Help me understand the credit card system

[May90]

Hello guys.

I recently moved to the US permanently for a PhD study. The way I see it, if I'm going to buy some kind of house in the future, I will need to have a good credit history, but as of now I don't have any. The problem is, I don't really understand how the credit system works. In Russia where I came from, interest rates on credits are so high that most people, including my family, simply never take any credits, so I have zero knowledge on this topic and, even after reading a few articles, I still do not understand the basics.

So, let's take an example. I would like to buy a PC in 4-5 months, and I think it is a good reason to take my first credit in my life. Suppose I get some basic secured credit card. We have something like this (all numbers are totally made up):

Total PC price: $2500
Price to take one in credit: 12 payments of $250 each month ($3000 total)
Credit card deposit: $500
APR: 20%
Interest rate: 15%

So, assume I get this card and put $500 on balance. Will I be able to buy this PC in credit right away? The way I see it, one of the following scenarios works:
1) I do not pay anything right away, instead monthly my balance decreases by $250 and I need to refill it by paying $250 to the bank.
2) Same as 1), only I have to pay some amount in front, like pay $1000 in front and then pay the rest $2000 in 8 instances.
3) My balance instantly decreases by $3000, I need to put $250 + APR / Interest rate every month until the balance again becomes $500. Seems kind of silly since it is simpler just to take a loan of $3000 from a bank and then pay it off in 12 months.

So, assuming I don't have any credit history or anything, is it possible for me to go the 1st or the 2nd way? Is it how the credit system actually works? And do I understand it correctly that, to get a "perfect" credit rating, I just need to never make my balance negative? Or do I also need to keep it above the deposit level, that is $500 in this case?

If anyone could clarify if I understand the system right, or if I am missing something very essential, or just explain how the system basically works without specific details related to specific banks or cards, I would be really grateful!

[xChurch]

If you're talking about a credit card, you'd just put all the purchase on it instantly and just pay at least what it tells you the monthly payment amount is which varies by card. They'll tell you the interest rate and it's usually just added to how much you owe. Pay a little more (10ish dollars) than the minimum due and your credit rating should go up. I'm Canadian though so US cards could be radically different.

[May90]

If you're talking about a credit card, you'd just put all the purchase on it instantly and just pay at least what it tells you the monthly payment amount is which varies by card. They'll tell you the interest rate and it's usually just added to how much you owe. Pay a little more (10ish dollars) than the minimum due and your credit rating should go up. I'm Canadian though so US cards could be radically different.

Thank you for response. I am pretty sure credit system works similar way everywhere, at least, on the West.

So, the way I understand it, if I say, have $500 balance initially and purchase the PC for $3000 total, my balance would suddenly become -$2500 and then I would have to pay $250 + interest rate a month for 12 months? Wouldn't the negative total balance negatively affect my credit rating? Also, do I understand it right that, if I pay $250 + interest rate + $50 additionally, my credit rating goes up?
Also, is monthly payment defined only by the card, or do the sellers have their own payment systems? And is it realistically possible to get a card allowing me to take credits and pay something like $300 a month without any credit history, or would I need to resort to much lesser sums initially?

[IRunSoFarAway]

If you got a secured credit card, your credit limit will be the deposit amount, or a percentage above that amount. So if the PC is $2500, no, you won't be able to just buy it, as it'd be over how much you can charge on your credit card. If your credit limit on the card was $2500+, you'd be able to.

[May90]

If you got a secured credit card, your credit limit will be the deposit amount, or a percentage above that amount. So if the PC is $2500, no, you won't be able to just buy it, as it'd be over how much you can charge on your credit card. If your credit limit on the card was $2500+, you'd be able to.

OK, I am a bit confused here. If I need to have deposit larger than the sum I am taking credit for, then what is the point of this card if I can just go and buy the PC for cash instead of putting this money on the card? Are secured cards in this case used only to get some credit history when you don't have one? I mean, what is the difference between secured credit card and usual debit card then?

[xChurch]

Thank you for response. I am pretty sure credit system works similar way everywhere, at least, on the West.

So, the way I understand it, if I say, have $500 balance initially and purchase the PC for $3000 total, my balance would suddenly become -$2500 and then I would have to pay $250 + interest rate a month for 12 months? Wouldn't the negative total balance negatively affect my credit rating? Also, do I understand it right that, if I pay $250 + interest rate + $50 additionally, my credit rating goes up?
Also, is monthly payment defined only by the card, or do the sellers have their own payment systems? And is it realistically possible to get a card allowing me to take credits and pay something like $300 a month without any credit history, or would I need to resort to much lesser sums initially?

Your balance starts at 0. It adds up how much you owe, the credit limit is how much you have. If you wanted a credit card in order to buy a 3000$ dollar computer you would need a card with a credit limit of 3000$ or more. As your balance goes up your available credit will decrease. You only ever pay back money for a credit card, you never add money to it. It's sort of like getting a bank account with X number of dollars already in it, only the bank will want that money back.

[IRunSoFarAway]

OK, I am a bit confused here. If I need to have deposit larger than the sum I am taking credit for, then what is the point of this card if I can just go and buy the PC for cash instead of putting this money on the card? Are secured cards in this case used only to get some credit history when you don't have one?

Yes, it all depends on what your credit limit on the card actually is, though. Unless you have good credit, or proof of funds, your credit limit on that card isn't going to be that high on it's own. It's something you pretty much just have to build up and prove that you're worth lending money to because you can pay it+the interest back.

Say you have a credit card with a limit of $500, you try to buy something for $2000, your card is declined, as that's way over your limit.
Say you have a credit card with a limit for $3000, you try to buy something for $2000, the seller gets the money, you owe the credit card company $2000+interest.

[Templar 331]

I've stayed away from credit cards because of how bad they can be. If all you pay is the minimum on the debt, you'll never get out from under it. Best to use it for small purchases and pay off as soon as possible from what I understand. If you're planing on buying something big, I'd go with a bank loan.

[May90]

Your balance starts at 0. It adds up how much you owe, the credit limit is how much you have. If you wanted a credit card in order to buy a 3000$ dollar computer you would need a card with a credit limit of 3000$ or more. As your balance goes up your available credit will decrease. You only ever pay back money for a credit card, you never add money to it. It's sort of like getting a bank account with X number of dollars already in it, only the bank will want that money back.

Ah, I see. So, basically, I pay [interest rate] * [balance] for keeping the credit, and my theoretical goal should be to get my balance to 0 eventually to get a good credit rate, right? Is it accurate to say that it works exactly as a bank account, only reversed, that is, instead of me loaning them money, now they loan me money? That makes sense.

Yes, it all depends on what your credit limit on the card actually is, though. Unless you have good credit, or proof of funds, your credit limit on that card isn't going to be that high on it's own. It's something you pretty much just have to build up and prove that you're worth lending money to because you can pay it+the interest back.

I see. So, assuming I do not want to bother keeping a secured credit card, is there a realistic way to get a normal credit card right away and get $1000-$2000 loan to quickly build a history? Or, as a person with no history whatsoever, I need to start with something very basic, like secured credit card or normal credit card with negligible credits?

Also, in 2010 I worked in the US on student exchange program and had an account in Bank of America with a debit card. Does it count in my history in any way, or are debit cards ignored in it?

I've stayed away from credit cards because of how bad they can be. If all you pay is the minimum on the debt, you'll never get out from under it. Best to use it for small purchases and pay off as soon as possible from what I understand. If you're planing on buying something big, I'd go with a bank loan.

Yes, but the problem is that, without any credit history, my chances to get a good bank loan are not that big either. Especially later, when I finish my PhD degree and start a serious work, I will want to finally settle somewhere, and without credits/loans my chances of acquiring a decent accommodation are next to zero. Or do the loans have different criteria on whether to be granted or not?

I myself don't really like the credit system, I would prefer to never go in debt, except for when I want to buy a house. But, as I understand, good credit card history here in the US gives so many privileges and opportunities that it is worth spending percents of additional money to acquire it?

[chrisberb]

OK, I am a bit confused here. If I need to have deposit larger than the sum I am taking credit for, then what is the point of this card if I can just go and buy the PC for cash instead of putting this money on the card? Are secured cards in this case used only to get some credit history when you don't have one? I mean, what is the difference between secured credit card and usual debit card then?

A secured credit card (which is essentially just a debit card you can load money onto), is one of the very low ways to establish SOME credit.

[May90]

A secured credit card (which is essentially just a debit card you can load money onto), is one of the very low ways to establish SOME credit.

Hmm, what are better options then? I assume, being an international student with Russian citizenship, I won't get that much trust from banks to get something much more serious?

---

Also, I noticed there are some companies (like Newegg) that offer some "Bill me later" options allowing one to pay monthly fees without any bank credit cards or such. Do these count in credit history and do they affect the credit rate?

[chrisberb]

Hmm, what are better options then? I assume, being an international student with Russian citizenship, I won't get that much trust from banks to get something much more serious?

---

Also, I noticed there are some companies (like Newegg) that offer some "Bill me later" options allowing one to pay monthly fees without any bank credit cards or such. Do these count in credit history and do they affect the credit rate?

Well, one easy way is to try and apply for a credit card with the bank you use (if you use one).
I would caution you to be careful about applying for too many credit cards though, because that can have a bad effect.
Some other ways of establishing credit include renting a home/apartment, getting a cell-phone plan.

*The Newegg "bill me later", even though it doesn't appear to be, is definitely a line of credit. It will function pretty much the same as a credit card, because they will perform a credit check.

[IRunSoFarAway]

I edited my previous post with two examples if you wanna take a look back at it, but yes, that's how it works.

You'd probably be best to start with something small, and work your way up, most card companies review you every 6 months(I believe that's what it is) and can increase your limit if you've been on time with payments. Paying more than the minimum payment per month is good too. You can certainly go to your bank and see what they'll offer you in terms of credit cards.

Yeah, that's the sad truth, you're not going to get a good home loan without good credit, the ONLY option in that case, would be to have your parents on as co-signers, but if you fuck up, it'll be on them.

Whatever the case, try not to get yourself into a situation that's too over your head/beyond your means, you don't want to be like one of the millions of people in very deep, deep credit card debt.

[Mormolyce]

I work in the credit card industry. If used responsibly, you can clear off your debts quickly and pay little or no money on them. If you're smart you can even MAKE money from a credit card, with all the deals that are currently available.

But the temptation is always there to spend like crazy and only pay the minimum back - this is where the credit card company makes money.

Basically, to buy a $2500 computer you will need a credit card with a limit >= $2500. The credit card company usually assesses you when you apply to see how big a limit they'll give you (they estimate your income and expenses to decide how much you can afford to pay back, basically - and also check your credit score to make sure you aren't a deadbeat with a history of not paying bills).

So say you get a $3000 limit - you buy the computer and now your credit card balance (ie what you owe) is $2500. Every month you are charged interest - 20%/12 = ~1.7% of what's still owing. This is just added to your balance, so after a month you'll owe $2542. You can choose to pay off as much of that outstanding balance as you like, obviously the more you pay the less you owe and the less interest you'll be charged next month.

Most credit card companies require you to make at least a minimum payment - not sure what it's like in the US but I think here it's 2-5% of the principal (so like $125 in this case maybe). This is to ensure you are making some effort to pay it off and not digging a deeper and deeper hole for yourself. If you only pay the minimum it'll take a very long time to pay off so it's in your interests to pay more if you can.

One other thing is that a lot of cards offer an interest free period - so like the first month you won't be charged interest. This is great if you need short term money - you can put everything on your card that month and pay it all off in one payment at the end and be charged nothing (other than the annual fee for the card, which some cards have). Some cards even have rewards points - so you get frequent flyer miles or whatever for every dollar you spend on the card. These cards usually have bigger annual fees to compensate, but can be worth it depending how much you spend.

[May90]

Well, one easy way is to try and apply for a credit card with the bank you use (if you use one).
I would caution you to be careful about applying for too many credit cards though, because that can have a bad effect.
Some other ways of establishing credit include renting a home/apartment, getting a cell-phone plan.

Well, I have only one Russian credit card ATM (which I've always used as a usual debit card, never spending more than I have), but I will open a US bank account soon. There shouldn't be any problem with opening an account since I have a working SSN and a job as a Teaching Assistant paying off about $2000 a month. But will they freely give me a credit card with a decent credit cap (something like, at least, $1500)?

[-aiko-]

The Newegg "bill me later", even though it doesn't appear to be, is definitely a line of credit. It will function pretty much the same as a credit card, because they will perform a credit check.

That depends. I'm not familiar with Newegg's Bill Me Later but many do not count towards your credit score because they do not report to the bureau. Similar to Rent A Center, they do their own thing.

[Endus]

Ah, I see. So, basically, I pay [interest rate] * [balance] for keeping the credit, and my theoretical goal should be to get my balance to 0 eventually to get a good credit rate, right?

Not really.

Banks like it when you carry a balance and pay it off regularly. You're better off keeping a balance on the card and making monthly payments than if the card sits at $0. In terms of credit score, at least; you'll be paying interest (which is why banks like it; they're making money). It doesn't have to be a ton of money, though, they just like seeing the regularity of payment.

I see. So, assuming I do not want to bother keeping a secured credit card, is there a realistic way to get a normal credit card right away and get $1000-$2000 loan to quickly build a history? Or, as a person with no history whatsoever, I need to start with something very basic, like secured credit card or normal credit card with negligible credits?

Do you have a job? Have you talked to the bank, directly? By which I mean, actually going in to see an accounts specialist (not a teller)? They should be able to go over this stuff with you, and pull up what the bank's able to offer you. If they can't give you anything that isn't secured, then you're going to have to build a credit history somehow, which means getting the secured card and building your credit rating.

[quote]Also, in 2010 I worked in the US on student exchange program and had an account in Bank of America with a debit card. Does it count in my history in any way, or are debit cards ignored in it?[/i]

Mostly ignored, IIRC, but it's good to bring up because it demonstrates history. This is good because it helps them see you're not an identity thief or something.

I myself don't really like the credit system, I would prefer to never go in debt, except for when I want to buy a house. But, as I understand, good credit card history here in the US gives so many privileges and opportunities that it is worth spending percents of additional money to acquire it?

It's mostly only relevant if you're going to be getting a car loan/mortgage. If you are, then you want to get some kind of credit rating going. Every bit helps. If you've got a $500 secured card, even carrying a $50 balance and paying the interest monthly will help things, because it shows you managing your money (not hitting the limit and being unable to pay it down) and that you're reliable (making payments like clockwork). That's important for credit score, other than that, it'll be down to your capability to repay, which will be evaluated based on your current estate and future income prospects.

[chrisberb]

Well, I have only one Russian credit card ATM (which I've always used as a usual debit card, never spending more than I have), but I will open a US bank account soon. There shouldn't be any problem with opening an account since I have a working SSN and a job as a Teaching Assistant paying off about $2000 a month. But will they freely give me a credit card with a decent credit cap (something like, at least, $1500)?

It sounds like you will have no problem opening a bank account, but getting a credit card you have to apply and qualify for, and I honestly couldn't tell you whether you would qualify or not. If you can show that you have a decent income (2000 isn't too bad), that could help in your favor.
I'm sure some will tell you, that honestly the BEST situation would be pay for the computer in cash, but I know sometimes it's not that easy.

[Vandexander]

If you have a bank account now, I would start by talking to your bank about getting a credit card.
If you don't have one, consider a local bank or a credit union, instead of going to a big corporate bank like Bank of America.

If you have a regular source of income, that will improve your credit score. Paying your credit card account on time will also improve it. Late payments will lower your credit score substantially.

Finally, a lot of business will offer credit "deals", where you buy something for $$$ on their store credit card, and you get 0% interest for X months, if you pay it off within those X months.

[Endus]

But will they freely give me a credit card with a decent credit cap (something like, at least, $1500)?

Wouldn't surprise me. I haven't gotten a card in the US, but Canada isn't THAT different in this regard, and I got something like a $1000 card just for being a college student. That card's limit is now somewhere over $10k, I think. I actually got them to reduce it at one point, it was up to $16k.

And I'm not wealthy nor has my work history been particularly consistent; I've been doing a lot of self-employed contract work recently. My head's above water, but it's not like I have a reliable monthly paycheck. Bank still likes me, because I make my payments.