What Are Credit Cards?

Hello Friends, I hope all is well with you! I am going to be going over another type of debt – credit cards. You have probably heard all of the scary stories of this type of debt, and most of them are true. Credit cards are one of the most dangerous types of debt because people might think it’s “unlimited money.” This is far from the truth, and you should not think like this. Credit cards shouldn’t be scary or intimidating; they can actually give you some rewards, but you need to know how to use them correctly.  I’m going to try and provide you with as much information as possible. Grab your pen and paper and let’s get started!

What are Credit Cards?

Mr. Nahas, what are credit cards? I love the question! Credit cards are a piece of plastic (sometimes metal) that you use to spend money that is not yours. What is mean by this is that the entity that issued you the card is basically giving you a loan through a piece of plastic. When you use the credit card, you aren’t using your money but rather the issuer’s money; they are letting you use their money to pay for your expenses. This is type of debt is considered unsecured, meaning there is no collateral. This type of debt is set-up differently than other types of debt. With other types of debt, you apply each time you want to take a loan but with a credit card, you apply once and if approved, the issuer gives you a revolving credit and sets a limit. Now you might be wondering what revolving credit is, which is perfectly understandable. Revolving credit is a type of loan that lets you use the funds up until the limit that the issuer set is reached. I think an example would help clarify this. Let’s say that your credit card issuer gave you a credit limit of $1,000. You are allowed to use the card up until you reach the limit and once the limit is reached, you can’t use the card again until you pay off some of the balance. Let’s say you used your whole limit of $1,000 and then paid off half the balance, so now you are at a balance of $500. You can only use $500 of your credit card before you can’t use it again. Basically, you use the funds, you repay the funds that you used, and then you can reuse the funds again; it’s a circle.

What you need to know about credit cards

There is some information that you should be aware of when considering a credit card. They are:

1. Billing Cycle – this is the time between the last billing statement closing date and the next one. The billing cycle is usually 30 days
2. Billing Statement – this is a statement that lists all of the transactions (charges, payments, credits, etc.) that happened to your account within your billing cycle. This statement comes after your billing cycle has closed
3. Fees – this is any fees associated with the card; it could be late payment fees, returned payment fees, foreign transaction fees, etc.
4. Credit Limit – this is the maximum amount that the issuer will let you use before you need to pay down the balance again to reuse the card
5. APR – this is the interest that the issuer will assess you for you using the card. The issuer will charge you interest on the unpaid balance. You can avoid interest by fully paying the card off every month. It’s important to note that credit card interest rates are double digits, even if you have an excellent credit score.
6. Rewards – these are any rewards that the credit card issuer gives you for having their card. Check out my post on Why You Should Use Rewards Credit Cards
7. Benefits – these are any benefits or protections that the credit card issuer offers
8. Grace Period – this is the time that the issuer gives you to pay the minimum due. The grace period starts at the end of billing cycle and lasts up until your bill is due; interest won’t accrue during this period. The grace period is a minimum of 21 days
9. Payment Due Date – this is when the payment is due. You will have at least 21 days from the end of the billing cycle to pay off the minimum due
10. Minimum Due – this is the minimum amount the issuer will accept as payment

How to Apply for a Credit Card

Mr. Nahas, how do I apply for a credit card? Fantastic question! Credit card application are easy to fill out, and sometimes you are even able to get a decision in a couple of minutes. Other times, the issuer will need to take a closer look at your application.

• Visit your bank or credit union in-person or go to their website and apply for a credit card
• Visit my credit cards page and find the best one that fits your needs

Although the application process is simple, the issuer will still need to verify some things like:

1. Credit Score – this is the magic score that determines if you are a worthy borrower. If you have a high credit score, you can expect to have a lower interest rate. It’s important to note that credit card interest rates are double digits, even if you have an excellent credit score.
2. Income and Debt – the lender will need to verify that you have sufficient income to pay your credit card debt. They will also take a look at your debt and calculate your debt-to-income ratio (monthly income to your debt). They want to make sure that you don’t have too much debt compared to your income. At the end of the day, they want to make sure that they will get their money back
3. Financial History and Credit Report – the issuer is going to dive into your history to make sure that you have a track record of paying off debt. They want to make sure that you don’t fall behind on payments often or have any chance of defaulting on the loan. They will also look to see how many accounts you have opened and closed in the past.

I hope that I provided you some valuable information on this topic. It’s important to note that you should use the credit card responsibly because the last thing you want to do is keep gaining debt and not gain any wealth. This is a bad debt; it destroys your wealth instead of building it. Just be careful! If you have any questions or need me to clarify anything, post a comment and I will reach out to you as soon as I can. Thank you, friends, for stopping by! Take care and see you soon!

Peace Out,

Mr. Nahas

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