Credit Card - The Basics
And the complexities behind it.
I came across a young woman over the phone who wanted to buy the latest iPhone on a 2-year contract and I asked her basic questions as part of my job of being a sales agent for a telecom provider. The phone retailed at approx. $1300 at the time and after asking basic questions, I found - a). She had landed in that country about a month ago, b). It was her first credit card with a total limit of $1500 (an international student), c). She knew nothing about a credit check or credit history & when I told her since she was new to the country, I couldn’t do it over the phone as she was not eligible and asked to visit a store. She asked, ‘‘ I have the credit card, can I just buy the phone outright?’’. I was screaming at the top of my lungs NOOOOO but it was all in my head. No, I wasn’t rude but I couldn’t say that she was making a huge mistake.
This post is for anybody who wants to get basic information, to understand everything about credit cards so they don’t make the most common mistakes. Share this or forward it to anybody who is new to the credit card world or planning to get one or whoever just wants to learn because that’s the motive.
In the world of credit cards, CREDIT=BORROWING. If you get a credit card and your provider says you have a limit of $1500, you do not actually have this money. It means you can make purchases within a billing cycle up to the amount of $1500 and it needs to be paid back as well because you’re not using your own money here, you’re using a credit card, a “BORROWING CARD”.
Too many words have been used here, quite many terms and if it’s a borrowing, why should one take it in the first place? I really don’t have to take upon a borrowing if I just have my own money. A perfectly valid question. To our disadvantage, society doesn’t like anything easy and it likes to judge everything! Speaking of judging, let’s pull back the curtain and take a look at everything pertaining to a credit card. To avoid a lengthy post, this one will mention the 1st half of important details, and the 2nd will come out next week.
Credit card = A card issued by a credit card provider (whether that’s a bank or a standalone institution like American Express) is a financial tool that allows you to make purchases now and pay them at a later date (and you’ll be judged for it).
If you become eligible for a credit card, you’ll get one of the 4 out of the ones listed below:
Visa
MasterCard
Discover Card
American Express, Below is a graphic to give you various features of each.
So why should one get a credit card? Answer - To build a credit history.
My job as a sales agent is for a Canadian company. I have previously worked for an American company, and both heavily rely on a credit report (also called a credit file). It’s essentially a statement of payment history with basic personal information showing how good we are at making timely payments, how much debt has one taken, when was it taken, and so on. My own country (India) and almost every country now uses this concept of assessing a person’s credibility before extending a loan or any kind of borrowing.
How does one become eligible for a credit card? Answer - One needs to have a source of income.
Trust there are many other ways or loopholes you can say, but they all eventually come down to the fact that a source of income is required because the credit card provider, the bank, needs to know if you’ll be able to pay it back if you use their credit card.
Building a credit history is essential because this statement is used almost everywhere. Do you want to buy a car? They check your credit report. Wanna get a mortgage? they check your credit among other factors. Do you want to get a postpaid cellphone connection? They check your report. What they are looking for is your credit score.
When I was working at a credit bureau (my first job), the most dreadful were the calls from customers asking why their credit score was low? or why it changed. or why has it not changed? and so on…
Credit Score is a rating given to your credit report, generally between 300-900 to determine how good you have been with your borrowings; whether that’s one credit card in your name or multiple lines of credit such as a car loan, or another credit card or a home loan or all the above.
So, if you have your credit report showing you have a score of, say, 750, that’s a good score. If you’re at around 400 or 490, that’s not a good score because it’s letting the bank know that you haven’t been good with payments or lines of credit. But wait, how does the bank know? Are they checking all the time? Answer - Absolutely no! They only check your credit file when you’re looking to apply for one of their products. To them, credit cards, loans, everything is a product to be sold to us. So, If I request a bank for a credit card, they check my credit report and score to see if I’ll be good with it or not, if they’re satisfied with my payment history, showing them my “creditworthiness”, the credit card comes my way.
Now, to make this short and downloadable, the following are the graphics detailing one of the most important concepts and common terms that you should know about. These are - the billing cycle, how it works, terms like inquiry, the facts regarding inquiry, etc.
This information lays the foundation for more details to come. There is so much more but again, I’ll use graphics for you to save on your phone to make it simple and easy. Next, we’ll discuss the ‘checklist for first credit card’, things to keep in mind, how credit scores impact so many things, and so on.