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Economics & Personal Finance
Credit Scores and Credit Cards
Credit Scores and Credit Cards
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Credit cards let people borrow money for purchases and pay it back later, but the convenience comes with rules and costs. Credit scores summarize how reliably a person manages debt, so they affect loan approvals, interest rates, apartment applications, and sometimes insurance prices. Understanding credit cards and credit scores helps students avoid expensive fees and build a stronger financial future.
Key Facts
- Credit utilization = credit card balance / credit limit.
- A lower utilization ratio, often below 30%, usually helps a credit score.
- Interest charge = balance x APR x days / 365.
- Paying the full statement balance by the due date usually avoids interest on purchases.
- Minimum payments reduce short-term pressure but can make debt last much longer and cost much more.
- A credit score is influenced by payment history, amounts owed, length of credit history, credit mix, and new credit inquiries.
Vocabulary
- Credit score
- A credit score is a number that estimates how likely a borrower is to repay debt on time.
- APR
- APR, or annual percentage rate, is the yearly interest rate charged for borrowing money on a credit card or loan.
- Credit limit
- A credit limit is the maximum amount a card issuer allows a person to borrow on a credit card.
- Statement balance
- A statement balance is the total amount owed at the end of a billing cycle.
- Credit utilization
- Credit utilization is the fraction of available credit currently being used.
Common Mistakes to Avoid
- Paying after the due date, because late payments can create fees and may hurt a credit score.
- Only checking the minimum payment, because paying only the minimum can lead to large interest costs over time.
- Using most of the credit limit, because high utilization can signal risk to lenders and may lower a credit score.
- Applying for many cards quickly, because multiple hard inquiries can temporarily lower a credit score and suggest financial stress.
Practice Questions
- 1 A student has a credit card balance of 1,500. What is the credit utilization ratio as a percent?
- 2 A card has an APR of 24%. If a $600 balance is carried for 30 days, estimate the interest charge using Interest = balance x APR x days / 365.
- 3 A borrower always pays on time but keeps a balance close to the card limit every month. Explain how this behavior could affect the borrower's credit score and why.