Let’s Talk About Credit Cards
The unofficial start of the Christmas season is when people us the word “stickers” and “planners” in the same sentence. At this point in time, registers are also going “swipe!” rather than “ka-ching!” It’s the time of the year when plastics rule.
Let’s talk about these ubiquitous rectangular plastic cards whose convenience everyone (especially the banks) is raving about. Is it really that convenient?
The Concept Behind The Credit Card
A credit card basically is a physical proof of what you would call a line of credit. Lines of credits are debt facilities extended to entities, either individuals or corporations, that allow them to “borrow” money from the bank within a certain credit limit, interest-free, as long as you re-pay it within the term of the line of credit. The term is usually very short, the most common term being a 30-day or one-month period.
A good example of the use of a line of credit in a business setting is when a company delivers goods to its customer on November 2 and the customer says that he cannot pay until November 20. The problem is that you have an account payable to your supplier that falls due on November 15. The business can draw the amount needed from the line of credit and use it to pay the their supplier and then wait until their customer pays so that they can repay the money borrowed without having to pay for interest.
Personal Credit Cards
The concept have been applied to personal finance and retail banking groups now offer a whole gamut of credit card products to individuals. The concept remains the same, however, the impact is different.
Credit cards come in all colors, credit limits and card networks. The most popular ones are Visa and Mastercard, with almost every bank offering card products under both card networks. Think of it this way, Visa and Mastercard are like mobile networks Globe and Smart while card-issuing companies are like mobile phone brands Nokia, Samsung, Motorola, etc. Each credit card has its own features but it uses either the Visa or the Mastercard network to facilitate payments.
You also have a hierarchy of card types like Classic/Blue, Gold, Platinum and Titanium, the main difference being the size of the credit limit and the amount of membership fees and the privileges and other fringe benefits that come with it.
Getting your first credit card
Straight out of college and into the workforce, I wanted to already have a credit card and start swiping. Young people had and still have a notion that credit cards are an endless source of cash. Nobody really explained that “credit” means debt. But when I attempted to apply for one after opening a savings account with my bank, my application was conditionally accepted, the conditioning being I open another account with the bank with 10,000.00 which will be locked in as a guarantee against the credit card. Of course I didn’t accept the condition.
Later on, I would receive my first ever credit card in the mail from another bank with which I had a (bigger) savings account. And I realized that in order for your application for a credit card to be approved, you need to establish a banking relationship with the issuing bank first. Since then, I have received five credit cards from three different banks. That’s because credit card companies share a database of credit users where they fish for potential new clients. Be flattered if you receive a call from them because they think that you’re good business. That might also be a good time to re-assess your spending habits. That’s just my opinion of course.
In the next blogs, we’ll discuss the benefits and drawbacks of owning a credit card. We’ll also explore the market to see what kind of credit card products are out there. If you have questions, you know the drill!