An introduction to credit
Down the rabbit hole of the American financial system
The word “credit” for me used to mean just one thing: a credit card. Living in Europe, I used my debit card with a PIN number for everything, except for online purchases. That’s where a 16-digit code came in handy.
When I moved to the U.S. I was surprised to learn that debit cards also work like credit cards. They have the same 16-digit code, and you can use them online just as easily. Awesome! I went into a local bank and got myself a debit card in fifteen minutes. I told my American colleague immediately about my new shiney piece of plastic. “I don’t even need a credit card anymore! Isn’t this great? It works everywhere!” She gave me the same look you would give a toddler for catching a frog. “Sure, but don’t you want to build credit?”
As it turns out, I do. The word “credit” meant something different here: a score you need to keep up, in case you’d like to get anything done financially like renting or even buying a house. It was the beginning of a plunge into the banking rabbit hole. Along the way down, things got more puzzling.
Debt
In order to get a credit card, you need credit. To get credit, you need a credit card. Chicken versus egg. If you’re new to the financial market, this can be quite a problem. A prepaid or secure card is your only option. The amount of money in your pocket can’t help, as one of my friends found this out when he moved to Silicon Valley after selling his company. With 6 figures on his bank account, he still couldn’t get a credit card from the same bank. He needed to build debt first, to build trust. Debt builds trust… which is completely the opposite of how it should work.
Cashback
A purchase with your card at select stores can give you cashback, a certain percentage of the paid amount, back on your account. It’s supposed to motivate you to buy more stuff with one specific card. But… why? Maybe most people have forgotten that spending more money does not actually save you money. Or that not having to pay interest on a payment is also a good way to save money. Perhaps that would be too simple. (Simple unfortunately, does not accept applicants with a work-only visa. It’s also a debit card, and does not build your credit.)
Grace period
This is usually a 21-day period where no interest is calculated on the standing amount on your credit card. It’s a set up. You’re supposed to forget all about it, so the banks get to charge interest. Sure, you can set up an automated transfer on your debit account so that doesn’t happen. But why wouldn’t I then just use my debit ca-? Oh, right, credit.
Transfer
I used to go out for dinner with my friends in Amsterdam, open my bank’s mobile app, and before my friend was at the register to pay the bill my share of it would be on his bank account. That’s something Americans can only dream of, when a wire transfer between different banks now costs you around $10 every time and takes days to complete. There’s maybe Paypal or Venmo, but most of your outgoing or incoming transfers will go by check. Luckily I can now cash a cheque with my mobile phone, which feels quite futuristic… if it weren’t for the fact that I’m taking a damn picture of a freaking piece of paper. Wow.
If I wanted logic with my banking, I maybe shouldn’t have gone to a bank at all.
Hundreds of years from now, historians will look back to today’s banking system in America and wonder: what happened? Why was the technologic achievement of secure remote money storage held back, to build personal debt and complex billing systems instead? For the U.S. financial system to evolve, we need to start asking ourselves that question today.
