By Diane Lochner
MoneyMix Contributor

Have you heard the one about the best things in life being free? You can get a lot of things in life without paying for them – at least right away. But eventually, the bill will find you.

starting out small

I had a savings account from a young age; at 15, I opened a checking account (I loved the special Minnesota Twins checks that my financial institution offered!)  I signed up for my first credit card at 16. It was a department store card, with a credit limit of just $200. I felt so grown-up doing my own shopping and paying my own bills with money from my part time job.  By starting with the basics, I learned about responsible money management and credit use - and that's what potential lenders want to see. If it can work for me, it can work for you.

We’re talking about credit.

If you use it well, you can get the things you want or need, like an education or a car. If you don’t, it can haunt you for years.

types of credit

First things first, credit is a type of loan called a consumer loan. These consumer loans come in two basic types, secured and unsecured.

A secured loan means you’ve put up some sort of collateral. Collateral is what you lose if you don’t pay the lender back. So, if you have a car loan and don’t make your payments, the car is collateral, and your lender has the right to send someone over and pick it up.

For an unsecured loan, your signature is enough to get the loan, if your lender thinks you’re an acceptable credit risk. Credit cards are a type of unsecured loan. You can pay off your balance in full each month, or pay it off over time – but you’ll be charged interest if you carry a balance from month to month.

For some loans a lender might require a co-signer – someone, like a parent, who promise to repay your loan if you don’t. This is pretty common for people our age because we have a limited credit history, and lenders want some assurance they’ll get their money back.

credit isn’t free

If you're shopping for a loan or credit card, it pays to compare. Check with your credit union or online for going rates.

Believe it or not, people won’t give you money for free – and the rates they charge can vary wildly. If you’re shopping for a loan or credit card, it pays to compare. Check with your credit union or websites such as www.bankrate.com for going rates. When you go looking, watch for these things:

Annual percentage rate (APR): This is the standardized interest rate you must pay the lender each year you’re using their money. The lower the rate, the better, but be sure to see if the good deal you found is only temporary – a 5% APR sounds great, but not if it’ll go up to 20% after 12 months.

Finance charge: This is the total dollar amount the loan will cost you. It includes fees, interest, or other charges. If you carry a balance on your credit card, the finance charge will show up on your statement every month.

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