!
Note: Before making any big financial decisions, we strongly advise you to talk to a parent/guardian or a trusted adult. They can help you make informed choices about building credit and taking on debt that can ensure your financial stability and success in the future.
Before we get into learning more about credit cards and interest rates, let’s define some key terms:
A credit card is a payment card that allows you to borrow money to make purchases. When you use a credit card to make a purchase, you are essentially taking out a loan that you must pay back to a credit card company.
A credit score is a three-digit number, typically on a scale of 300 to 850, that estimates how likely you are to repay borrowed money (credit cards, car payments, etc.) Credit scores are based on your credit history, including how much debt you have, how often you make payments on time, and how long you've had credit.
An interest rate is something that lenders charge you for borrowing money. Basically, it is an amount added to your borrowed amount, as a percentage. For example, if your credit card has an interest rate of 15%, and you have a balance of $1,000, you would be charged $150 in interest (on top of paying off the initial $1,000).
APR stands for "annual percentage rate." This is the interest rate that you are charged on your credit card balance. The APR includes both the interest rate and any fees that may be associated with the card. This is a very important term to look for when applying for a credit card.
Variable interest rate
A variable interest rate is an interest rate that can change over time. This means that the interest rate on your credit card could go up or down depending on market conditions. Often, the APR or variable interest rate on a credit card application will be listed as a range of percentages. For example, you might see “APR 13.9%-20.9%”. This means that while you have this credit card, your interest rate may be as low as 13.9%, but could increase to 20.9%.
Your account balance is the amount of money you owe on your credit card. This includes any purchases you have made, as well as any fees or interest charges that have been added to your balance.
How do credit cards work?
When you use a credit card to make a purchase, you are essentially taking out a loan from the credit card company. You will need to pay back the money you borrowed, along with interest and any fees that may apply. Credit cards typically have a grace period, which is the amount of time you have to pay off your balance before interest starts to accrue. The grace period can vary depending on the credit card company and the terms of your agreement.
If you do not pay off your balance by the end of the grace period, you will be charged interest on the remaining balance. The interest rate can vary depending on several factors, including your credit score, the credit card company, and the terms of your agreement.
Why get a credit card?
There are some good reasons to apply for credit cards, especially as a teen or young adult. It is also important to apply for credit cards knowing what you are getting into! Some positive reasons for getting a credit card are:
- Build credit history: Using a credit card responsibly can help you start building a credit history, which can be important when applying for loans, renting apartments, or even getting a job in the future.
- Emergency funds: Having a credit card can provide a safety net in case of emergencies, such as unexpected car repairs or medical bills.
- Convenience: Credit cards can make it easier to make purchases online or in person, without needing to carry cash.
- Rewards and benefits: Some credit cards offer rewards programs, such as cashback, points, or airline miles, which can be a great way to save money on everyday purchases. Other cards may offer additional benefits, such as purchase protection or travel insurance.
Why do interest rates matter?
Interest rates are an important factor to consider when using credit cards. It is always good to keep in mind that this is how credit card companies make their money, so always be sure to know the terms of any interest rates you’re signing up for. The higher the interest rate, the more you will have to pay back over time.
Interest rates can be fixed or variable. A fixed interest rate remains the same over time, while a variable interest rate can change based on market conditions or other factors. Many credit cards will offer you an initial interest rate of “0% APR.” This sounds golden! But be sure to read on! Zero-interest deals are almost always time-bound. It may be zero interest for the first six or twelve months, but then they will list the variable interest rate.
You’ll often see this written as “0% intro APR for six months on purchases and then a variable APR of 12.99% - 21.99%.” This doesn’t mean that you won’t have to pay interest on your first six month’s worth of purchases. It means that you have that grace period of six months to pay your balance off without interest. After that, any balance left over will be subject to that higher APR.
Tips for using credit cards wisely
There are several tips you can follow to use your card wisely and avoid debt:
- Only use your credit card for purchases that you can afford to pay off in full each month. This will help you avoid interest charges and keep your balance low.
- Set a budget for your credit card spending and stick to it. This will help you avoid overspending and keep your expenses under control.
- Pay your credit card bill on time each month to avoid late fees and negative marks on your credit history.
- Monitor your credit card statements regularly to ensure that all charges are accurate and to identify any fraudulent activity.
- Look out for fees. Many credit cards come with fees, such as annual fees, late payment fees, or over-limit fees. These fees can add up quickly and make it harder to pay off your balance.
- Be aware of theft and fraud. Credit cards can be a target for fraud and identity theft. It's important to monitor your credit card statements regularly and report any suspicious activity to your credit card company immediately.
Before making any financial decisions, be sure to consult with a trusted adult in your life to ensure you’re making the best decision for your situation. Any questions? Text #Jobs to 33-55-77 to get in touch with our advisors (click here to have the text message set up for you). You can also check out all of Get Schooled’s free Money Management resources!