Credit cards are a gateway to opportunity for many. Many of us are familiar with credit cards or even carry them with us currently. However, there are some who have never carried credit cards who may not understand their purpose or how they impact an individual’s personal credit. If you have never applied for credit or been extended credit, such as being a student or never renting/owning property, you may be new to the terms related to the credit card systems.
A credit card is a method for purchasing items without having the money on hand to pay for the item. Most credit cards are based on your credit score. In some cases, some type of collateral may be required to secure the line of credit. Collateral is a term meaning, serving to support – collateral ‘backs up’ the amount of credit you are approved for. The simplest form of collateral is trust. Credit extended to individuals based on merit or personal worthiness make up a large percentage of the credit carrying population of developed societies.
What does this mean for you? If you have never carried a credit card or been extending credit based on your personal credit worthiness, then you are considered to be a high risk borrower because there is no history for you regarding you ability to repay debts. Having no credit history can make it hard to obtain loans, find housing, purchase furniture, or receive valuable discounts on consumer products. For a new borrower, establishing credit is not always an option but a necessity; credit cards can be an easy and effective way of establishing, building, and rebuilding credit.
Debit cards and credit cards are very different. Debit cards are connected to existing funds that, you as the account holder, make available through a debit card. Nearly every bank and credit union offer some form of debit card program or account nowadays. Credit cards are similar in function, but are not linked to funds you have supplied. The funds are ‘loaned’ to you based on the amount the credit agency feels you are able to repay without causing you, the borrower, financial concerns or delinquency. The limit imposed on a credit applicant is called his or her’s credit limit. As a new borrower, it may be hard to obtain credit or to obtain a large amount of credit initially. With time (and good payment habits), it is possible to have your credit limit raised.
Another difference is interest. Debit cards do not incur interest as credit cards and loans do because there are no ‘owed’ monies; the debit card is linked to funds you’ve provided. Interest on credit cards is accumulative and applied every 30 to 45 days. Depending on the credit agency providing the service there may be monthly service charges as well. The amount of interest is determined by two main factors: the monthly balance and the annual percentage rate.
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