Credit Cards 101 – Parte Número Uno
Part 1 | 2
March 29, 2005
Cap -@- StopBuyingCrap.com
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)
All Done! (If I remember any more terms, I’ll add them in and update as
necessary, if there's something you want me to add in, let me know!)
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!!
Um... or rather, all that I know.
So, let’s continue on to Part Two!