Part One: Credit, Credit Report, FICO Scores, and Terminologies

This is a difficult topic to write about. I’ve finally decided to separate it into different parts, and work on it slowly through time. It’ll probably consume the rest of my life. >_<

I had this long introduction before, but I realized that it was SO BORING that nobody would read it.  Even I had a hard time reading it myself. So I highlighted everything and pressed DELETE. I then decided to drink a few bottles of vodka to get enough juice in my system to get this topic rolling.

So, like Al Bundy always say… let’s rock.

In order to talk about credit cards, there are some basic things that we’ll need to go over. READ IT or I’ll have my sister’s dog bite you where the sun does NOT shine. (Yeah you heard me right, the bottom of your foot.)

CREDIT – What it is, and what it ISN’T!

Before we go further lets define credit:
According to Webster’s online dictionary, consumer credit is: “credit granted to an individual especially to finance the purchase of consumer goods or to defray personal expenses.”

An easier read definition can be found from www.dictionary.com which for the purpose of this article, credit is: “An arrangement for deferred payment of a loan or purchase.”

I think most of us know what credit is, we borrow money that we pay back later, at a rate and time specify by those who loan us money.

Credit isn’t a savings or checking account. It’s true! Opening a checking account or savings account isn’t like applying for a credit card or loan, you’re not borrowing any money nor are you doing some payment plan. Occasionally, opening a checking account does involve some credit check by the bank (where they inquire about your credit report and history) to use as one means to determine if they should approve of your application or not. Usually what appears on your credit report (your credit history) has little effect to your application for a checking or savings account.

So yeah, when you get that ATM/DEBIT card in the mail, it’s not a credit card, nor does it have anything to do with your credit history. It’s true that ATM cards these days are more convenient due to the MasterCard or VISA debit/check card capabilities, but that doesn’t make them credit cards (even when you charge them as credit instead of debit). Opening or closing your checking account will generally not impact your credit history or score negatively (although at times, inquiries are made on your credit report when you apply for a checking/savings account).

At times, when you apply for a new wireless mobile phone, you may require credit too. Besides using it to verify your personal information, they can also be sure that you will pay your bill on times. Other familiar credit checks are: application for employment; getting a lease on an apartment; opening accounts at utility companies; cable TV/Internet accounts, etc.

Credit Score (FICO® Score) – The adult scores. The score that revolves around us for the rest of our lives but for some reason a lot of us don’t even know what it is…

I’ve read a lot of articles that calls your credit score (FICO score) the adult score. Remember when they made such a fuss over SAT scores? It doesn’t even matter anymore after we get in college, all those hours of studying… well, for some of us. I didn’t really study and the results shows. But yeah, anyways, credit scores. Let’s go back to that, something that I still have a chance to improve on.

When people talk about credit score, they generally mean a FICO score. FICO stands for Fair Isacc Company, they’re the nice people that gather your credit report from the three major credits reporting agencies and, using their formula to give you a score base on the ranges of 300 to 850. You usually don’t see scores below 500, although there is a small percentage in the US population with that score. (1% according to Fair Isacc), the median score for the US is 723, and I believe the average is around 690-710.

FICO score is basically one of the few factors that helps lender determine your eligibility in credit approval. It tells a lender how much of a risk factor you are. The higher your score, the less of a risk you are to not pay them back. Hence this becomes a VERY important score, especially during those times where big purchases like a car loan, or house mortgage comes in. FICO score also determines what sort of rate you’ll get when you borrow that money. The higher the score, the lower your mortgage rate, it can be as drastic as almost a 4% APR change, when you compare a score of 550 (rate of 9.29%) to a score of 750 (rate of 5.95%). Remember though that a FICO score isn’t the only factor that a lender considers when deciding to give you credit or not, although it does play a big part.

FICO score, like credit, is another whole subject on its own; so we’ll address each of them more later in the future. Here’s a final note, checking your credit report, or FICO score, does NOT have any impact on your FICO score!

Some Other Terms You Might Want to Know

Credit limit: Also can be referred to as your credit line, this is basically the amount of money you can charge on your particular account. If your credit limit is $1,000, you can spend $1,000 before going over your credit limit. As most of us know, going over your credit limit is a no-no, and you’ll usually get slapped with a nice hefty fee.

Interest: The charge for the money borrowed. Straight forward enough. We all know what it is, and why we hate it. When you borrow a certain amount, you pay back interest on the amount borrowed, usually a certain percentage of the amount.

APR: Annual percentage rate. For credit cards, the APR is basically the rate of your interest. For example, if you have an APR of 14%, and you charge $100 on your card, after a year (annual) and assuming you didn’t pay squat (bad idea); the interest you now owe is $14 bucks. The APR is usually determined by adding a certain percentage to the prime rate.

Prime Rate: For credit card, the prime rate generally refers to the Wall Street Journal published prime rate. The prime rate is basically the lowest rate a bank will lend to a customer. The rate changes depending on market condition and the WSJ updates and publish the new rates accordingly. When the prime rate goes up, you should expect your variable rate credit card to change too. You can find out the current WSJ published prime rate from BankRate here.

Revolving credit: This is what your credit card account is classified as in your credit history/report. Simply put, a revolving line of credit is money that you borrow which can be used again and again once it has been repaid. For example, if you charge $1,000 on your credit card, after you pay back the $1,000, you can use the credit card again and again – as long as you make your payments. A loan that you take out from a bank, however, may not have that option. After you pay back that loan from the bank, you can’t simply just get money again and again, without further applying for the loan again. There are also non-revolving credit cards, which you must pay back before you can use it again; a good example of this is the American Express Green Card.

Grace Period: This is the period of time in which no interest rate are charged.  Most credit card have a certain grace period, usually 20-30 days in which you are not charged interest rate for the purchases you made.  They also usually required that you made the previous month’s payment in full, for there to be a grace period for your current month’s charges.  For example, if I paid my credit card bill in full last month, and I made a $50 charge on my credit card today, there will be a 20 day grace period before interest starts accumulating on that charge.  If however, I did not pay my bill in full last month, and I currently carry a balance, then interest rate starts accumulating IMMEDIATELY as soon as I made the charge.  (Hence the many advocacy of PAYING IN FULL)

Now that we have some basic concept of what credit is, some details on credit report and credit scores, we can get to the juicy part: all the things you want to know about credit cards!!

Part Two: Types of Credit Card, Secured Card, Revolving Credit Card

Okay, Let’s Talk Credit Cards

Plastics are wonderful. Have you ever seen those commercial that talks about the wonders of plastic? From products made via plastic materials that ease our lives, medical equipment made with plastic that saves our lives, and many other things that I can’t think of right now, are made by plastic.

Well you know where I’m going at with this. There’s this other “plastic” that we both love and hate at the same time.

Yes, credit cards are often referred to as plastic, since they’re mostly made from plastic cards. (Wow really?)

Yes, really.

So, why do people love and hate credit cards?

I’m glad you asked because there are several reasons for this, but before we get ahead of ourselves, we need to go over the different type of credit cards there are out there. (Yes, there are different types)

The two main different types of credit cards are secured credit cards, and unsecured credit cards.

For a lot of people with bad credit, or no credit history, sometimes a secured credit card may be the only way to establish or re-establish your credit history.

Secured credit cards are cards that require you to open a savings account or deposit a sum of cash as security for your line of credit. The line of credit you have is usually around 50 to 100 percent of your security deposit, although there are some secured cards that require you to pay around an extra 25 percent of your card’s limit. The offers and condition varies from one card issuer to the next, but generally your secure card’s credit limit is 100 percent of your deposit.

For example, the Bank of America Secured VISA gives you a credit line 100 percent of your savings account deposit. So if you deposit $1,000 to the savings account, you will have a credit limit of $1,000.

The obvious reason why major lenders will give you a credit card, even if you have bad credit or no credit is because of the security you have against the possibly that you can not pay your bills. If the unfortunate does happen, they have the ability to recoup some of their lost.

You should realize that even with your security deposit, you still have to pay at least your minimum payment when the bill comes every month.

Secured credit card is mostly for those that are trying to re-establish their credit history, after things such as bankruptcy, judgment, and collections. In time with proper use and responsibility, a secured credit card can be converted to an unsecured card, in which case your security deposit will be issued back to you.

Although secured credit card can also be an option for those without credit, there are also better alternatives out there, especially for students. (i.e. student credit cards, or credit cards from lenders that are easier to get approved from)

Secured credit card is not something that’s too widely talked about, and it will definitely be something I’ll be addressing in the future, but for now I hope that gives some idea on what it is. For those that are interested, I’ll definitely recommend you Google it, and do some research to see if it is the right choice for you.

Unsecured Credit Cards isn’t exactly a term that’s widely used too. Mainly because that’s regular credit cards, and people don’t call it as such. So for the rest of these articles, we’ll be focusing on unsecured credit cards. (We’ll also just refer to them as credit cards, mmkay?)

Again, there are many different types of credit cards (unsecured, that is). There are student credit cards that are easier for students with no credit to obtain; there are reward credit cards that give you products and services when you use them for purchases; there are business credit cards, cash back credit cards, airline credit cards, department store credit cards, etc. etc. The list goes on.

They come in all sorts of funky design and colors, and they also come in different credit card networks. (VISA, MasterCard, Discover, etc.)

They especially come in all sorts of different terms and condition, different annual percentage rates, different grace periods, different minimum payment amount, different introductory rate period, and many more.

At many times, credit cards can be an extremely convenient way to make payments on products and services, but at another time, they can also be an incredibly big burden on those without the discipline in their spending habits.

In the upcoming Part Three, we’ll go more in-depth into the world of credit cards, and explore what they have to offer, and the potential financial burdens they may cause.