A Student's Guide to the Credit Card

Merchant Warehouse |

May 31, 2012

Working in merchant services since 1998, Merchant Warehouse has long believed that an informed consumer is an empowered consumer. This expands beyond our own training and education programs for merchants looking to learn more about processing credit cards at their business, and extends to individual shoppers as well. The following is an article aimed at aiding students and parents searching for more information on the power and responsibilites that are associated with a personal credit card account.

A Student's Guide to the Credit Card

How often do we want an item but we can’t afford it? People with steady incomes experience this feeling all the time. Even with a job, it can still be hard to afford everything on one's wish list. This is where credit cards can come in handy. Credit cards can be an invaluable resource as long as the person using one is responsible.

Applying for a Credit Card
When considering getting a credit card, it is a good idea to ask parents, relatives, and even teachers for advice. These adults may have plenty of experience using credit cards, and can even give tips on what cards to look into, how to use them responsibly, and they might be able to make some of that credit card lingo easier for you to understand. When you find a credit card you’re comfortable with and you decide to apply for it, the credit card company will likely ask you a few questions.

You will most likely be asked about your credit score. Your credit score basically gives companies an idea of how likely you are to pay off your bills on time. While credit card companies make money if you submit your payments late, they will not make money and could potentially go out of business if too many people do not pay at all. A decent credit score will assure a credit card company that you are trustworthy. Some credit card companies allow people with lower credit scores to apply, but will charge a higher interest rate, so be careful to look into this when applying.

Another common question pertains to employment history. If an applicant has had numerous jobs over a short period of time, and especially if they have experienced multiple extended periods of unemployment, a credit card company will question their stability. Credit card companies may also want to know about any loans you have taken out. If you are getting ready for college and have taken out a student loan in your name, this certainly applies. The best precautions someone can take are to stay debt-free and keep that credit score nice and high.

Using a Credit Card Wisely
Before applying for a credit card, ask yourself if you really need one. Remember that credit cards aren’t free money nor are they an alternative to money. You need to have the money to back up any and every purchase you make with the card. To keep it simple, find a credit card with no annual fee and a grace period for any finance charges. Some cards also offer benefits such as airline miles or discounts on certain purchases. If you choose a credit card with these benefits, make sure you read the fine print over two or three times to be sure of the conditions.

Once you have the credit card, you need to be responsible with it. One great tip is if you wouldn’t spend paper money on it, don’t use a credit card on it. Another tip is never to use a credit card to buy any object that costs less than $20. Even under tight circumstances, most people can scrounge up a few bucks to buy a slice of pizza. Even if you buy cheap fast food, a few extra jumping jacks are much less stressful than an out-of-control credit card bill.

In cases when you do use your credit card, repay the money as soon as you can. Don’t just return the minimum payment; try to pay it all off if you can. To help make sure this is possible, keep track of your spending and make sure you don’t use your card for any more money than you can pay back on a single bill. Finally: never, ever use one credit card to pay off another credit card.

What Happens Behind the Scenes?
Using a credit card may seem as simple as scanning a card, signing your name, taking your purchase home, and getting a bill in the mail later. However, there is actually a complicated multi-step process that you are not responsible for. Though it is not your responsibility, you must still be concerned with it because there are multiple other parties involved and occasionally one of them experiences some sort of error that can affect you. The first step is authorization. In this step the merchant’s system requests payment from an acquirer, which then sends the request to the credit card issuer. If the card is valid, the issuer sends confirmation back through the channels.

The second step of a credit transaction is batching. Generally at the end of each day, a merchant will compile a “batch” of all the sales they made accepting credit. They then submit this amount to the acquirer. Once batching is complete, the third step, clearing, begins. In this step the card network (Visa, MasterCard, etc.) distributes every transaction to the issuer which then collects its interchange fees. The rest of the money is returned to the acquirer. The fourth and final step is funding. All it involves is the acquirer subtracting its fees and paying the merchant. Due to interchange and acquirer discount fees, the total amount of money the merchant earns on a credit card transaction is actually slightly less than it would be with a cash transaction – however, merchants still choose to accept credit because so many consumers prefer it.

Paying it Off
While there are other ways to do so, someone who always makes their monthly credit card payments on time will build their credit score. Everyone has a credit score, whether they have a credit card or not. This number is used to determine interest rates on any loans that may be taken from the bank. Landlords also use them to decide if a potential tenant can be deemed trustworthy. Credit score ranges between 350-850, with the vast majority running between 600 and 700. A credit score below 650 is considered poor, and someone with a credit score below 350 is said to have no credit. A whopping 32% of a credit score is determined by a person’s payment history, with another 15% based on their debt. Therefore, someone who always pays their credit card bills on time and has no other debts to their name already has nearly half of their credit score factors working in their favor.