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Credit
and Debt
| Credit
is a financial term that has two meanings. |
Borrowing Money
One definition of credit means borrowing money and creating
debt. Debt is a financial term, too. It means that you owe someone
or a company money.
Your parents or a mentor may lend you money, meaning that you can spend it now,
but have to pay it back later. You may negotiate a date when you have to return
the money to whomever you borrowed it from. |
Paying Money Back On Time
If you pay borrowed money back
on time, you establish good credit. When you have good
credit, people or companies know you are able to pay money back on time, and
are more likely to give you loans in the future.
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| Credit and
debt usually go together, just like borrowing money
(credit) and owing
money (debt) go together. |
Credit Cards
Credit cards represent a system that allows people to borrow money and pay it
back. Plastic credit cards allow you to use the system. This system is run by
financial institutions like banks and credit unions. These institutions will
issue, or provide you with a credit card, if you have a good credit history,
or a reputation for paying money back on time.
Why Use a Credit Card?
Using credit cards has pros and cons. Credit cards can make your life easier,
but
they
can also make it more painful.
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Credit cards:
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Provide you with cash you need in an emergency,
such as getting your car fixed
if it breaks down. |
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Allow you to work out conflicts
more easily with store owners if you bought defective
merchandise with credit. |
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Allow you to make purchases over the telephone
or Internet. |
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Allow you to take advantage
of sales when you lack cash to make purchases. |
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Are usually safer and more convenient
than cash.
Because credit cards are so convenient, if you’re not careful in how you
use them, they can make your life painful. |
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Think back to what you learned about comparing wants
and needs, how advertisers lure you to spend money,
and, if you don’t keep close tabs on what you
spend, living beyond your means. If you think you might be prone to living
beyond your means, using credit cards can be devastating to your financial
well-being. |
Read this carefully before
you decide to take advantage of the convenience of
credit cards.
| 1 |
Many cards are offered without annual fees.
But sometimes an annual fee can be hidden, meaning
you have to read the fine print on credit
card paperwork in order to know about the fee,
or directly call the credit card company and
ask
if it charges an annual fee. |
| 2 |
If you are not charged an annual fee for a
credit card, there is no cost to use it, but
only if you pay the borrowed money back on time. |
| 3 |
If you do not pay the money back on time,
three things happen: a) you are charged a late
fee and interest on the amount, or balance, owed,
b) your credit history goes from good to bad,
c) you risk getting into too much debt. Some
credit cards carry high interest rates, much
higher than traditional loans. Fees and interest
can accumulate quickly, sending your debt skyrocketing. |
| 4 |
Debt is very costly. You will end up paying
back much more money than you borrowed. |
| 5 |
If you get into too much debt, it usually
takes a long time to pay it back, and can derail
your pursuit of financial and career goals.
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The bottom line in spending money wisely is this:
stay focused on what you want
out of life. Your persistence in pursuing your financial goals, your education,
and your relationships with family and friends will help you get what you want.
Nothing you can buy in a store will do that.
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