Credit Card Debt

What is a credit card, and how does it work?

If you have been to the grocery store with your parent, and you have checked your items out, you most likely heard the term "credit card" before. Just like a debit card and cash, a credit card can be used as a form of payment, A credit card is a plastic or metal card that is used to pay for goods and services with money loaned from the government installed inside of it.

There are four main types of credit cards:

Visa credit card: You can use a Visa card to pay bills, make purchases, or withdraw cash. They can be used at an automated teller machine (ATM), something you may have heard of before. Visa cards are beneficial because you are able to have travel advantages, receive rewards (money from interest), and build up your credit history.
Master card credit card: Master cards contain the same elements as Visa cards, and can be used for everyday expenses like grocery shopping.
American express credit card: Think of an American express credit card as a luxury credit card, typically used by companies. If you've ever seen a notification on your phone about exceeding your limited storage, think of an American express card as premium storage that allows you to have many things within it. However this premium storage only lasts for some time, and eventually expires after a certain amount of time. The same goes for an American express card. Another negative of an American express card is that it charges for initial payment of a good/service.

Suppose you bought a couch for 3000 dollars. With a Visa or Master card, you could purchase this 3000 dollars, and pay the amount of compounded interest over time (which is only applied if you exceed the time limit) + the original price of the couch. With an American express card, however, you would also be charged an initial payment alongside the interest (which is only applied if you exceed the time limit) + the original price of the couch.

Discover credit card: A Discover credit card is a credit card offered for people of all credit levels, regardless of your score. Unlike the other types of credit cards, Discover cards charge zero annual fee and lets the user earn cash back, or a percentage of the money they spend on the credit cards, as rewards!

How does a credit score relate to your credit card?

You've probably seen the terms "credit" or "credit score" in past lessons, and really have no idea what they mean. We talk about these terms and see how they relate to a credit card!

Credit is the ability for you to borrow money securely knowing that you can pay back whatever you borrowed.

A credit score is a numerical expression describe your capability to pay back whatever you borrower. There are generally four categories that can describe your credit score/history:

Excellent: A credit score of 720-850
Good: A credit score of 690-719
Fair: 630-689
Bad: 300-629

How does this relate to a credit card?

The amount of debt you owe on your credit card affects your overall credit score; and you need around a "Good" (690-719) credit score to have a chance at apply for a loan. A good credit score can also make up for other factors such as one's income.

What is credit card interest/debt?

Credit cards typically have a three-week time limit until you need to begin paying interest
Credit cards typically charge a higher APR (Annual Percentage Rate), the yearly charged rate of a loan/investment than regular loans like mortgages or auto loans.
Credit cards issuers charge compound interest on a daily basis, rather than simple interest. This means that your interest is added to the original price of whatever you purchased every single day. This is known as your DPR (Daily Periodic Rate). If your DPR continues to accumulate annually, this becomes your APR. However, if you are able to pay off your debt sooner rather than later, you don't have to worry about your APR, or interest continuing to pile up after your time limit to pay of just the original price of the item you purchased expires.

How do you prevent credit card debt from getting out of hand?

You want to pay off your debt soon so that debt does accumulate. This way, you won't continue to lose money or even worry about your APR if the time comes.
You can manage your debt using different budget rules, and the 28/36 Rule stated in the lesson about mortgages.