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Creditors and Credit Card Deals

2007-05-10

Credit card deals are deals made between a consumer and a credit card company. These deals are populated with legal jargon much in the same way that traditional loan agreements are, but the difference is in the fine print.

Historically speaking, credit card deals haven’t been around for a particularly long amount of time. They’ve only been around for about half a century and before that time period the only way to get money up front (in other words, the only way to borrow money at all) was to get a traditional loan from a bank.

Under the agreement of this loan, you took out money and put up something as collateral against the loan. After a certain amount of time (referred to in credit terms as a grace period) passed by, you were required to start paying the loan back and usually with interest. If you were unable to make the loan payments, then the lender took whatever it was you had put up for collateral. It was a simple arrangement and one that served to give both the lender and the debtor something they needed.

The only problem with these types of arrangements is that if a person needed money right away in a specific situation, they were stuck.

Enter the first great credit card deals to be created. These were done primarily by banks looking for additional ways to make money and they did so via a system where they would extend instantaneous credit to certain customers in exchange for customers paying them back with interest of a higher level than they required for traditional loans.

These primitive credit card deals were very satisfactory to the consumer because it allowed them to get money quickly and not have to use collateral and they were also satisfactory to the credit card company (which really at that time was a bank, specific credit card companies did not exist at the time) because it allowed them to make a higher amount of interest.

Since then, new credit card deals have sprouted up all over the place; some of them bad credit card deals, some of them good credit card deals and some of them great credit card deals. Nowadays though, with the existence of the credit reporting agencies and the easy access that a credit card company has to your credit rating, creditors look at customers differently. To understand how creditors work, you need to understand how creditors think.

The only way to do that is to read their literature. At least that is the only way to do that in a specific sense. In a general sense, the rest of this article is devoted to giving you a good introduction as to the thought processes of the typical credit card company.

Creditors Look for Capacity
If you are a credit card company, what are you most interested in doing? The answer is preserving your bottom line and expanding your bottom line. In order to do the latter, credit card company representatives seek out people that are likely to generate a lot of interest over time with high balances and low payments.

In order to do the former, credit card deals are created that reach out to people with a good credit history – these are the people that have in the past and do in the present demonstrate capacity and these are the people that creditors frequently search for.

What is capacity? Well, simply put, it is the ability of a consumer to repay debt that they incur. When creditors judge capacity of a person trying to make new credit card deals, they look at their current employment income as well as other sources of income. They look at how steady their employment (or other source of income) is and they try to gauge how much of that income flow is not already tied up in other expenses.

Creditors Look for Character
If you’re a credit card company, you want people that are likely to pay back their debts. And right here is where credit rating comes in big time. If you have an excellent credit history, then the creditor knows that it is in your character to pay back the money you borrow.

If you have poor credit, then likewise the credit card company might suspect that your character is suspicious. They might suspect that you have no intention of paying back the money that you borrow or even if you do it might make them go back and look at your capacity in more detail.

Whenever people talk about credit scores and credit rating, they are talking about character. While capacity can also be judged from a credit rating, it is more so used to look at character. So much so, that the two at times can almost be considered to be analogous terms to each other.

Creditors Look for Collateral
While this doesn’t apply so much to credit card deals as it does to other forms of credit, it is still worth mentioning. A credit card deal is essentially an agreement between you and a credit card company saying that you are willing to take on a higher interest rate in exchange for not having to put up any collateral on the credit that you draw.

To a credit card company, it’s a little bit like an investment. Lending out money without requiring collateral is a much riskier proposition because of the risk of getting nothing should the debtor default on the loan. In order to make this higher risk worth it for the credit card company, they need a higher reward. That higher reward is a higher interest rate.

Other forms of credit still use collateral though and if you have collateral that you can put up against the loan, you are much more likely to get the loan than someone who does not possess any collateral. Even if you get the loan without collateral, just like with a credit card deal, chances are that the interest rate for that loan is going to be much higher because of the lack of collateral.

This is a very short introduction into the insight of a typical creditor. Credit card deals and especially good credit card deals are hard to come by if you don’t possess capacity and character. More so than capacity and character it is important to have the impression of capacity and character.

That is to say, the credit card company must think that you have enough capacity and enough character before they are willing to do business with you. If they suspect either one, they might try to make you sign one of their bad credit card deals and that could end up being bad for you.

To find out in more detail the thought processes that your specific creditors go through, go and talk to them directly. Different creditors think differently and the only way to know for sure is to ask.