Credit Cards & The Scammers

The sun is burning bright out and you are looking to get away to somewhere nice to get hammered without parental supervision. You start to book a trip online and when you reach the end to pay you remember you don’t have a credit card.

So, what do you do? You read this post first to get schooled before you go down the hole.

Before you read on, make sure to go read my post on [credit] to get your fundamentals down.

WHAT IS A CREDIT CARD?

In a nutshell, a credit card is a payment card issued to users to enable them to pay the merchant for goods and services based on the cardholder’s promise to pay it back. This is the single most important point to remember and understand. You are using someone else’s money (e.g. bank) because you do not have it at the moment, and you are promising to pay it back. If you do not pay it back, there will be consequences such as interest charges, declining credit rating and card termination.

For the purpose of this post, I will not be going through each different financial institutions’ credit card offerings. You can just go to all their websites to figure out what’s most suitable for your needs. Universally, regardless of varying financial institutions, all credit cards are governed by the same rules and underlying usage guidelines.

HOW TO GET A CREDIT CARD?

This question can be divided into three different types of applications.

1. Regular Application:

• Go to any financial institution to apply and they will need your government issued ID, proof of income and employment letter.
• They need proof of income because at the basis of it all you are asking for money to use, therefore the banks must see that you do indeed have the financial means to pay them back. For example, if you are making $5/month and you want a credit card limit of $1,000 do you think that will work? Of course not, because if you max out your limit of $1,000 it would take you 200 months or ~16.66 years to repay that $1,000 back.
• If you do not have other existing credit products, you will be adjudicated based on your age and what you have provided to your card issuer as a blank slate.
• If you have other existing credit products, you will be adjudicated based on a balance sheet in which your monthly income is used against your monthly payment obligations. For example, your monthly income is $4,000 and your monthly obligations such as car payment, mortgage, insurance, phone bill etc. comes to $4,000 why would somebody lend you any money? You already do not make enough to have any left over so lending money to you would be risky to the bank. Also it will raise concerns such as why do you need a credit card if you cannot even pay it back?

2. Post-Secondary Student Application:

• After reading the above, you are probably thinking how the hell am I going to get approved if I don’t have an income while going to school?!
• Majority of the banks have looser rules and promotions geared toward student clients. But wait… you just said people without an income that tries to get credit products raise red flags for the lender?! It is true, but keep in mind a bank is a business at its core, by giving credit to post-secondary students the bank is investing in the future because more than likely the student will graduate with a full time job earning median or higher income.
• If you are wanting to go through this category, you will be required to provide an enrollment letter from the post-secondary institution and also a copy of your term schedule to prove you are either going to post-secondary full time or part time.
• For professional students such as lawyers, doctors and dentists, you will be subject to a much higher limit on credit products like student loans and line of credits. Because of the professional students’ potential, lenders usually have dedicated personnel to help with their needs.

3. Special Promotion Application:

• This category is specific pertaining to the institution’s individual promotions.
• For example, majority of the banks in Canada have newcomer programs designed to help them get off the ground quicker.
• Scotiabank for example, will approve a credit card to permanent residents, international students and foreign workers with different rules than applying under the regular route. If you are applying under this category, depending on your residence status you might not even need proof of income. All you need is your landing papers such as SIN #, Canadian address, passport etc.

HOW DO I CHOOSE A CREDIT CARD FOR MY NEEDS?

There are 3 major institutions that work with banks on credit card offerings. Visa, MasterCard and American Express are not to be confused with banks. These three companies are credit card companies and work along with banks.

Let me give you an analogy, Honda makes Honda vehicles, your local dealership, Bob’s Automotive, sells Honda, Hyundai, Toyota etc.

Visa and MasterCard are the most common ones, and they are accepted almost everywhere in the world. American Express is a new comer in the game, although they offer differing benefits they are not widely accepted; especially small vendors like mom and pop shops since they charge a hefty merchant fee unlike the other two. So, my recommendation is to go with either Visa or MasterCard for your first credit card.

Once you go to your bank’s website, you will be pestered with a ton of choices. My advice in choosing a card is by looking at fees, rewards/benefits and protections.

Fees:

• Some cards will be free to use, others will charge an annual fee
• Before you complain about the fee, make sure to see if you can justify it by looking at the rewards of the card. For example, if the card has an annual fee of $40/yr and your annual cash back reward is around $100, then I’d say it is well worth it to get this card since the cash back reward paid for the card itself
• Cash Advance Fee (I will explain shortly)
• Over Limit Fee; if you go over your credit limit on the card there will be penalties
• Additional Monthly Statement Fee and other miscellaneous fees
• Please note due to the universality of Visa and MasterCard, you will be able to use these cards anywhere in the world without an extra fee unlike the roaming fees that your cellphone carrier charges you

Rewards/Benefits:

• No benefits, low rate, cash rewards and travel benefits
• No benefits; very simple, it is just a credit card and has no extra benefits on the side
• Low Rate; this card usually comes with lower than standard interest rates, but think about it this way though… if you always pay back the entire balance owing on time, who cares about what the interest rate is!
• Cash Back; in order to stimulate your credit card usage, the bank will usually give a percentage back based on the things you buy (refer to my above example)
• Travel Benefits; usually works off of a point based system in which you can redeem them for plane tickets, merchandise, gift cards etc. also comes with VIP lounge service at airports, plane ticket price protection, luggage insurance etc. (a lot of the younger folks usually pick this option but keep in mind, although it is nice to travel but does your usage actually warrant enough of a reward in the end? If you seldom use your credit card, then how are you going to accumulate points?)

DO I HAVE TO PAY BACK WHAT I OWE ON THE CARD?

Seriously. Did you just really ask this question? If you did, please stop and never get a credit card because you do not know the implications of having one. Of course you have to pay it back!

Let me just rephrase how a credit card works again before you read on.

When you pay with a credit card, you are saying:

“I don’t have the money right now, BUT I will pay it back once I have the money”.

Read that again.

OK, let’s move on.

The payment on the credit card will have interest implications. You have EXACTLY 21 days to pay back the entire balance on the card before interest kicks in on the balance. If you used the card to buy something on Amazon on July 1^st, you will have 21 days from then to pay back the balance owing on the card.

When it comes to the fine print, the banks are not joking around. Make sure you fully understand and read thoroughly. When it says 21 days + 19.99% interest, there should not be any ambiguity. Treat it as the law.

For example, you paid $20 for a phone case on Amazon with your credit card on July 1^st, then from now on to July 22^nd (21 days), if you pay back the $20 then there will be ZERO interest added. If you only pay back $5, $15 or $10 of the $20 (not the whole balance), you will be charged interest! This interest is usually 19.99% on the entire balance owing. It doesn’t look much in this example, but if we scale it up to owing $2,000 or $20,000 then this interest is killer. This is exactly how people get into debt by NOT paying back what they promised when they signed off on their credit card application.

Let me reiterate the importance of this again, the bank at its core is a business.

They are looking to profit and not here to play games with you. If you are irresponsible, then do not get a credit card. The banks now offer apps with either email or text reminders and even automatic minimum payments on credit card balances. So, if you are an irresponsible air head, make sure you set this up. This is absolutely crucial to understand!

On the surface, a credit card creates a huge convenience for society but it comes with very strict guidelines. If you find that your paycheck is not coming in within the next 21 days, then do not make a purchase with your credit card. DO NOT dig your own grave.

If you are still not convinced, then hear this.

In the event of not paying your credit card balance, not only will the interest be charged, your interest rate of 19.99% will be increased as well. I have seen some people with credit cards that charge 30% interest rate. That is astronomical!

I am not writing this to scare you, I am merely vaccinating you so when you go and complain to your bank you know you are the idiot here. Majority of Canadians blame the bank for being in debt, but this is not the case since we blindly sign applications without reading the fine print.

Another important rate you need to understand is the cash advance fee. When you swipe your card for gas or some groceries, it is counted as a purchase; hence you will be charged a purchase interest at 19.99% if you do not pay back on time.

A cash advance means, you are taking money out of your credit card like a debit card.

For example, your credit card limit is $5,000 and you are going to take this amount out in the form of cash. You will be charged a cash advance interest rate of 23.99% right away. This differs from taking out cash from your debit card, since you have money in your debit card you are not subject to pay it back; it is the money that you already have. In terms of a cash advance on a credit card, you are taking out money that you DO NOT HAVE, thus a higher interest is charged since this move is very risky to the lender.

My suggestion is to never do a cash advance unless if you absolutely had to for emergency reasons. Again, notice the difference in interest percentage between a regular purchase and a cash advance. It is a viable option to use credit as money but it is a highly risky option only recommended for absolute emergency reasons.

Also, on regular purchases you are given a time period of 21 days to pay back the balance, but in terms of a cash advance there is no grace period and the higher interest is charged right away.

I hope this post have helped you in understanding how credit cards work and left a clear impression on the implications and consequences if you abuse your credit. I have used the term “scammer” in the title of this post to ask you a who you consider is the scammer when it comes to a credit card company? Because after all, the fine print is labeled clearly and consumers either continually fail to understand the consequences or just plain ignore it.

Oh, and don’t be that guy above suffering in heaps of credit card debt.

Sound off in the comments below

As always – stay thrifty.