Personal Finance 101: Introduction to Credit Cards

What is the first thing you should know about credit cards? YOU MUST HAVE ONE!

If you are a US person, or a foreign citizen who intends to stay in this country, eventually you’ll need to take some kind of loan for your house, your car, your kids’ education, to name a few. How do creditors evaluate your ability to pay back the loan? They rely on your history of managing debts. Think you’re a reliable borrower since you’ve made enough money to never have to take a loan before? I wish it worked that way.

The truth is, all creditors rely on what is known as a credit history, which is the documentation of your personal history of debt management. The more experience you have with managing debts, the better you’ve previously dealt with debts, the better your credit history looks. Here’s my personal story with starting a credit history:

On November 25th, 2011, I was on an Alaska Airlines flight from Seattle to Las Vegas. The cabin crew announced an offer from Alaska Airlines, where if you applied for their credit card and got approved, you would receive 25,000 bonus miles, enough for a round trip ticket. The first year’s annual fee would be waived. To me, that means a free round-trip ticket whose value would offset the annual fee for the next couple of years. I jumped on it. 2 weeks later, I received a letter from Alaska Airlines, saying my application was denied for lack of credit history. I was dumbfounded at the time, but as I later realized, I wasn’t alone: a large portion of the population doesn’t have the slightest idea of what a credit history is.

So I asked the American family I was staying with about this, and they advised me to start building a credit history by getting a credit card with my bank – Bank of America. After consulting with posters on an internet forum, I was determined to ask Bank of America for a secured credit card. On January 7th, 2012, I went to a BofA branch in downtown Seattle, talked with a personal banker from Poughkeepsie, and opened my first credit card, a fully secured credit card. Now this personal banker and I got along really well. I don’t know if this was the reason he applied for a really good secured card on my behalf. I will explain to you later why I think this card is awesome – in fact, the best secured credit card there is on the market right now. But first let me explain what a secured credit card is.

Unlike the normal credit card where you borrow against the creditor’s money and pay it back to the creditor, with a secured credit card, you borrow against your own money which you deposit in a special account as collateral. This is a hybrid of a debit card and a credit card, and it teaches you how to manage a credit card account, i.e., always make payments on time. Your secured credit card account is reported to credit bureaus who keep a record of your credit history. So having a secured card helped me establish a credit history. And thanks to my efforts to always pay the balances in full, I built a clean credit history, which launched me into the world of prime credit cards.

On September 3rd, less than 8 months after managing this secured credit card alone, I had a FICO credit score of 713, which means I would be qualified for a 30-year mortgage rate of around 3.285%. With a blank credit history, it would be a struggle to get any mortgage at all.

So what if you will never take a loan of any kind? First off, congratulations on having such stellar financial resources! But let me explain why having a credit card would still greatly benefit you.

Credit cards have perks that unfortunately too few people are aware of. If your card is a decent one, it should offer you at least 1% cash back on every purchase. That means if you charge $10,000 on your card in one year, the card would give you $100 back. Then you can reward yourself with a nice Christmas gift. But what I personally consider the greatest benefits of credit cards are extended warranty and purchase replacement. Let me quote the summary of these benefits that my BofA secured card provides:

” Purchase Guard will double the manufacturer’s original United States (U.S.) warranty period on personal items purchased in full with your eligible card that carry a warranty duration of less than 1 year and extend the manufacturer’s original U.S. warranty period for 1 additional year for Covered Purchases with a warranty duration of 1 to 3 years. ”

” Purchase Replacement – Within the first ninety days of the date of purchase, Purchase Replacement will replace or repair eligible items of personal property purchased entirely with your eligible card up to a maximum of $500 per claim and $50,000 per year, in the event the item is lost, stolen, or damaged. ”

This means that if I used my card to buy a laptop from Lenovo with the regular 1-year warranty, I would have another 1-year warranty from the card, and if I damaged my laptop within the first 90 days and Lenovo doesn’t cover it, my card will pay me $500. How many times have you damaged your laptop without coverage from the manufacturer, and how many times have you had a laptop stop functioning right after the 1-year warranty? If the answer to either of these questions is more than 0, having a credit card would’ve saved you a lot of money.

My credit card offers other perks such as emergency travel assistance and auto rental collision damage waiver, which I have yet to utilize but are definitely nice to have. If you already have a credit card and wonder about its benefits, you can find out through this website: www.benefitinformationcenter.com

So, moral of the story is: YOU MUST HAVE A CREDIT CARD!

OK, so how do you get a credit card? What exactly is a credit card? What should you know before and after getting a credit card? The later posts will cover these topics, and more.