Credit can be a valuable addition to your financial tool box if you use it carefully and sensibly. Credit means someone is willing to loan you money—called principal—in exchange for your promise to repay it, usually with interest. Interest is the amount you pay to use someone else’s money. So the higher the interest rate, the higher the total amount you pay to buy something on credit.

The best part about credit is that it lets you buy something—like a car or a year of college tuition— you couldn’t otherwise afford if you had to pay for it all at once. You get to buy the item now but pay for it over a period of time, usually with interest.

But sometimes people use credit purely for convenience. They have the money but don’t want to carry cash with them. Or they simply decide they want something NOW, don’t care if they have the money, and use credit for immediate satisfaction, which isn’t a smart use.

Credit is a fact of life, especially for people with busy lifestyles. But don't let yourself be fooled: the idea that having a credit card unlocks a higher standard of living for free is an illusion. You do have to pay it back.

Keeping Score
Just as your report card tracks your success in school, a credit report tracks your success in managing money responsibly. Right now, you may be more concerned about the grades on your report card, but your current financial habits can carry over and affect your ability to get credit as an adult. That’s because your credit history will follow you for the rest of your life.

A credit report is simply a record of your personal financial transactions, or credit history. Lenders look at it to see how well you’ve managed credit in the past. Your credit report tells lenders any credit you have, loan amounts you’ve received, your credit card balances and limits, and whether you paid your bills on time or not at all. In short, it’s your credit report card for the past seven to 10 years. That’s why it’s so important to start out with good credit habits.

While your personal financial transactions on your credit report detail your current and past borrowing history, a credit score is a number that reflects your creditworthiness. When you apply for credit, lenders want to know what risk they take in lending you money. Your credit score gives them an idea of your creditworthiness at the moment in time when they check it. And your score changes over time as your financial situation changes.

Credit reporting agencies, also known as credit bureaus, sell credit report information to businesses that are interested in finding out your creditworthiness. For example, lenders will purchase and review your credit report anytime you apply for a credit card or loan. When you apply to rent an apartment or buy a cell phone, someone will probably review your credit report. And you may be surprised to learn that employers often look at your credit report during the hiring process. So building a good credit history can smooth the way in many areas of your financial life. Building a good credit history just takes discipline

• Always pay your bills on time. That’s the single best way you can show creditors that you’ll be responsible with their money.
• If you have a savings account, it’s good to make additional regular deposits, no matter how small. That’s the easiest way to put money aside for a specific purpose or for an emergency fund.
• Be choosy about your credit cards and loans. Apply only for the ones you really need, and keep them for a long time.
• Surprisingly, it’s better for your credit score to maintain a low balance on one card and pay it off each month than to have no balance at all. It shows you are responsible enough to make a monthly payment.

• Making late payments. Even just one missed payment can affect your credit report.
• Writing checks or using your debit card when you don’t have enough money in your account to cover them. (This is often called “bouncing” checks.)
• Having a lot of credit cards and loans. If lenders think you have too much credit available to you, they may perceive you as a risky customer.
• Maintaining high balances on your credit cards and loans. Especially with credit cards, lenders are leery of lending you more money if your balances are too close to your credit limit.
• Changing credit cards frequently. Lenders like to see credit card holders maintain long-term relationships with credit card companies. Your score can decrease if you’re always switching to cards with a good introductory offer.

Part of being a savvy consumer is regularly reviewing your credit report once a year to make sure it is accurate and that there hasn’t been any fraudulent use of your identity. You are entitled to a free credit report every year, so there’s no excuse for not monitoring your credit report at least annually. To do so, just visit www.annualcreditreport.com.

If you do find something inaccurate on your report, don’t panic. Simply contact the credit reporting agency, and ask them to investigate the information. By law, the agency must research the questionable item and correct or delete anything that’s incorrect. If that doesn’t resolve your issue, you also have the right to attach a short statement to your credit report. You may want to describe the situation along with any facts that support your claim so the lender can take that information into account.

Finally, credit bureaus must delete unfavorable information that is more than seven years old. They also must remove information on any bankruptcy that is more than 10 years old. So even if you do go through a bad time, it won’t be on your record permanently.

Anatomy of a Credit Card Offer
Whether you decide to go to college or not, you will soon be bombarded with credit card offers. Maybe you already are. Most of these offers try to persuade you to sign up for a card by focusing on the convenience and buying power a card can give you... while skirting over the responsibilities you assume by signing up. There are many credit cards offered by many business outfits, so you can expect a wide variety of offers. Most of them will include a letter that tells you how you can take a vacation you've always wanted, enjoy the ease of buying things without cash on hand, and generally tempt you with cool stuff. Ignore this lame attempt to distract you, flip the letter or application over, and look for a table of information. It may be in smaller type and look uninteresting, but this information is the most important thing to read.

• Annual Percentage Rate (APR) for purchases: This is the annual interest rate you’ll pay on the unpaid balance of your card each month. In some ways, the APR is the most important detail of the card since it tells you how much you’ll have to pay if you don’t pay off your card each month. If the card has a temporary introductory rate, the rate that applies after the temporary rate expires will also be listed. Also, any rate – even your standard APR for purchases - may increase if you forget to pay your bill.
• Other APRs: These are the annual interest rates you’ll pay if you get a cash advance on your credit card, if you transfer a balance from another credit card, or if the credit issuer applies penalty rates. Often the interest rate for a cash advance is much higher than the interest rate for purchases, while the balance transfer rate might be much lower (at least temporarily). Also, any of these rates may increase if you forget to pay your bill, or any other bill on your credit report. This is called the Universal Default Clause.
• Variable-rate information: If the card has a variable (changing) interest rate instead of a fixed rate, this section will tell you how the variable rate is determined.
• Grace period for repayment of balances for purchases: This is the number of days you have to pay your bill to avoid getting hit with finance charges (in the form of interest). With most credit cards, the grace period applies only to purchases, while cash advances and balance transfers may start accruing interest immediately. And if you’re already carrying a balance from a previous month, your grace period is usually suspended, even for new purchases. So, the key is to pay off your card within this grace period each month.
• Method of computing the balance for purchases: This is the method used to calculate your outstanding balance if you carry over a balance and have to pay a finance charge.
• Annual fees: The annual fee (or other periodic fee) the credit card company charges you to have the card. You may have to pay this fee even if you never use the card.
• Minimum finance charge: This is a minimum fixed finance charge that can be imposed during a billing cycle. A minimum finance charge usually applies only when a finance charge is imposed, that is, when you carry over a balance.
• Transaction fee for cash advances: This is any charge imposed when you use the card for a cash advance. If the card charges transaction fees for purchases, these fees will also be listed here.
• Balance-transfer fee: This is the fee you have to pay for transferring balances from another card to this card, unless it is specifically waived as part of a special balance transfer offer.
• Late-payment fee: This is the fee you have to pay if your payment is late even one day.
• Over-the-credit-limit fee: This is the fee you have to pay if your charges exceed the credit limit set for your card or if your fees take you over the limit.

Quick Facts

• Credit cards are not free, and they are not income.
• If you can eat it, wear it, or drink it, don't charge it.
• Begin with a low credit limit, one you can easily pay off (try $250 or $500). If you're offered a higher limit, ask the credit card company to lower it. As you get older and earn more you can increase your limit.
• Shop around for a card with a low, fixed interest rate. Anything over 14% and you're paying too much. And watch out for introductory rates that expire!
• Limit yourself to one card. • Don't sign up for every gimmick on campus. That "free" t-shirt or cell phone cover isn't really free.
• "Free" checks from the credit card company aren't checks and they're not free; they're cash advances that typically have high fees and carry higher interest rates.
• High interest rates (from 14-30%) mean you might wind up paying much more than you think for stuff you buy.
• Having too many credit cards can negatively affect your credit report - lenders see it as a risk and may not be willing to offer a car loan or home loan in your future.
• Cash advances do not have a grace period, can carry a higher interest rate, and can include fees.
• If your credit card is stolen, you're responsible for $50 of the cost of stolen purchases.
• If you use your card to pay for everyday purchases, your balance can easily become overwhelming if you don’t pay it off monthly.
• Miss a payment or pay late once and you can lose benefits, such as a lower interest rate and a longer grace period.
• Paying only the minimum payment can greatly extend the payoff date and amount.

1. Choose a card that's right for you. Have you ever wanted something, but restrained yourself from buying it until you could shop around for the best deal? Use this tactic with credit cards.
2. You'll probably receive tons of credit card offers in the mail. The offers are plentiful, so don't just sign up for any credit card thrown your way. Also, keep in mind that the competition for your business is stiff. Use this to your advantage to get the best deal possible, and make sure you know all your options. Don't let the credit card company tell you what's best for you. Only you know that.
3. Understand the fine print. You know that teeny, tiny print on the back page of a credit card offer? That fine print (the "terms and conditions") gives you information on the annual percentage rate (APR), minimum finance charges, miscellaneous fees, grace period, annual fees, and other important information. It reads like legalese, but it's important stuff to know. The fine print is especially important if you're considering an introductory credit card offer. Introductory offers are just that: introductory. The terms being offered are good for a limited time only, and may even change during the introductory period (especially if you miss a payment or pay late). Not only are credit card companies great at marketing, they're very creative at coming up with fees to charge you for using their cards. For example, you'll probably be charged a fee for paying late, not paying enough, going over your limit, or taking out a cash advance. You should also watch out for annual membership or award program fees.
4. Make your payments on time. With late fees averaging around $30, it's just plain smart to make your payments on time. Send your payments as early as you can. Just because the bill isn't due until the 20th, it doesn't mean you should wait to send it until the 17th. Make sure it gets there on time because calling the credit card company and dickering over the due date isn't anybody's idea of fun. To make this process even easier, consider signing up for online or automatic payments.
5. Be able to say 'no.' After you get the hang of one card, you might think it's time for one more, or maybe ten. But having too many credit cards is frowned upon by creditors (you know, the people who give you the loan for your wheels) and can lead you into some serious temptation. Remember, if you don't have the cookies in the house, you won't eat them.
6. Know when to use credit. Credit cards are great for lots of things: traveling, emergencies, an occasional gift or evening out. But they're not good for fast food or larger, long-term expenses. Using credit cards to finance part of your college education can be costly. If may seem easier to pay for school expenses on the credit card, but the federal government has designed some good student loan programs with really reasonable interest rates.

1. Know the real cost of debt. The same item will cost more in the end if you buy it on credit instead of with cash. So choose the credit option carefully.
2. Don’t use credit to live beyond your means. If you can’t pay for an item in a reasonable amount of time, you shouldn’t be borrowing money to buy it.
3. It’s all about the details. The fine print is your friend when you’re comparing credit options. Uncover the details of what an option may truly cost you in interest, fees, and other penalties.
4. Pay as much as you can, as early as you can. This will help you reduce your overall finance charges, avoid penalties, and keep your credit report in good shape. Always pay it off in full if you can.