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Credit Card Pitfalls

12:19:49 AM Friday, June 29, 2007

Credit Card Deals And the Infamous Catch 22

You might be familiar with the phrase “catch 22”. It is a phrase that refers to two related things, neither of which is possible without the other. The end result is that neither ends up being possible as one is not possible without the other. In terms of finding employment, a catch 22 occurs at the time that experience is cited. A person usually will not get a job unless they have experience, but a person can not get experience without having a job. The end result is that the person can’t get either a job or more experience, as both things require the other.

One of the most common and most infamous catch 22 situations in existence is intimately related to credit cards. It’s a situation that many people come across, right when they’re going for their first credit card. They’ve been looking over possible credit card deals for awhile now and have chosen a great credit card deal that fits them perfectly. They fill in the application and send it out, eagerly awaiting their first non-debit piece of plastic and imagining all the wonderful things they will do with the credit card rewards that come along with the particular card they have in mind.

A few weeks later, they get a denial letter back. Confused as to why they were rejected, they open the letter and get confronted by the catch 22. No credit, no credit card deals. No credit card deals, no credit.

Oops.

The Reason for the Catch 22

The idea behind the credit card is that the lenders are always taking a risk when they extend credit. With no collateral, it is quite possible that they may never see the money they lend out again. While interest rates go a long way towards making companies willing to take that risk, they don’t completely make up for the lack of collateral. To make up the rest of the ground, all credit card deals made with a credit card company are contingent on a person’s credit rating.

While it’s quite true that having no credit is not the same thing as having poor credit, to the credit card company most of the time the difference is negligible. While you don’t have bad credit history, at the same time you don’t have good credit history and the lender usually isn’t willing to assume that you’ll be good with money. Since they won’t lend to you without credit and there is no way to build credit without it in the first place, many people find themselves stuck.

Hence the infamous catch 22.

There are a few ways around this problem, all of which involve not panicking. You can make changes over time to your credit report that will make creditors look upon you more favourably over time and if you keep at it, eventually that credit card will be yours.

Credit Reports

These are the bread and butter of the money borrowing and lending business. Lenders get the scoop on borrowers and based on the information contained in the report, decide whether or not to extend credit to them. Good credit history can also result in lower interest rates, great rewards programs and the best credit card deals available on the market.

Many people don’t think about trying to improve their credit report. After all, since it contains information about their credit and they have no credit, it’s somewhat pointless to look at their credit report right?

Well, not exactly.

See there are things in your credit report that have nothing to do with your credit. A good example of this would be identification information like your name, date of birth, address and social security number. Even something as simple as maintaining a steady address for a period of time can cause creditors to view you in a higher light. Employment information also appears on your credit report and if you keep steady employment (especially if it’s with the same employer), lenders will start to look upon you more favorably as well.

Parting Shots

All the top credit card deals (and most of all the other credit card deals) are only available to people with a good or excellent credit score. People who have no credit will find it difficult to establish credit right away, but there are steps that can be taken to slowly nudge and push things in the right direction.

Remember that creditors are mostly just looking for stability and re-assurance. Also remember that their bottom line is making money and their risk analysis is waging a constant battle with their lust to get more customers. Most credit card companies are just looking for a reason to hire you. Maintain yourself well for awhile and who knows; that might just be enough to get that first acceptance letter.