Part 2: Building Good Credit
Just because you have a credit card does not mean you are free to charge it to the max. You still have to pay for what you buy and, depending on your interest rate, this could take a long time.
For example: Say you spent $150 on a shirt at the store, credit card is 22 percent interest, $10 per month minimum payments – which go down as your balance goes down.
$150 x 22 percent interest – only making minimum payments will take 18 months to pay off. Plus, $28 total interest will be paid.
$150 + $28 = $178 total. This doesn’t sound too bad.
Another example: Let’s say you build your credit and get a Best Buy card with a $3,000 limit. They have a sale and you go nuts. You buy a big screen TV, high def, Wii console, DVR, all the cables, etc.
Total = $3,000. They tell you your minimum payment is only $75/month and will go down as your balance goes down. So you make only the minimum payment and after a couple of years, you wonder why you still are paying on that TV.
This is why:
$3,000 x 22 percent interest = only making minimum payments will take 374 months to pay (31 years)…
…plus, it will cost $7,476.99 in interest to pay off that TV.
$3,000 + $7,477 = $10,477 total for TV and stuff.
If you can make more than the minimum payment on your cards or on any loan, the total interest you pay will drop significantly.
In the case of the TV, instead of starting with $75 each month, pay $100. The extra $25 goes direct to the principle – the amount you borrowed at first – in this case it’s $3,000.
Just that little extra brings your total time down to only 44 months (3 1/2 years) and your interest is only $1,395.
If the $100 is too much every month, pay it when you can.
If you can afford the $75 a month, keep making it, don’t go down when they lower the minimum payment, and it will take you 73 months (6.1 years) and cost $5,020 in interest.
IF you make your payments late, this is what will happen:
- 1. Your credit score will be affected – it will go down.
- 2. Your interest rate can/will go up. You may already be paying 22 percent and they can raise it. Additionally, your other credit cards will raise their rates too.
- 3. You will be charged a late fee – $15.00 or more every time you are late. Don’t throw away your hard earned money.
One last word, a good credit score will affect your ability to rent an apartment, and now your car insurance rate.
Also, if you are a 3.0 student, be sure you talk to your car insurance people and see if they offer discounts for good grades!
Happy credit building!
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