Credit Cards 101 for Consumers & Business Owners

What is a Credit Card? Find Out & Apply Online for Instant Approval

Credit Cards 101 – A credit card is a plastic card that empowers the cardholder to charge services and goods to an established account. It represents an enforceable contract between the cardholder and a finance company that requires the cardholder to remit future payments, for the privilege of purchasing something today.credit cards 101

As a cardholder, you will be required to

  • Pay off the entire amount of purchases, or,
  • Remit a minimum payment if so permitted by the charge card contract.

But, remember: A reduced payment transfers the previous month balance forward to the next billing cycle. This then leads to additional fees, like finance charges. The Finance Charge is calculated based upon the annual percentage rate (APR) of the credit card and the cardholder’s outstanding balance. (Take a look at some of the credit card offers below or scroll to the bottom of the page to learn more about credit cards before applying).


 

Credit Cards 101: Part One – A History

Charge card usage began in the United States during the roaring 1920s. It was during this early 20th century decade that merchant account companies began issuing consumer credit cards for a purchase (aka – a credit card transaction) made at company stores ONLY.

Diners’ Club, Inc. introduced the first credit card for use at more than one location or store. By 1958, the American Express Company introduced an innovative credit card (that soon required the invention of the point-of-sale terminal) intended for travel and entertainment purposes. Policies set forth by this type of credit card required cardholders to pay an annual fee (for the privilege of using the card) and to pay the balance periodically, typically on a monthly basis. This rule is still commonplace in the credit card market today as lines of credit are available to a commercial or by a consumer bank.

The evolution of credit card/debit card usage now includes opportunities for business owners to obtain money through a) a cash advance b) the ability to finance business opportunities and c) the capability to carry a balance, without incurring a late payment. However, business owners are encouraged to evaluate their credit situation before applying for new credit and understand the card’s fees and perks.

Fast forward to 2017 where applying for a credit card is remarkably simple. When you find a credit card online for which you wish to apply, you simply:

  • Enter your information into an online form
  • Click submit

But, wait!

Obtaining a credit approval is a bit more involved than just submitting an online application. Credit approval is a) contingent upon a number of credit industry arithmetic benchmarks, and b) typically requires preparation prior to actually applying.

For those searching for a credit card that offers special rewards and beneficial financing provisions, the applicant must have good or excellent credit. So, if you know your credit history is less than perfect, or you are new to using credit cards, it may be worthwhile to postpone applying for credit until your finances improve and your credit profile is back on track. Improvements to credit scores can be accomplished by:

  • Maintaining an on-time minimum payment
  • Maintaining appropriate debt levels on existing credit cards
  • Preventing additional debt from gathering

There are some tried and true tactics to improve your chances of receiving a credit approval by improving your credit score.

The following list of methods begins our discussion regarding Credit Cards 101.

 

Credit Cards 101: Lesson #1 – Minimizing Debt

Approximately one-third of a credit score is based upon the amount of outstanding debt. Retaining elevated balances (when compared with the card’s credit line maximum), month after month, is particularly detrimental to one’s overall credit score.

There is a way to determine your current debt levels. The credit utilization ratio calculates what percentage of your line of credit is actually owed. Simply divide the outstanding balance on the credit card by the card’s maximum limit. Your outstanding balance should be no more than 30% of card’s upper limit.

EXAMPLE: If your credit card has a limit of $10,000, you are encouraged to keep the balance below $3,000 to improve your credit profile.

In addition, a credit utilization ratio can be improved by paying down an existing credit card balance that exceeds the recommended limit of 30%.

 

Credit Cards 101: Lesson #2 – Be vigilant. Find the right credit card for you.

Credit card applicants with imperfect credit may find it difficult to be approved for the more desirable credit cards – those that offer bonuses or rewards. Every application for credit is reported to the credit repositories as an inquiry on your credit report. Many inquires appearing on the credit report can damage your credit score.

 

Credit Cards 101: Lesson #3 -Be honest on the application

History has shown that a credit score is a reliable gauge of creditworthiness. However, a credit profile cannot disclose, or verify an applicant’s income, and important part of the creditworthiness evaluation. To properly evaluate an applicant’s creditworthiness, a credit card company uses the applicant’s income to comprehensively evaluate your debt-to-income (DTI) ratio. This DTI ratio is used throughout the financial industry to calculate the chances an applicant will make future payments.

Caution: Resist the lurking temptation to overstate your income when completing an application. Fraud is punishable by up to $1 million fines and/or 30 years of prison.

 

Credit Cards 101: Lesson #4 – Never give up

If your credit application is denied, speak with the Reconsideration Service Representatives at the lending institution to plead your case after the denial is made. Additionally, if your credit application is denied, you might consider applying for a secured credit card. A secure credit card (also known as a prepay card) requires the cardholder to post cash deposits as collateral to secure the line of credit given. Some secured credit cards offer the opportunity to upgrade to an unsecured card after establishing an acceptable credit history.

Federal law mandates that anyone who is denied credit (because of inaccurately reported credit data) be given the contact information of the repositories that provided the alleged erroneous information. Contact the credit bureau within 60 days of the denial to receive a free copy of your credit report. If the credit report has an error, the credit bureau is under the obligation to investigate and, if needed, correct the issue for free.

It is your right to dispute errors and mistakes you have found on your credit report. Use it to your advantage.

 

Credit Cards 101: Lesson #5 – Know your score. Know your odds of Approval.

Credit is assessed using numerous credit scoring algorithms. The two most well known scoring systems are a) a FICO score and b) a VantageScore. Financial companies, when deciding upon credit applications, most often use the FICO credit scoring system, developed by Fair Isaac Corp.

The better your credit score, the better your chances of getting approved. A five-year study (2007- 2012), revealed that those with FICO scores that fall between 660-719 had a nearly 59% percent chance of an approval for general-purpose credit cards. As noted on the graph below, those with FICO credit scores in excess of 720, have a chance of credit approval of 85.5%. Overall, consumers have average approval rate of 39.1 percent. Subprime consumers were approved at only a 17.1 percent rate in the CFPB survey.

Don’t forget, good credit typically translates to more reasonable interests rates and higher spending limits. The Credit Cards 101 curriculum continues with a discussion regarding the level of impact certain situations have on a credit score.

 

Credit Cards 101: Part Two – Demonstrating the Levels of Credit Damage

Finding your current credit profile or investigating unknown credit damage has become increasingly easier. More and more credit card issuers are providing customers with free credit scores. Of course, you are encouraged to reach out to the major credit bureaus once a year for your free credit report. It is important to note that checking your credit score or requesting your credit report will not hurt your credit profile.

 

Credit Cards 101: Damage Meter – Applying for Numerous Credit Cards – Mild Damage

It does not matter why you have applied for different credit cards. Perhaps you wanted to shop around for a great deal or just wanted to see which lender will approve your application. But, heed this warning: Credit scoring algorithms evaluate 10% of your score based upon the existence of new credit found on one’s credit report. As noted above, various credit inquiries, generated by a few credit card applications around the same time, will likely have a negative impact upon one’s credit score, because lenders typically interpret this as dangerous credit behavior.

So apply for new credit cards strategically. If you get rejected once, figure out the reason for the rejection before you reapply or apply for another card.

 

Credit Cards 101: Damage Meter – Excessive Subprime Credit on Credit Profile – Mild Damage

Subprime lenders provide financial options to people with bad credit. Subprime products typically have higher interest rates that offset the higher-risks undertaken by lenders for this situation.

If there are excessive amounts of subprime lenders on your credit report, (which accounts for ten percent of your score), credit card companies may begin to interpret this as a negative trend.

 

Credit Cards 101: Damage Meter – Cancelling Other Credit Cards – Mild Damage

As odd as it sounds, canceling accounts that are in good standing with other lenders can misguidedly fool credit card algorithms that would now interpret the length of your credit history as having been reduced. This measurement accounts for fifteen percent of your credit score and reduces, to your detriment, your total available credit. This in turn pushes up your debt utilization ratio (a negative signal), if you’re carrying larger balances on the cards you have not cancelled.

However, keep in mind that if a rarely used charge card requires an annual fee or, if you want to simplify your credit card holdings, by all means, shut down the credit line. But, be prudent. Do not shut down multiple lines of credit at the same time.

 

Credit Cards 101: Damage Meter – Using Too Much Credit – Moderate Damage

As noted above, your credit utilization ratio reflects a comparison of outstanding credit when compared to the card’s credit limit. The ratio accounts for 30 percent of your credit score. If you are near, or have reached your credit limit, it is likely that you will be considered a high-risk applicant.

As a general rule, credit card holders who maintain better credit scores typically have balances equal to less than seven percent of credit cards’ limits.

 

Credit Cards 101: Damage Meter – Missing Payments – Major Damage

One’s payment history accounts for the largest portion of a credit score – 35 percent. Timely Payments are considered the most important factor to creating (and maintaining) a good/great credit profile.

 

Credit Cards 101: Damage Meter – Co-Signing for another who is Financially Irresponsible – Major Damage

As a co-signor you agree to resolve the consequences of someone else’s credit choices.

When co-signing for another for a credit card or a business line of credit, you, the co-signor, is responsible for the repayment of a loan should the primary signatory fail to make a minimum payment. Lenders won’t typically communicate with co-signers on a regular basis but begin contacting co-signers when the account is delinquent by 90 day. By then though, it is ridiculously difficult to contend with because the delinquencies are now a permanent part of your credit report.

Of Note: One solution requires that a copy of the credit statement be mailed to the co-signor from the onset of the debt.

 

Credit Cards 101: The Take-away

Successful business owners employ a variety of external business financing sources, like Business Financing Hub (BFH), to fund new or existing business needs.

Credit industry professionals crafted BFH for business owners and entrepreneurs to efficiently and easily take advantage of available credit cards and business lines of credit. BFH provides complete personal and business lending solutions like credit cards; personal loans and mortgages. BFH reaches out to their clientele, and online visitors, by publishing insightful topical articles about personal and business finance issues.

The Business Financing Hub specializes in evaluating financial scenarios and creating viable solutions through a variety of products, tools and services. Their company ethos is as follows:

Helping consumers to make educated and well-informed financial decisions.

 

Sources: Card Act Report