You might have heard grown ups talk about credit or something called ‘credit card debt.’ If you’ve ever wondered what that meant or why some grown ups seem so stressed out by it, Four Points is here to help.

Credit just means borrowing money. Like when you ask your brother, sister, friend or even Mom or Dad to borrow a couple of dollars to buy a snack at school; if your friend agrees to lend you the money, it’s your job to pay back what you owe. Credit is the same thing but it happens when an adult borrows money from a bank and agrees to pay it back.

When you borrow money you probably only have to pay back the amount you borrowed. For example, if you borrow $5 to buy lunch at school one day, you’ll bring $5 for your friend or grown up the next day. Well, when you buy something with a credit card, you owe whatever you spent to the bank whose credit card you use. Usually, you have 30 days to pay back the money you borrowed. If you don’t pay back everything you spent in that time, you have to pay part of it back and pay something called ‘interest’ on the rest of it.

Interest is a small amount of money that the bank adds to what you owe for as long as you owe it. The longer you take to pay off what you borrowed, the more money you will end up paying the bank overall. Here’s an example:

Let’s say you buy a $100 bike and you only pay off part of it, instead of paying for it all at once. Here’s what that might look like if your bank charges 18% interest on what you owe.

Payment $5 $10 $15 $20 $25
Months to Pay Off 20 10 7 5 4
Total Interest Paid $19.07 $9.03 $6.14 $4.68 $3.86
Cost of the Bike $119.07 $109.03 $106.14 $104.68 $103.86

That’s a lot of numbers! But, they tell one important story – credit is NOT free money. It’s money you borrow to buy things. So, why would you need it in the first place? Well, the answer to that takes another blog post to write BUT let’s just say that when you want to buy big things like cars or houses, banks want to know if they can trust you to pay them back since those things cost so much money. One way they can tell whether or not you’re trustworthy is by seeing that you’ve had credit cards and always paid them off.

So, getting a credit card when you’re old enough can be a great thing, as long as you buy only the things you can afford and you pay back what you spend each money in full. If you use it wisely, credit can help you reach your dreams. Do that and you won’t have to worry about stressful things like credit card debt.

What questions do you have about credit? Do you think you will get a credit card someday? Why or why not?

Youth Print and Complete budget (PDF)