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The problem with money, for most people, is that it's not always in-hand when we need it.
Thankfully, we can borrow. Banks give us a loan and we pay them back later, usually with a little extra money called interest. Interest is like a fee for borrowing money.
But it doesn’t always make sense to ask the bank to borrow money for everyday purchases, and carrying a lot of cash can be a pain. It would be easier if we could borrow money from the bank as we need it over a month, then pay it back later, all at once.
That’s what credit cards let us do. The bank gives us an easy way to pay today, and keep track of it, then pay them back later. Let’s look at how this works.
Meet Lucia. Her friend recently recommended getting a credit card. After thinking it over, she applied for one and soon a card arrived in the mail.
In reading the paperwork, she noticed a few big points about this credit card. First, her credit card has a limit of $500. It stops working when she spends that amount.
Second, her credit card comes with an interest rate, which is a percentage of the amount she spends. This interest is just like the fees her bank charges for loaning money, but it’s often more expensive, and this interest is optional. Here’s why:
She has a choice, if she only buys what she can afford and completely pays off her credit card each month, she can completely avoid paying interest. But, if she pays anything less, she has to pay interest on what she still owes. And over time, interest can build up quickly and make those purchases more expensive.
Because she's smart, her goal is to avoid interest and pay off her credit card, in full, every month. Yaaay!
But her friend Marlon wasn't so smart. He spent the limit on his credit card and didn’t even bother paying the minimum monthly payment. The interest and fees stacked up until he owed twice the amount he originally spent.
Frustrated, he gave up trying to manage it. This led the credit card company to report his debt
which prevented him from getting other credit cards, borrowing money or using credit for years into the future.
Credit cards can be useful and convenient, but that doesn’t matter if they’re not managed responsibly. Buy only what you can afford, pay it off each month and you’ll have more money and better opportunities in the future.
What it teaches
This video tells the stories of Lucia and Marlon, who demonstrate valuable lessons in using credit cards. One learns to save money by paying off their balance every month while the other encounters the hard lessons of being delinquent on payments. It teaches:
• Why credit cards exist
• How interest works in credit card accounts
• How to use credit cards responsibly and avoid paying interest
• What happens when payments aren’t made
• How a poor credit rating can impact options in the future