How To Use A Credit Card: Guide For Teens

How do you decide which credit card to get?

How do you decide which credit card to get?

Why Do You Need A Credit Card?

We have all been told by our parents or grown ups that it is important to establish a credit history. “If you don’t have credit that is just as bad as having bad credit!” Probably heard something along the lines of that, right? So you know you need to establish a credit history but you unsure of where to begin. I know, I’ve been there. Establishing credit early on in your career is important. You do want to be able to buy a house and car, right? Establishing a credit history is important because it shows banks and lenders that you are responsible with handling your debts. Building a good credit score takes time so if you start early at 16 and are prudent in your spending habits you could have a good credit history within 2 years, maybe sooner. I will show you how to get a great credit score and everything you need to know to be on your way to a great financial future!

The Credit Score Breakdown

Now, before we begin on choosing the right credit card it is important to talk about how your credit score is calculated and how it is affected by your actions. The credit score is broken up into these categories:

  • Payment History
  • Credit Utilization
  • Debt Load
  • Account Age
  • Account Diversity
  • Hard Credit Inquires
  • Collections Accounts & Public Records

Payment History

The payment history category is one of the most important in determining credit scores because it makes up 35 percent of the total credit score. Therefore, it is imperative that when you have an outstanding balance on your credit you need to pay it off on time, every time. Even having just one late payment can send your credit score into free fall, particularly if you have yet to establish a track record. Always keep track of the due date to make sure you pay it on time. When you apply and get approved for a credit card the issuer will send you paperwork stating when payment is due. But i believe it is a good idea to just call the card issuer directly and find out exactly to avoid any mix ups that may occur.

Credit Utilization

The second part, credit utilization is equally as important as payment history. Credit utilization makes up 30 percent of your credit score. What exactly is credit utilization? Credit utilization is the percent of available credit that has been borrowed. As a rule of thumb, it is best not to go over 30 percent of available credit. Lets do some examples to get a better understanding. Lets say you have a credit card with a $1,000 credit limit. (Most cards start you off with $300 and you can ask for more later or get a secure card, more on that later). A 10 percent utilization rate is $100 dollars, 20 percent is $200 dollars, 30 percent $300, ect. A survey was done by Credit Karma to show the relationship between credit score and credit card utilization.

A credit utilization between 1-20 percent proved to be the best. Those with a utilization ratio of 10 percent had the best score with an average credit score of 753. People with a utilization ratio of 11-20 percent had a score of 715, beyond this ratio, your score drops more noticeably. The reason for this is because when the card issuer sends the report to the credit bureaus it looks bad when you use up most of you available credit. Your credit card balance must be paid back in full by the due date at the end of the month. Those with little to no credit history or bad credit typically spend more than those with good credit. Having a low balance shows that you are responsible with your debts. Another thing to note is that your payment history and credit utilization make up over a third of your entire credit score, so if you can properly manage your spending and pay on time your almost there!

Debt Load, Account Age and Diversity

The rest, such as debt load, account age and account diversity make up a much smaller portion of your credit score, usually 15-10 percent each. I won’t go into as much detail with these categories but a brief explanation is needed. Your debt load is basically the percentage of your gross pay that is currently used to pay off debt. Some loan applications will ask you how much of your income is used for debt before they will approve the loan to make sure you have the ability to pay it back. If you have a mortgage its best to have 40 percent or less of your income servicing on debt. If you rent, it should be below 30 percent. Account age reflects how long your credit accounts have been opened. Typically, the longer the better. A longer account history shows that financial institutions trust you and your business due to a long account history. The longer the account is open the better your credit score will be. It is because of this that you should think carefully about what kind of card to apply for. I prefer to get a card with no annual fee, otherwise you could end up paying $25 or $45 a ear just to keep the card active.

Account diversity is a measure of how many different  accounts are opened in your name. Account diversity means you have several different types of credit or loans out. These accounts could be credit card accounts, mortgages, auto loans ect. The account diversity metric shows that different lenders are willing to extend you credit or loans meaning they trust you.

Hard Credit Inquiry

Hard credit inquiries are put on your credit report whenever someone, (bank, person,ect) runs your credit to see if you can obtain a new loan. Another type of hard credit inquiry is when you apply for a credit card. When an inquiry is placed on your report your credit score will take a hit and go down temporarily. It is usually short-lived and your credit score will go back up within a few months, assuming you have been using your credit responsibly. It is very important that when you apply for a credit card that you space out your applications. If you apply for too many loans or credit too soon your credit score will drop more severely and could prevent you from being able to buy a home, car or anything requiring a credit check.


While it is important for teens to build up credit what is equally as important is HOW you use the card. Remember, pay the balance due at the end of the month in order to avoid a late payment fee, interest charge on the balance due or a drop in your credit score. Just one late payment or missed payment can drastically mess up your credit, therefore it is important to not overspend on the card. Watch your credit utilization, keep it under 30 percent at all times, but preferably 10 percent will yield the best credit score. If you keep in mind and put into practice the information I have laid out here you will see your credit improve in a relatively short time frame.

Please stay tuned as I will continue to bring valuable information on all matters on finance and investing.

Balance Sheet Explained

The Balance Sheet Explained: Interpreting the Balance Sheet

Are your assets and liabilities in check?

What does your personal balance sheet look like?

In the first part of the financial statements I explained what the income statement was and I gave an example of a snapshot of a real income statement to better illustrate and explain the income statement. Just like the income statement, the balance sheet is another very important document to search through and use for analysis of a good company to invest in. The Balance Sheet is a great document to analyze to find the financial strength, weaknesses, assets and liabilities of a company. Keep in mind that the balance sheet is not for current position of a company as the balance sheet is updated every quarter. But nonetheless, it is important to keep track off and watch how the balance sheet changes over time. The balance sheet is basically a snapshot of all assets and liabilities within a company. People can have personal balance sheets as well, as in the picture, you could ask yourself, “how much money do I have versus how much liabilities (like a car or house payment) do i have?”

What Makes UP the Balance Sheet?


A balance sheet is nothing more than a summary of assets and liabilities. One important thing to remember is that the accounting equation is assets equal liabilities plus equity. For example, on the asset side of the balance sheet you could have cash and on the liabilities side you could an I.O.U. if someone lent you the money. Let’s elaborate further, say you had $500 in cash and used it as start up capital. That would be considered owner’s equity and a asset. Now suppose you borrowed $800 from the bank to purchase an asset for the business, however the cost came out to $500 total. You would have $300 left over, the accounting equation would look like such:

Assets($500 Startup Cap in cash)+($500 Asset)+($300 Cash left over)= Liabilities ($800 loan)+Equity ($500 Owner startup Cap)

Assets=$1,300 and liabilities and equity=$1,300


Using the Balance Sheet for Investment Analysis

The balance sheet is a great place to look to find discrepancies and see how the management is using capital. If a company had $50,000,000 in a short term loan and only $2,000,000 in cash then it is a possibility that the company has too much debt and could risk going bankrupt if they are borrowing too much debt. On the flip side, if a company has $100,000,000 in cash and total liabilities, both short term and long term of $25,000,000 then management has utilized its capital wisely and is most likely a financially strong company. Another way to put this into perspective is to say, the company has a 4:1 ratio of assets to liabilities. Therefore the company has plenty of cash to pay off its debt and still have surplus to invest somewhere if need be. A ratio of 1:1 would indicate that the company has only enough assets to pay off debts and have nothing left, which in my opinion is just as bad as having too much debt. Think of it as your income: Say you make $1,000 a month and spend $1,000 a month. You would have no savings! What if you get in a wreck and have to pay to have your car fixed? What if you get hurt and need money for the emergency room? What if your child’s tuition for school is more than you thought it would be? The same principles are involved. A company with no savings is doomed for failure.


I hope this was insightful and that now you have a better understanding of what goes into the balance sheet. It is always a good idea to view the balance sheet to see where a company stands at a given point in time. Always be on the lookout for debt levels and that the company has enough assets to pay off the debt should an unforeseen event occur. Always due your own research and do not go by what others say until you have a complete understanding of how the company makes money and how they spend their money!

For more information view for insights into the balance sheet and financial information.