Credit Card Basics
By this point in your life, you probably have at least one credit card. And you can be sure if you have one, or even if you don't, you'll be offered more.
Credit card companies in this country send out almost 2.5 billion offers for cards a year. That's 10 offers for every man, woman, and child in America. And then there are the companies that will find credit cards for those who have had serious credit problems and can't get conventional cards. There are more than one billion credit cards in circulation in the United States, according to the popular financial gurus, the Motley Fools. That comes out to four apiece for every person.
Credit cards are a huge business in this country, to say the least. It wasn't too long ago, however, that credit cards didn't even exist.
Credit card companies began hitting on young people in the 1980s, when they realized they'd completely saturated the baby boomer market. Even high school students who have just turned 18 are, in many cases, offered credit cards.
How Me the Money
Revolving consumer debt is the balance on a credit card that is carried over from one month to the next, incurring interest and fees as it does.
Among Americans who have one or more credit cards, the average debt being carried over from month to month is nearly $4,000, according to a 2004 Gallup Poll. The only way to avoid mounting debt like this is to pay off any debt you have now and not incur anymore.
All that changed in the 1960s, when, at the tail end of the baby boom, the Bank of America introduced the first bank credit card. The idea caught on quickly, and Americans were soon charging up a storm. Unlike now, however, nearly everyone paid off the balance each month in those days. It was considered almost a disgrace to owe on a credit card. Cards were fun and convenient, but the balance on them was rarely carried over to the next month.
Somewhere along the line, the stigma of owing money on them lessened and eventually disappeared. Today, it's estimated that about 70 percent of cardholders carry a balance from one month to another. This balance is called revolving consumer debt, and it's on the rise. At the end of June 2003, the total revolving consumer debt in America had risen to $726.9 billion, according to Federal Reserve statistics. Credit card debt accounted for the great majority of that total.
This revolving debt can quickly cause trouble for credit card holders. When you don't pay off your balance, the bank or credit card company starts charging interest on what you owe—a lot of interest. The interest rate can vary greatly, depending on who issued the card, but the average credit card interest rate as of June 23, 2004 was around 13.3 percent, according to bankrate.com. That's a lower rate than it was several years ago, attributed to an overall decrease in interest rates. Still, if you carry over a $2,000 balance at that interest rate, you'll pay $266 in interest charges per year, more than $22 for one month. Analysts are predicting that all interest rates will climb again soon.
Getting a Card If You Don't Have One
Now that you know about the history, advantages, and potential pitfalls of credit cards, you probably still want one if you don't already have one. And you probably should have one. As mentioned earlier, credit cards often are necessary. Some banks won't even let you open an account if you don't have a credit card, and it's important that you acquire credit in your name for use later on.
If you don't have a card, you can find applications at your local bank. You also can find them in magazines or by accessing a bank that offers credit cards, such as Citibank or Chase, on the Internet.
We know people who will spend hours, even days, shopping around for bargains. They'll never buy anything that's not on sale, yet they'll let their credit card debt accumulate and pay close to 17 percent interest on it. Even if they find a bargain purchase, they'll still lose money by having to pay those high interest rates on their credit cards.
Normally, if you have no credit history, but are at least 18 years old with a job, you'll be able to get a card with a limited amount of credit, usually $500 to $1,000. If you don't have a job, but you have a parent who is willing to be a co-signer or guarantor (see the next section), you can still get a credit card.
If you are diligent with your payments, you'll probably be able to have your credit limit upped after 6 to 12 months. The amount of the increase is dependent on your income or your ability to repay the line of credit.
Co-Signers and Secured Cards
If you have no credit history and your earnings are low, or if you already have a bad credit history, you might not be able to get a card in your name alone. You may need to apply for a secured card or get someone to act as a co-signer or guarantor. A co-signer, or guarantor, is someone who agrees to assume responsibility if you can't, or don't, pay off credit card debt.
If you need a guarantor to get a credit card, the person must be an adult with a good credit history. Usually, a parent will take this role, although it could be someone else, depending on the circumstances. Both you and the other person whose name appears on the card are responsible for missed payments and overspending.
Show Me the Money
A co-signer or guarantor is someone who assumes the responsibility if you can't pay off credit card debt.
Collateral is something of value put up as security for a loan. It is to ensure that the lender will not lose the money loaned.
The old saying, “If it sounds too good to be true, it probably is,” definitely applies to ads for credit cards. You can get yourself into a lot of trouble if you make the mistake of dealing with a disreputable company. Many of the cards have “initial balances” (really substantial fees) on which you pay interest with very minimal monthly payments.
A secured card or credit account is when the bank or credit card company requires a deposit that serves as collateral. The deposit is equal to the amount of credit allowed on the card. So, if you got a card with a $500 credit limit, you'd have to make a $500 deposit. There are often other fees charged to open a secured account, although, as more companies begin to offer these types of cards, some are dropping the fees in order to get an edge on the competition.
Some companies will pay you a bit of interest on your deposit, but don't expect it to be very high. You, on the other hand, will pay between 17 percent and 21 percent interest on unpaid balances, because your credit risk is considered higher than someone's with a regular card. But if you want a card and want to begin a credit history, a secured card might be the way you'll need to go.
A big word of warning here: Be very wary of com-panies that offer credit cards, either secured or un-secured, at fabulous rates or to people who haven't been able to get a card. There are a rapidly growing number of unscrupulous companies that target people with poor or nonexistent credit ratings, who can't get approved for credit cards through traditional issuers. The Internet is full of offers for people who previously couldn't get cards. Some of these offers are pretty unbelievable and should be avoided.
If you do get a secured card, be sure that you find out when your account can be converted to a standard account. At that point, you should get your full deposit back, provided you've made timely payments and don't owe any money on your credit card.
The following are a few of the institutions that offer secured credit cards:
- Amalgamated Bank of Chicago (1-800-723-0303)
- Household Bank (1-800-771-7339)
- Merrick Bank (1-801-545-6600)
- U.S. Bank (1-800-285-8585)
Excerpted from The Complete Idiot's Guide to Personal Finance in your 20s and 30s © 2005 by Susan Shelly and Sarah Young Fisher. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.
To order this book visit the Idiot's Guide web site or call 1-800-253-6476.