Hey, i’m from Brazil, and i have seen in series and movies about this whole thing that americans have with their credit and credit cards and i don’t get why the US have this system.
A long time ago i saw a little explanation of it in a tv show that to get a credit card you need to have credit, but, to get credit you need to have a cradit card(i think it was everybody hates chris), but i still don’t get it.
Can someone explain this to me?
sorry for any grammar error, I’m still learning english
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There are starter credit cards that you can get with little to no credit history. From there, if you make regular payments, you’ll build up a good credit history and have access to other options: credit cards with more rewards, loans with lower interest rates, etc.
So, making payments on your credit card does help your credit score. But even if you don’t have a credit score yet, there are ways to get started.
A credit card is a convenience to access credit you have available.
You get credit by applying for a credit card or another form of loan.
So first off, there’s a difference between credit and debit cards, but the way they are used is often identical. A debit card is just tied to your bank account.
Credit is used to determine what kind of loans a person is eligible for, you can kind of think of a credit card as a loan that you don’t owe any money on until you spend, compared to a loan for something like a house or car where you get all the money up front and then buy something with it.
It’s easy to start building your credit, once you turn 18 there are plenty of credit card companies that will give you a card with a low limit that you can use to start building credit.
It’s not quite as circular as you perceive it.
To initially get a credit card, you need to have good financial credit (as in a record of responsibility of paying bills on time, etc.) or proof of a stable income. Absent that, you can get a “secured credit card” where you have a given amount of money on deposit (the “secured” part refers to this money they hold) to cover any debts you might incur with the card, which has a limit equal or not much more than the amount of the deposit.
The more you pay bills, your mortgage, car loans, or a credit card and pay them off, the more of a credit history you have, and more you will be loaned or allowed to have more “open credit” (i.e. unsecured by a physical object like a house).
A lot of people start building their credit with what’s called a secured credit card. It’s meant for people with no credit or bad credit. You have to make a deposit on the card and your spending limit is based on the amount you deposited. If you keep making your payments on time eventually you can get your deposit back and move up to an unsecured card with no deposits and higher limits.
I don’t exactly understand it myself. My dad and I had to bully the bank into letting me get my first credit card. I had already graduated college, recently started a decent paying job (~$52k/yr), renting a cheap room in a house with my friend, etc. Because I had never taken out a loan or done anything to build credit, they didn’t want to give me a card even though I was a very low risk. We eventually convinced them to give me one with something like a $500 limit until I could build my credit up a little.
You can get a secured credit card where you put a deposit of $200 and it helps build your credit. The bank only asks for the $200 just in case you don’t pay back your debt but you’ll get it back within a year or when you close the card.
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i’ve never had a credit card and built my credit by having a car loan (had a cosigner) and some student loans. Surprisingly still no credit card at 25 but my credit is good and in 2020 bought my own new car w/o a cosigner 🙂
Credit cards are a way to borrow money, typically on a very short-term basis.
You use your card to pay, then they send you a monthly bill, and then (ideally) you pay the bill. If you pay the bill when it’s due, you don’t pay any interest on it, so it’s like you have that much purchasing power available to you at any given moment.
The thing is, they have a limit that the card company determines based on what it thinks you’re able to pay back.
> A long time ago i saw a little explanation of it in a tv show that to get a credit card you need to have credit, but, to get credit you need to have a cradit card(i think it was everybody hates chris), but i still don’t get it.
That’s honestly kind of hard for me to imagine. I think in the U.S. if you have a bank account and a job, you can get a credit card super easily.
The benefit of having a credit card for a long time would be, if you have an account that’s open for a long time without any problems — late payments, etc. — then your credit score is good, and a good credit score means that you can borrow more easily, including having a higher credit limit.
If your limit on a card is $20,000, then you effectively have $20,000 more in “purchasing power” because of that credit. You can buy things with money that isn’t in your bank account. The catch, of course, is that if you don’t pay it all back you have to pay interest on it, so it is a loan at that point. And typically not a great rate on a loan.
A credit history is just what it sounds like: a history of how you repay your debts. A credit card is a good way to build up a credit history, but it isn’t the only way. Any type of loan you take out can impact your credit history. In the US student loans, auto loans, and home mortgages are common loans people enter into.
Your country probably has a similar mechanism in tracking someone’s history with loans and debt, its just called something else.
There are credit cards people can qualify for as a young adult with little to no credit history. It’ll have a limited line of credit like $1,000. Over time the company it is through can increase or decrease your line of credit depending on how trustworthy you are in paying at least the minimum monthly payment.
A common misconception is that you need to carry over debt on a card to build credit history but that isn’t true. Paying off the entire balance at the end of the month, every month, is fine and does not hurt your credit history.
Credit cards are very important cause if you don’t have cash on you. You can use it and its much more easier
You can build credit just by paying your bills. I built up a 700-something score just paying rent every month
I’ve worked in credit card industry for about 12 years so here’s the best summary I can give.
There are three major credit reporting agencies that most financial institutions use to determine someone’s credit worthiness.
Nearly all financial institutions and collection agencies report to the credit reporting agencies about your payment history on loans credit cards and other bills. All this info is compiled into what we call a credit report. Which is basically a person’s history of paying their loans back. The credit reporting agencies then use a formula that incorporates various metrics to compile a score called your credit score. The higher it is in general the more credit-worthy you are deemed to be. That score gets higher by having a long history of on-time payments to various different types of accounts and loans.
Financial institutions and sometimes landlords and employers can then obtain a copy of your credit report to see your history of repaying loans and then use that and your credit score to determine how likely you are to pay your bills on time. And thus determine whether or not they are going to approve an application for a credit card or other loan or in the case of landlords to determine whether or not you are going to pay your rent on time.
Usually if you don’t have any credit to begin with then you can apply for what is called a secured credit card. That means you put x amount of money down as collateral in case you default. So you put down say a $500 deposit and you get a credit line of $500. As you make payments on that eventually you start to build credit.
Another way to build credit is through things like car loans. That is another type of secured loan that is usually easier to get because it is secured. Meaning if you default and don’t pay they can repossess your car.
It’s a bit of a complex system but I’ve tried to summarize the most relevant points here.
How much you can spend on a credit card (your limit) is based on how much the credit card company trusts you.
When you first start using credit cards, these companies do not know anything about you. They limit how much you can spend.
As you build a history of spending on your credit card, and repaying to the credit card, they increase their limit.
To get your first credit card, there are starter cards. They limit how much you can spend and charge a higher rate of interest.
Additionaly it’s safer to use a credit card than to use a debit card or cash. There are protections against fraud and theft. If you are defrauded in a transaction or have a card stolen the credit card company can reverse the charges and refund your money. Many cards also offer cash back at a up to 5% of transactions so in essence you get a discount for using them. Paying with my credit cards yields me hundreds of dollars in cash back per year.
My bank provides credit builder loans and credit cards that you put money on up front. Both provide better credit.
The credit builder loan they put money in your savings and it is locked from you until you make a payment. Then that amount of the payment is unlocked. This gives the appearance that you are taking out a loan and making payments, but to no risk of the lender.
And then there are the credit cards. You give them 500. They allow 500 credit on the credit card. Thry hold your 500 hostage the entire time. Then they have no risk of losing money. And to all it looks like you are using and making payments on a credit card, but there is no risk at all to yhe lender.
I got my first credit card in college. They had tables set up offering the paperwork to sign up. That’s how I started my credit. This was 1996.
Credit Cards provide a lot of benefits like fraud prevention, that you don’t get with debit/cash. Also points/cashback. It’s a divisive topic, and many people misuse credit cards and end up in debt.
Once I turned 18 I got a credit card with a low limit from the bank I use for my debit card. I just remember to use it every once in a while and pay off the bill and it helps me slowly build credit. I also use it for larger purchases because credit cards give you more protection if you get scammed
Tip: A lot of credit card companies will make great offers to college students. It’s wise not to take those offers. It’s so easy to spend those up and rack up a lot of debt.
A way to build credit is to make consistent and regular payments on the card. It’s better credit-wise, I’ve read, to pay $50 a month against the debt, than nothing or minimum one month and $500 the next. They like consistency because consistency shows restraint.
They don’t want to have to eat the debt completely if a person spends themselves to bankruptcy. Restraint is a good trait to have, from a creditor’s point of view.
The other thing is, at first they will give a person a low maximum. That maximum (how much you can charge to the card total), increases the more credit (trust) you build over a period of time.
But they don’t start people out with a $10,000 limit, so that’s how people can build credit: slowly.
Many of us were given small credit cards around the time we went to college. Those are pushed by banks and are easy to get. You have 2 ways that things can go from there – you use it and pay it off and build up credit, or you abuse it and spiral into a pit of debt.
Obligatory not American but can explain
Credit is basically available debt. If you have $2000 in credit, you can pull from that credit first before spending your own money, but you will owe whatever you spent + any interest accrued on it over time. The credit card lets you access this credit. So if I have a $2000 limit credit card, I can spend up to $2000 with it without touching my own bank account, and at the end of the month I’ll get a $2000 bill. Usually the minimum payment is just the interest and some principal or 10 bucks depending on what is more (at least in Canada), but then your balance starts to accrue interest and your minimum payments go higher and higher and it will take longer and more money to pay off. Your credit score is based on having a lot of credit available that isn’t in use, how often you pay your bills on time, and other indicators that the lender will get their money back. You need a credit score that is good for them to trust you with high credit limits and big loans to actually pay back on time or at all, but you can get really low limit credit cards and whatnot without a good credit score to build yours up at first.
Some car dealers offer credit building auto loans on used cars as well, the terms and interest aren’t ideal, but will help you build credit.
A credit card allows the CC company to buy you goods or services that you then pay on a later date. If too much time elapses before it’s paid off, they charge an interest fee.
It can be a risky business venture for these companies because people can end up not paying or be late very often, causing the companies to miss out on money.
By paying back the card in a regular fashion, you earn a credit score. This tells other companies “This person is trust worthy and not that risky to lend money too.”
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The first card I applied for was with my bank, Chase. They initially told me know, you have no credit history. So I decided I’d take one up with Discover, who had been sending me offers every month for about a year. Within two months of signing up and using my Discover card, Chase now sends me an offer.
Since then, I’ve gotten others. A store credit card, like from Target, is also useful to build a credit score to get other cards.
TV is meant for entertainment not to be informative.