Credit basics for young adults
Important facts on becoming a smart credit consumer
Educate yourself now and enjoy
a more secure financial future
Getting a credit card can be a major step in
your financial life because it’s a valuable tool
that opens up many benefits to you. It also
provides a great opportunity to learn how to
use credit wisely from the start. As a student or
young adult who may be using credit for the
first time, you owe it to yourself to learn good
credit practices right now. That way, you’ll be
more likely to develop good habits around smart
spending that will last a lifetime. Check out the
following information for some helpful tips.
How does a credit card work?
When you use a credit card, you are essentially
borrowing money to buy something now that
you will pay for later. At the end of the month,
you receive a statement that shows your
purchases, the total amount you owe and the
minimum amount you must pay. If you pay the
entire amount due, you won’t pay any interest.
However, if you only make the minimum
payment, an interest charge will be applied to
the remaining balance on your account.
Why is credit important?
When you start using credit cards, you begin to
establish a credit history for yourself. Good credit
history leads to a positive credit score, which is
typically used by banks and other businesses to
determine if you’re someone who’s responsible
with money. In addition, credit can be a very
useful tool in managing your everyday finances.
Here are a few of the areas where credit cards
offer advantages:
More Options
•A
credit card can help you manage your
money. You can track and adjust your monthly
spending with a simple review of your monthly
statement, which may also help with your
monthly budget.
• Credit cards give you more ways to buy things.
They are accepted worldwide, even where
cash and checks may not be accepted, (e.g.
hotels, car rentals, mail or telephone orders
or online shopping).
• A credit card can also afford you some peace
of mind since you can use it as payment in
emergencies or to cover larger, unexpected
expenses, such as car repairs, medical
emergencies, new appliances, etc.
Security
• Carrying a credit card offers more security
than carrying cash and it gives you zero liability
protection against unauthorized purchases.*
Financial Freedom
•M
any cards have grace periods that last as long
as 25 days, essentially giving you an interestfree loan for nearly a month before you have
to pay off your balance. The best practice is to
pay your balance in full each month.
• You can use a credit card to cover short-term
costs until your next payday so you avoid
overdraft fees on your checking or debit
card account.
How to be credit wise
As you’ve read, responsible use of a credit card
can help you build good credit, as well as achieve
independence and financial freedom. That makes
it easier to reach your short and long-term goals,
from renting an apartment to buying a car or even
a house. Here are a few more details about credit.
What’s a credit score and
what does it mean to you?
A credit score—sometimes referred to as
your FICO score—is a widely used calculation
of various factors concerning your credit
history and current credit accounts. Financial
institutions and other companies use your credit
score to determine whether you’re someone
who is responsible with your money (which
includes meeting the terms of your credit card
agreement). Credit scores range from about 350
to 800. A low score indicates poor credit history
and makes someone a high risk for credit. A
high score, which indicates a good credit history,
can give you many advantages, including better
interest rates and higher credit limits on things
like credit cards, mortgages and other types
of loans such as a new car loan. It also lets
landlords know that they can trust you to pay
your rent on time each month.
What factors determine
your credit score?
Factors affecting a positive or negative credit score:
Payment History: Overdue bills or late payments
will lower your credit rating.
Responsibility and Stability: Staying at one
address and at one job for extended periods of
time (usually at least two years) are viewed as
positive signs.
Unused Credit Cards: The credit rating formula
looks at the difference between the amount
of credit a person has and the amount being
used. Closing one or more credit card accounts
reduces your total available credit. This, in turn,
lowers the percentage of available credit, which
ultimately lowers your credit score. The formula
also factors in the length of time your credit
accounts have been open. So before you close
an account, talk to your bank or get advice from
an experienced financial advisor.
Number of Credit Inquiries: When you apply
for credit, you authorize lenders to ask for a
copy of your credit report from a credit bureau.
When you check your credit report after such an
inquiry, you may notice that inquiries are listed.
That’s because inquiries from lenders directly
affect your credit score since lenders assume
that multiple inquiries are a sign that you’re
looking for loans, which may make you a poor
credit risk. You can help your credit rating by
keeping credit inquiries to a minimum.
Stay on top of your credit score
It’s a good idea to order and review your credit
report every year. Everyone is allowed to get one
free credit report every year. For a free copy of
your credit report, you can go to
www.annualcreditreport.com.
Otherwise contact these major credit bureaus:
Equifax—www.equifax.com
Experian—www.experian.com
TransUnion—www.transunion.com
Check your report for any inaccuracies and
if you need to dispute errors, contact the
reporting agency to explain the disputed items.
You can request an investigation, send copies of
supporting documents and tell the creditor that
you are disputing an item.
Amount of Debt: In general, your non-mortgage
credit payments each month should not exceed
more than 15 percent of your after tax income.
MasterCard believes that informed consumers are better equipped to
enjoy the financial freedom a credit card offers. To learn more about
credit cards and financial responsibility, MasterCard encourages you to
visit the Learning Center at www.mastercard.com/education
*Conditions and exceptions apply. For further details, see www.mastercard.com/zeroliability
©2009 MasterCard
Seven ways to use
credit responsibly
and avoid getting
into debt
1. Be sure to check your
monthly statement to
see if all charges and
payments have been
reported accurately
2. Only purchase items you
can afford to pay back in a
reasonable amount of time;
if you know you can’t afford
something, don’t buy it
3. Do not exceed your
credit card limit
4. Pay more than the
minimum due if you can.
You’ll reduce the time it
takes to repay your credit
card debt and save money
by paying less interest
5. Keep unpaid balances
low—borrow only what
you can repay in a given
time period
6. Do NOT miss a payment
or pay late. If you do,
you’ll be charged fees
and additional interest
7. Know the interest rate
on your card and read the
terms and conditions of
your account to familiarize
yourself with all possible
fees, such as those applied
for cash advances