Interest rates, credit scores, and creditworthiness. These words are thrown around a lot, but they're never truly explained to many high schoolers. However, to be truly prepared to hold a job and become financially stable, it's essential to understand personal finance basics. If you're like me and still get confused between checking and savings or debit and credit, here's a simple explanation of the most fundamental aspects of personal finance that will help you feel confident as you begin to earn money
Checking Accounts, Savings Accounts, and Interest
One of the most essential parts of managing your money is understanding different types of bank accounts. Your checking account, which is often connected to a debit card, is your "right now" account and should be reserved for your spending money. On the other hand, your savings account is your "for later" money. In general, you should try to put as much money into your savings account as possible — because these accounts let you earn interest, money that the bank pays you for keeping your money in their bank. When choosing a bank, it's important to look into the interest rates or the percentage of your money that the bank will essentially match. Banks will offer different rates, and they may fluctuate depending on the health of the economy, so be sure to pay attention to what each bank is offering you.
Debit Cards vs. Credit Cards
Another essential part of personal finances is understanding the difference between a credit card and a debit card. As I mentioned earlier, your debit card is connected to your checking account and allows you to spend the money you already have. While debit cards are a great way to avoid debt, be sure not to lose them as they are a direct line to all of the money in your account, and you may have to cover the cost of any fraudulent charges. In contrast, credit cards allow you to borrow money from the bank whenever you buy something and pay for it at the end of the month. While they are helpful because the company can cancel any fraudulent charges so you don't lose money, they can often feel like unlimited money and cause people to fall into debt when they spend more money than they have. As a rule of thumb, you should only spend as much money as you have in your accounts and pay off your entire credit card bill every month to avoid debt.
Credit Score and Credit Reports
Why is avoiding debt important? Because of your credit score! Your credit score is a three-digit number between 200 and 850 that serves as a measurement of your creditworthiness, or how likely you are to pay back a loan. Every time you pay back a loan, your lender will measure how "well" you pay it back and adjust your credit score accordingly. The next time you take out a loan or a line of credit, your lenders will look at this score by requesting a credit report. If it is too low, it will become more and more difficult for you to get loans, such as a mortgage or a car loan. Factors that can cause your score to decrease could be late payments, making an expensive purchase on a credit card, or going bankrupt.
While these concepts only brush the surface of the ins and outs of personal finance, they are some of the most important ideas to consider as you begin to open bank accounts and manage your own money. It may seem confusing at first, but with a little research and careful planning, becoming a smart spender is easy!