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Email me the linkManaging credit · About 25 minutes · thedime.news/resources/worksheets/credit-cards-and-scores/
Credit cards and credit scores
How credit card interest works, why the minimum payment is a trap, and what builds a credit score.
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A credit card lets you borrow money to buy things now and pay later. If you pay the full balance by the due date each month, you usually pay no interest on purchases. If you don't, the card charges interest on what's left at a yearly rate called the APR. Many cards charge more than 20%.
Each month you have to pay at least the minimum payment. Paying only the minimum keeps your account in good standing, but interest keeps piling up on the rest.
How you handle credit shows up in your credit score, a number usually from 300 to 850 that lenders and landlords check. For FICO scores, the most common kind, the factors are payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and the mix of credit you have (10%).
Words to know
Write what each word means in your own words.
- APR
- Minimum payment
- Credit score
- Credit utilization
Questions
- A card has a 24% APR. What is its monthly interest rate?
- You carry a $1,000 balance on that card for one month. About how much interest do you pay?
- Which factor counts the most in a FICO credit score?
- How much money you earn
- Paying bills on time
- How many credit cards you have
- Your age
- Which is the smartest way to use a credit card?
- Pay the minimum every month
- Pay the full balance every month
- Use as much of the limit as you can to build credit
- Use it for things you can't afford yet
- Open thedime.news/resources/credit-card/ and set a $1,000 balance at 22% APR. How long does paying only the minimum take, and how much interest does it cost? Then try $100 a month.
Plan Time to pay off Interest paid Minimum payment $100 a month - Your credit limit is $2,000 and your balance is $1,500. What percent of your credit are you using? Is that good for your score?
- Name two things you could do at 18 to start building good credit.
Answer key: Credit cards and credit scores
Words to know
- APR: Annual percentage rate: the yearly cost of borrowing money, shown as a percent. It includes interest and some fees. Many credit cards charge more than 20%.
- Minimum payment: The smallest amount you can pay on a credit card bill without a late fee. Paying only the minimum can keep you in debt for years.
- Credit score: A number, usually from 300 to 850, that tells lenders how likely you are to pay back what you borrow. Paying bills on time is the biggest factor.
- Credit utilization: How much of your available credit you're using. Using a small share of your credit limit is better for your score.
Questions
- 24% ÷ 12 = 2% a month.
- 2% of $1,000 = $20.
- B. Payment history is 35% of a FICO score. Income isn't part of your credit score at all.
- B. Paying in full every month avoids interest and builds a strong payment history.
- Minimum: about 5 years and 10 months, and about $766 in interest. $100 a month: about 1 year, and about $115 in interest.
- $1,500 ÷ $2,000 = 75%. That's high. Using a small share of your limit is better for your score.
- Answers will vary: pay every bill on time, keep balances low, pay cards in full, become an authorized user on a parent's card, or use a secured card responsibly.
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