And keeping a lid on debt

At age 18 you are entitled to get a bank loan, an overdraft and credit
cards – and you will probably be deluged with offers from credit card companies and banks.

Now is a good time to start getting smart about credit. Learning to use it responsibly is a critical survival skill in this day and age.

Experience: being in debt

Being in debt really stinks. It means that all the nice money you earn goes straight into paying off interest. The times I’ve really been messed up were times I didn’t keep accurate accounts of what I spent. One time a £10 cheque that bounced cost me £75 in bank charges. Another problem is when I buy things on an impulse and regret it later on. The cure for the first problem is simple: write down everything you spend in a reliable place. The cure for buying on impulse isn’t that easy. — Adam

How interest works

Credit is an arrangement for deferred payment of a loan or purchase. The most common types of credit are bank loans and credit cards. In return for offering you credit, the lender charges interest.

Interest is a percentage of the total loan and this may be higher or lower depending how much you borrow, how risky it is to lend you money and other factors. You can compare interest rates by looking at the APR (Annual Percentage Rate). This is the annual average total cost of the interest, principal and finance charges.

Some lenders only publicise their monthly interest rates. Something like "rates of 1.5% per month" may not sound like much but this is equivalent to 19.6% APR. Here is an example of how interest works:

• You get a credit card with an 18% APR and a £1000 credit limit.
• You spend up to your limit.
• You pay the minimum payment of £20 each month.
• It takes 8 years and 5 months to pay off the balance of £1000.
• You pay an additional £1087 in interest!
• In other words, for every £1 you put on the credit card you have to pay £2.08 back.

How Credit Cards Work

Credit cards are not free money. If you spend £100 on your Visa or MasterCard, you have to pay £100 back. If you can pay it all back at the end of the month, brilliant. This is the smart way to use credit cards because you don’t pay a penny to the lender. But, if like most people you have to pay it back a bit at a time, you will have to pay interest. You will also have to pay penalty fees of around £20 if you go over your credit limit or don’t pay your bill on time. To use credit cards wisely:

• Pick a card with a good introductory APR and a good ongoing rate.
• Stay away from cards with an annual fee.
• Avoid cash advances. Charges are around 2% per month.
• Only spend as much as you can pay off each month.
• Use for convenience or emergencies only.