Introduction to US Credit Cards (1): Basics


I’ve read several posts about introduction to credit cards online, but found none of them satisfying, so I decided to write one myself. I think most people have little awareness of credit cards’ benefits in their daily lives.

After all, my personal experience and knowledge is limited, so some of my statements may by not accurate or even misleading. Your corrections are welcomed.

First of all, I want to make it clear: don’t be attracted by the bonuses of credit cards and cashback websites and spend too much on unnecessary things, or you would be dragged into the banks traps.

I’m going to write four posts for the Guidelines, which are:

  1. Basic Credit Cards Knowledge
  2. How to Choose a Beginner’s Card
  3. Introduction of Common Cards and Combination, including Grocery Credit Cards, Airlines Credit Cards and Hotel Credit Cards
  4. Some Suggestions, such as How to Avoid Card Closed due to Exceeding Bank’s Bottom Line

This post focuses on the most basic knowledge for beginners.

1. Perks offered by credit cards

Maybe there is a better way to put this: why do you want a credit card? I believe that not everyone has a credit card in the US, but all must have a debit card of one certain. In the US, people can pay by debit cards just like credit cards, so they may think there’s no difference, As a result, they’re not interested in applying for credit cards. What? You use cash only? I think those using cash only are mostly rich guys!

If you really think so, credit cards’ perks are so underestimated. Most apparently, how embarrassing if you use a debit card when others pay by credit cards! Hahaha…However, some high-end credit cards appearances do make the users look more superior to others. Well, let’s come back to the points, what are the additional perks of credit cards?

1.1. The Fraud Protection

In the US, card fraud is very common. I remember there were more than four credit cards information leakage incidents in the US in the past year, covering big businesses like Target, UPS and Home Depot. Even Chase’s system was hacked (but this time cards information was not leaked). In addition, there are other common things leading to fraud in daily life, such as card lost. So it is not rare if you experience card fraud in the US. Even some people suffer four or five times a year. Banks in the US usually state that credit card holders are not responsible for fraud, and it is quite easy to solve when a credit card fraud happens stolen brush after solve very convenient. You can easily find “dispute transaction” on online banking website, or handle it with a phone call.

1.2. Cash Back & Points

In general, there will be certain amount of cash back if you use a credit card. Common cards provide 1% cash back at least, and some provide 5% or even 6%. It seems little, but is real money. After two or three years, that would be a great amount. Some may say shopping portals like Ebates offer much cash back. Indeed so, but if you use credit cards, there will be a bit more. Even for Discover It, you can get 5% cash back if shopping online in fourth season. It is not so little when added together. Chase and Discover also have similar cash back portal, whose amounts are not less than that of Ebates (to be honest, I’m rather surprised by the high cash back rate of Discover Deals sometimes). In addition, the large scope of credit cards cash back/point is far more better than portals like Ebates (for example, 5%~6% for grocery), and flexibility of points is higher than the cash back. However, I want to remind you again that do not shop irrationally whether on cash back websites or by credit cards.

1.3. Price Protection

I bet all of you have had experience that the price of something drops right after you have bought it. Sometimes, shops may give back the price difference within 7 seven days. However, compared to 90-day price protection common to credit cards, that is too short. Some even try to make advantage of this price protection to enjoy Black Friday’s discounts in advance (I think it’s unpractical). There are certainly limits for the cashback, usually like limit for per order (such as $500 per order) and for the whole year spending.

1.4. Purchase Protection

New bag is stolen? A credit card will help you. You can claim to the bank after being stolen, and it will give the money back. Of course, there are limits for time and cashback. Some may try to cheat: what if I claim for cashback even if I’m not stolen? Some tried and succeeded. Many banks are too nice to check all the claims. However, once you’re found cheating, it is a felony and then you find yourself squatting in a prison.

In addition, credit cards can sometimes extend the time limits of returns, so if you buy some unnecessary things but pass the time limits of the shops, you can turn to banks for help.

1.5. Rental Insurance

In the US, you need car insurance to drive, so dealers will require car insurance as well as rental when you rent cars. Many people seems to ignore that lots of credit cards provide car insurances, secondary at least and primary for some. But car insurances provided by credit cards only cover Collision and Damage Waiver (CDW) with others uncovered. You should buy what you should buy anyway. For more details, refer to Summary on Rental Bonuses of Credit Cards.

1.6. Trip Delay Protection

It is so common that flights delay due to mechanical failure or weather condition. Sometimes you even have to stay the night at airport or other places. Some credit cards, such as Chase Sapphire Preferred (CSP), can offer compensations at those times: offering credit for your additional spending during those time periods, including restaurants and hotels. Please note that you should buy tickets by the corresponding credit cards, or you would not enjoy the bonuses if you use others cards.

1.7. Warranty Extension

It is also a good perk. You can get 1-year warranty extension if you use cards with this perk to shop. This 1-year extension is provided by the banks, not the shops. After all it is better than buying extension services yourselves. For detailed discussion, refer to Summary on Warranty Extension of Credit Cards.

1.8. Sign-up Bonus

It’s the most important bonus of credit cards. Many credit cards offer great sign-up bonuses. For example, Chase Freedom offers $200 for opening one or two times every year, Chase Sapphire Preferred (CSP) offers 40k points, and Citi AA airline card offers 50k AA miles and hotel card offers free nights. The sign-up bonus is one of the reason to apply for many credit cards. However, sign-up bonus is not offered for free: there are usually some spending requirements, like 500, 2000 or even 10k for three months. Generally speaking, better opening bonus means higher spending requirement. So you must make yourself clear before applying for a card, or you would get no bonus and cry hard. But do not buy unnecessary things for reaching the requirements, which is exactly what banks want us to do.

Details about these perks can be found in credit cards’ official websites or guidelines mailed with the cards.

2. Personal credit report

The United States has developed a very mature system of personal credit records which begins to record your credit history since your first credit behavior (including opening a credit card and getting a loan). When a bank reviews your application for a credit card, it will refer to your credit report mainly and consider your other information such as yearly income and monthly house rental. After that, it will decide whether you are qualified to hold a card and what your credit limit is. Of course your credit report is also the main reference when you apply for loans for car or house purchase. However, I won’t talk about that since this post focuses on credit cards.

There are three major Credit Bureaus, Experian, Equifax and TransUnion. Your record will be reported by bank and then kept in the three bureaus. When you apply for a credit card, the banks will pull the credit report from them. So, what are the key factors in your credit report?

2.1. Payment History

I don’t want to waste too much about on this. Prompt payments are the most basic factor for good credit records. I think it is not a problem for our readers here. It is regarded as paying on time as long as you pay the minimum payment by the due day in statement every month. However, if there’s APR, banks will charge you interests for unpaid money. So I highly recommend that you pay the full balance right after the statement comes out if financially allowed. If you miss due date once by accident, call the bank to explain immediately. Banks are not so strict with the first time, so you can ask them not to report to Credit Bureau. However, it won’t work if you miss too many times.

2.2. The Credit Limit and Utilization Rate

Utilization is the total balance to total credit limit (CL) ratio, which equals total statement balance/total credit limit. Generally speaking, it should be kept around 20%. There’re other opinions. But one thing for sure is that you never leave it over 50% for too long, which can do harm to the credit score and make the banks lose faith on your financial situation. As a result, the banks may lower your CL down or even close your cards.

It’s quite difficult for beginners to keep utilization around 20%, because the total CL is too low and they can easily reach that. However, there is only one solution. That is, you pay the balance frequently and make sure the utilization rate is low while the statement is coming out.

2.3. The Length of Credit History

The length of the credit is mainly the overall length of credit history and the average length of credit history. It is why sometimes others warn you not to close the first credit card easily. Your credit history began since your first card. If you closed it, you would lose the biggest part of your credit history, which may affect you overall and average length of credit history so badly. So, if your first card is really disappointing, do not hurry to close it. Take care of your credit history long enough and then call the bank or find Custom Service online to ask whether you can change it to a better card they issue.

Once you open one more card, your average length of credit history will be shorter. When you hold just a few card, a new card can make you the average length much short. But as cards increase and credit history get longer, a new card will make little difference. There’s no shortcut for beginners, but they have to wait patiently. According to my personal experience, if you have a good credit record for one year, it’s time for you to challenge applying for many middle-end cards.

2.4. The New Credit the Opened/Hard Pull

Every time you apply for a credit card or a loan, the bank will pull your credit report from the Credit Bureau. Then you report keep the inquiry record, called Hard Pull (HP) or Hard Inquiry. Strict speaking, there’re two kind of inquiry, hard and soft. HP can affect your credit score. SP will be also recorded with no negative effect. Soft Pull is usually produced when you retrieve your credit record, or when the bank pulls the record to monitor your credit situation at regular intervals after you receive the card. I’m sure that you can try to see all the Pulls on the report including SP. However, I cannot answer you whether the bank can see them while making a HP. But in conclusion, SP doesn’t affect the credit score, so you don’t need to care indeed.

Every HP is kept on your report for 2 years. That is, others can only see 2-year HP history when they pull your report. Generally speaking, if a bank find there’re many HPs while pulling your report, it is of low probability that it approve your application, because that may show you’re out of money suddenly and apply for many cards to fill the gap. So, some may suggest that you apply for a new card after about half a year. It is quite a right thing to do, for too many HPs do abuse credit. However, based on what I’ve see online and experienced, banks care more about your overall credit history sometimes, especially your account management ability shown on the report (including prompt payment and low util), rather than the numbers of recent HPs. If you get more than 20 HPs recently, I suggest you to wait. I will write more about HP’s effect on card application by analyzing my personal experience with strategies for applying later.

2.5. The Type of Credit

It refers to all the types of credits you have: credit card, car loan, mortgage, student loan, etc. Generally speaking, if you can manage different kinds of credits/loans at the same time, it indicates that you have excellent management ability and financial situation. Then banks think you’re reliable and lend money to you. However, I know little about others credits/loans other than credit card, and it is appreciated if you can teach me some.

The proportion of the factors above are different. FICO model shows its proportions above. The range of FISO score is 300-850. I think it’s pretty good to keep it above 700. Above 800, you can apply for any card if you like. If you find the score fall suddenly when you check your credit record once in a month, don’t worry, it’s common that the score fluctuate. As long as there’s no big flaw in your record, the score will rise as time goes by. At last, i want to remind you again that the score is not everything, even not the most important factor. Your credit behavior recorded in the report is the key factor to a bank’s decision.

As for how to check the credit score, please see How to get free credit reports and scores.

3. Basic terms

Many beginners may be confused by some terms on the statements or the websites. So let me explain them as follows:

3.1. The Statement

It is the bill, which is sent to you every month. No matter checking/savings account or credit card, or even your utility bill and telephone bill, you receive a statement on a fixed date (or around that day) every month, and that’s statement closing date. The statement provides details about your spending, payment and other behaviors from last closing date to this closing date. Please note, if one of your purchase is before closing date but still pending while statement is coming out, that won’t be written on this statement, but on the next statement after post.

3.2. The Balance

It is about how much you owe. The statement balance is how much you owe after the statement. Current is how much you own in total at present. However, on AmEx’s website, the current balance refers to the balance of last statement, and outstanding balance is the current balance I mentioned.

3.3. The Payment Due Date & Minimum Payment

As the words indicate, it’s the date that you should pay with all effort. The date is usually 20-30 days after the statement is out. As long as you pay the minimum payment written on statement, it won’t be regarded as late payment and leave a record on the report. However, as I said before, you’d better pay full statement balance if are not in a financial problem.

3.4. SSN

It’s the well-known Social Security Number, the key number associated with your credit record in the US. You check your credit record basically by match of SSN, name and birthday, though you can pull your report in the Credit Bureau without SSN. This number is really important. Don’t tell others easily. I strongly suggest you get one if you want to use credit cards, or you cannot get some good cards at all.

3.5. APR

Annual Percentage Rate. It’s used for counting your interest rate. Actually, I’ve never thought about figure the counting way out myself, because our goal is not to pay interests to the banks!!! Many cards offer a bonus period with 0 APR after opening, such as Chase Freedom. You can take this period for installments, but I suggest beginners not do this, for it hurts utilization rate and then affect credit score. The bank will refer to your credit record when they consider you APR while opening a card. So, a good record can ensure that you pay much less if you have to pay interests.

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