Credit Card Notes

Credit Card Basics

The 3 C's of Credit

  • The three C's of credit are character, capital, and capacity. These are used to evaluate creditworthiness.

Credit Card vs. Bank Card

  • Distinction between credit cards and bank cards (not detailed in this excerpt).

Credit Cards: Credit Limit

  • Definition: The credit limit is the maximum amount a person can spend using their credit card.
  • Initial Limit: Often low for a first credit card.
  • Increasing Limit: Paying the balance quickly can lead to an increased credit limit.
  • Maximum Limit: Can reach 20,000 for individuals with excellent credit scores and high income.
  • Considerations: People generally avoid high credit limits to mitigate the risk of theft.

Credit Cards: Interest Rates and Fees

  • Interest Rate Variance: Interest rates vary widely.
    • As low as 10\%.
    • Store-specific cards (e.g., Canadian Tire) can have rates up to 30\%.
  • Fees:
    • Annual fees range from 10 to 120.
    • Monthly fees for services like loss insurance can also apply.

Credit Cards: Usage Guidelines

  • Staying Under Limit: It's crucial to remain below the credit limit.
  • Minimum Payment: A minimum payment, typically 5\% of the total balance, must be paid each month before the due date.
    • Failure to pay can result in the institution refusing advances or payments.

The 3 C's of Credit: Detailed

Character

  • Definition: Will you repay the debt?
  • Evaluates honesty and reliability in paying credit debts based on credit history.
    • Have you used credit before?
  • Factors:
    • Paying bills on time.
    • Having a good credit score (e.g., 730 is considered excellent).
  • Assessment: Evaluation of debt repayment habits by a person or company.
  • Establishing Credit:
    • Young people can start by obtaining a phone subscription.
    • Credit cards are a way for young people to establish credit by using them cautiously and paying the balance each month.
  • Other factors considered:
    • Length of time at current address.
    • Length of time in current employment.

Capital

  • Definition: What if you don’t repay the debt?
  • Assessment of valuable assets that could be used to repay debts if income is unavailable.
    • Real estate.
    • Savings or investments.
  • Considerations:
    • What property can guarantee the loan?
    • Do you have a saving account?
    • Do you have investments that can be used as collateral?

Capacity

  • Definition: Can you repay the debt?
  • Evaluates whether a person has a stable employment that generates sufficient income.
  • Factors:
    • Job stability and salary assessment.
    • Other loan payments.
    • Current living expenses and debts.
    • Number of dependents.