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"Credit" refers to paying off debt. If you're smart with your credit, you'll save a ton of money in the long run. If you're not, your only way home will be a long run.


Credit Tips

Build your credit. Every time you buy something and pay it off quickly, the "credit police" put a gold star on your credit report (figuratively, of course). Your future landlord likes to see those gold stars (literally).

A credit report is basically your financial transcript. Big Brother keeps track of all your financial dealings for the rest of the world to see and judge mercilessly.

You're entitled to a free copy of your credit report every year (see annualcreditreport.com) or within 60 days of rejection for credit, employment, insurance, or rental housing that was based on your credit info.

You can monitor your credit frequently (via Experian, Equifax, or TransUnion) without hurting your credit score. You can also dispute something on your report without hurting your score. But if it is pulled repeatedly (i.e., for a credit card application) by a company (or companies), your score can be negatively affected. So resist the urge to apply for every card offered to you in the mail.

If you have the spending habits of a rock star, get a debit card. It's similar to a check: when your card is swiped, money is automatically withdrawn from your account. Then establish with your bank that once your account runs dry, your card won't work any more. (Otherwise, your bank may charge you large fees when you overdraw on your debit account.)

If you can't get credit because you don't have any credit history, investigate "shoebox credit." Lenders are required to consider your payments towards rent, cable, insurance, utilities and other items that don't traditionally show up on a credit report.

Even worse than the "permanent record" you were threatened with in grade school, credit problems stay on your record for seven years (ten years for bankruptcies).

Credit cards with rewards typically pay you back the equivalent of 1% of your purchases. If you always pay your bill on time, use your rewards card for all of your normal purchases. It's like getting paid for breathing. Kind of.

When using a credit card, you usually don't have to make a payment for 15 to 30 days. If you pay your bill in full and on time, you're borrowing someone else's money for a few days and not paying interest. It's a nice little perk.


Minimum Payments

Credit cards (or the banks that issue credit cards) make their money from your interest payments. The longer you take to pay back your balance, the more you pay in interest. (These are much better terms than the mafia offers.)

To encourage you to keep a balance on your card, cards offer you a low minimum payment on each bill. If you had a balance of $4,000, your minimum monthly payment would be only $83.33.

Q: If you never used your credit card again and only made the minimum payment each month, how long would it take you to pay off your balance?

A: Roughly 29 years and $13,000 later, you'd pay off your balance. If you don't enjoy poking a stick in your eye, pay the entire balance (or as much as you possibly can) every month. (FYI: Minimum payments are usually the greater of $20 or 1/48th of the balance.)


The Monthly

Many high-ticket items (cars, electronics, Manolo Blahniks, etc.) are pitched by their low monthly costs. What sounds like the better deal?

(a) $399 per month
(b) $10,000 now

You should be thinking, "How long?" If you pay $399 for 36 months, you'll end up paying over $14,000. The extra $4,000 you pay over three years is the cost for paying over time (interest). Do the fancy math (monthly payment x months) and then make your decision. Paying for something "monthly" means buying it on credit.


Student Loans

Grace period (student loan):
The amount of time you have, after you graduate, before you have to start repaying your loan. In some cases, interest still accumulates during this time.

"Subsidized" student loan:
The government paid the interest while you were in school, but now it's your turn to pay ... and pay ... and pay ... and pay ...

Graduated repayment:
Payments start small and gradually increase.

Income-sensitive repayment:
Payments are a percentage of your monthly income.

Extended repayment:
Payments extend over 25 years (if eligible).

Consolidating:
Combining all of your student loans into one monthly payment and potentially lowering your interest rate (if rates are lower now than when you originally borrowed the money). You can only consolidate once and must do this within the first six months after graduation.


Story Time

Many years ago, Bert ran up huge credit card debt. He needed cash. Now.

To make money, Bert offered up his body for a variety of medical experiments. Within months, he'd grown a third ear and a prehensile tail.

The extra ear came in handy one day when Bert heard a kitten mewing from the branches of a tree. Using his prehensile tail, he climbed the tree and rescued the cat. He was immediately hailed in the local paper as a superhero of some sort: "Extra Ear Guy With a Tail."

However, this publicity drew the ire of the local super villains. As they dangled him over a vat of boiling oil, they realized that his powers -- the ability to hear twice as well on the left side of his head while pouring coffee without hands -- were far from super.

They let him go with just a villainous group noogie. Bert has been in therapy ever since.

Although individual results may vary, it's always best to stay out of credit card debt.