As I mentioned in my last post, I said that I would briefly explain the main differences between prepaid and postpaid. Hopefully, this will give you a better understanding between the two models, and why there are pros and cons to each approach, or why you should even bother with them. I endeavour to approach this rather complicated world of investments and loans by using analogies that even a sixth grader can understand.
Okay, suppose you went to McDonalds, and you ordered a meal. They tell you how much it is, and you pay for it. Then you eat your meal and you are done. In this example, you paid before you got your product or service. Pre means before. That is the case for the majority of transactions you will be familiar with.
Now, suppose you went to a fancy restaurant or a bar. You get a menu of items, and you tell the wait staff to get you what you want. They give it to you, and you eat it. Then, the bill or cheque arrives, and you have to pay for it. In this example, the staff trusted you to pay for their product or servivce after you had used it. This is because with this, you are paying after you had eaten your meal, not before. Post means after. This is a slightly less common type of transaction you will see on a daily basis. Note, with the advent of worldwide delivery apps in today’s technology, this will gradually dwindle. But, why would a restaurant use this approach in the first place? Traditionally, restaurants were made so you could choose what you wanted from a menu. The food would be prepared, but since it is not fast-food, it had to be done pretty slowly. While you ate, you could request more items until you were satisfied. All that required a means of keeping track of what you had and for how much. Additionally, some guidelines were made about how to properly tip the person waiting on you. If you couldn’t afford to pay for your bill, you had to work it out by washing dishes in most cases. Some hotels wouldn’t let you have a room without paying for it in advance if you didn’t have any luggage with you.
But, I digress. So, how does all this apply to loans, phones, credit cards, and stuff like that? Lots! Using our two examples, here are just a few more analogies.
If I went to a store and asked to get a prepaid phone, the first thing I am going to look at are the prices, and whether it is on a monthly value plan, or pay only as needed. A monthly value plan is when you pay for the service every month before you actually begin to use it. However, if you’re one of those people who don’t always use a phone every month, you can set up an as-needed arrangement. This is when you manually add credit to use the service whenever you need it the most. Since you’re paying for the services before you actually use them in these two examples, they are both called prepaid. Now, here’s what happens if you don’t pay for the next month, or if your minutes or whatever runs out. Since it is prepaid, they won’t charge you anything, since you had used something which you had paid for in advance.
So, now you might be thinking, why would I still have unlimited calling or texting if it were prepaid? Let me explain. We’ll use the following example. Let’s say that you purchased a package to go swimming at a pool for one month. The service is unlimited. It costs a hundred dollars. You handed that over to the cashier, and they gave you a pass. If you have that pass, and if it is still within the month, you will have unlimited access to the swimming pool. When the month runs out, you’ll no longer have access to the pool. You don’t have to pay anything, since you’ve already paid everything in advance. That amount is enough to keep their establishment afloat, provided that they have enough people using their services and they allocate their expendatures well.
Here’s another little concept that people usually don’t tell you about. Let’s say that you found a really neat gadget that you just had to get, but it was way out of your budget. Normally, a post-paid arrangement would be made. But, did you know that you can sometimes pay the amount in smaller chunks and then get the item? Well, that is actually possible. This is called a layaway. The downside to this is that you will most likely have to pay a deposit to ensure that the seller will not give the item to someone else. They will only hold it to you for a short amount of time, so you’ll have to be quick about it. It’s much like reserving your place at a hotel. The good news is that if you approach this carefully, you can also do this with some medical and cosmetic procedures not covered by insurance.
Now, here’s how postpaid really works, because it has some unique properties that are not found in prepaid concepts, whether this applies to limited or unlimited services. Think about it this way. Calling, texting, and data are all considered services that rely on an underlying infrastructure. A plan is a set of one or more services. You have a plan consisting of all three, unlimited calling and texting (within the US), and a certain number of GB in data). Before we get onto the slightly confusing concept of postpaid products and services, though, here’s a bit of a history lesson on how the consumer credit information industry began.
First of all, what is credit, anyway? Well, credit means to lend, in a way, with complete trust. If you do something amazing, you want others to give you credit for your achievement. So, when I credit you something, it means that I am taking your word for it and that I trust you or have belief in your accomplishments. That’s pretty much what the origin of the word means. If you remember from an earlier post, I talked about how civic virtue was a requirement, not an incentive in ancient rome, and how the government collapsed because of that.
There was a time when people would walk into a little general store, though it would usually be a well-known acquaintance or public figure; someone whose shopped there for many years. They often made purchases that were generally large enough to a point they couldn’t keep track of how much money they had. So, they would say, ‘I’ll pay you to-morrow if you’ll take my word for it.’ That was an extension of credit. The store credited the amount, which meant that the buyer had a debt, or debit, of said amount. Debit, by the way, comes from debt, but it has slightly different meanings depending on the context. When you debit a certain sum, you are basically saying that you are billing the bank for this amount. That’s also why it’s called a cheque.
Soon, charge accounts were started, and that was later followed by investing, which we won’t cover here. So, people asked the merchants to put the items on their charge accounts, and every month a bill or invoice would be sent to the debter until it was paid off. This continued for a number of decades or centuries until around the 1950’s. Until then, this was about the only way people have done it, and then came along a gentleman by the name of Hilton. We all know of him because of his hotels. He started buying all these credit accounts from stores and eventually became so widespread that businesses were in on the deal. Soon after, the credit industry was born.
One of the first charge cards to be made were called the Hilton Club International card. Then came along the others, like American Express, Visa, Mastercard, and Discover. Interestingly enough, the Chargers football team got their name and a lightning bolt for their symbol, not because they wanted to charge across the field, but it was because they were representing people who charged these cards. So, naturally, we needed to develop a system of knowing whether you or I were credit-worthy. That led to the formation of a credit repository that later became known as one of the three credit bureaus; Equifax, Transunion, and Experian. There are more consumer reporting agencies, but almost everybody uses the three major credit bureaus today.
So, here’s what’s going to happen when you first go to a postpaid company. They will ask your permission for them to collect some information from you, so they could check you out via a small background check using your personal information such as your name, date of birth, social security number (usually the last four digits) and your address. Since this company is risking itself with you, they have to make sure that you are a responsible borrower. I’ll explain why in a bit. So, they’ll use your social security number and other demographic information to identify you through those credit bureaus. The most common credit scoring system is called the Faire Isaac Company (FICO) score. It generally ranges from 300 to 850 points. There are other scoring models that are sometimes used, like Vantage Score (which is found on CreditKarma) so don’t be surprised if you get a letter in the mail having a completely different score. Think about it this way. Your credit score is basically like a GPA in school. It measures how responsible you are with people whom you borrow money from, or what grades you tend to make on average.
Let’s say that the following statements are true: You were someone who borrows money from me because you needed to cover an unexpected expense that you couldn’t afford to pay off. So, you and I agreed that you would pay me back in full within six months by giving me a small portion of that sum. Let’s say I gave you six hundred dollars. You would pay me a hundred every month for six months, which adds up to the grand total. Let’s say that you’re very good at keeping track of this, so I am very confident that you will pay me back. As a result, you would have an A or B in borrowing money. So, your credit score would be around 750-850 points if it were an A. A B would be around 650-750 points. A C would be around 550-650 points, a d would be 450-550 points, and an F would be 300-450 points. This would also depend on your credit age and sources of income.
Many young people face a problem with not having credit, but there is hope! If you have a zero credit score, you have no grade, so lenders won’t know what to do with you. As an example, let’s say that I gave you the six hundred dollars. And let’s say you only paid back two hundred dollars, one each month, but after that you went off the radar, and you didn’t pay me back the rest. That’s a risk that all lenders have to face. So therefore, we would have to work out a form of security. The security is called a collateral. What kind of things do you have that are really valuable and are willing to give me if the amount of money you ask me is equal in value? Let’s say that you had a fancy musical keyboard that was pretty valuable and appraised it to be around $400. I gave you the four hundred, and you gave me the keyboard. The keyboard is worth the same amount I loaned you. Now, let’s say you paid me back only two hundred and went off the radar after that. Since you agreed to give me the keyboard, I would sell it to make up for the other two hundred that you failed to pay off. However, if you do manage to pay the debt in full, I will return the keyboard back to you. But, there is a catch. It not only cost me four hundred dollars, but I needed to be compensated for the loan as well. This is called an interest. This is how a lot of pawn shops work. Of course, you can always sell your items outright if you’d like. You can recognise pawn shops by their unique symbol.
As another example, let’s say I gave you a meal consisting of a Subway sandwich and a bag of chips. I gave them to you in advance, since you are really hungry. I would say that the meal is twelve dollars. But, let’s say you wanted more chips, so I got more of that for two dollars. Unfortunately, you only have twelve dollars with you, but because I got you another bag of chips, the total would be fourteen dollars. So, now you would owe me two dollars, since you already paid twelve dollars for the sandwich and first bag of chips. But you would still owe me the two for the extra bag of chips I gave you. So, you and I would work out a payment arrangement so that you could pay me back fifty cents a week. Note that this is just a hypothetical scenario that is very unlikely to happen. Let’s say that you agreed to pay me back by next month for four weeks. When that time arrived, and I still haven’t received anything, I might start charging you five cents for every day that you fail to pay me back after that. This is called a late fee. Sometimes it is also referred to as an interest rate, though this is usually fixed by something called an annual percentage rate and usually occurs when you only pay the minimum amount due. Watch out for promotional periods, because if you fail to pay off the amount during that period, they will start imposing finance charges and other things on you.
So, if $100 was the minimum amount for the loan of $400 that I gave you in the previous example, then I would charge interest, so you would be paying a little more than $100 per month. A finance charge is not the same as an annual fee.
Some time after credit cards came out, debit cards were introduced sometime between the 1970’s and 1990’s. Here’s an article that explains more. Generally, a merchant will be asked to collect money from a credit card transaction and be deducted a fee for doing so. If you charge a debit card as if it were a credit card, the transaction will show up as pending in your bank account. However, if you used a pin to conduct the transaction, then it becomes instant. Since most people say credit cards to assume all cards are either credit or debit, and since we don’t really know that, maybe saying bank card or payment card would make no distinction between the two.
One really good way to begin your credit history is to get a secured credit card from a bank or credit union. A security deposit is the same as a collateral. So, if you want a credit card with a credit limit of three hundred dollars, you would have to deposit three hundred dollars into a savings account, which will be held for you (usually for about a year) and then they will allow you to convert your account to an unsecured one. If you do well in about six months (in most cases), you can optionally choose to increase your credit limit by depositing more funds into the account. Most people will start with a revolving account, meaning that you might get caught in a cycle of charging your account, then paying it off, and repeating the cycle over and over. A common reason you might see in a letter of adverse action for loan denial is insufficient number of satisfactory-rated credit references. I actually had to dispute this because I recently went through a legal name change. That’s right. The Fair Credit Reporting Act allows you to dispute anything on the credit report, and the lender is required by law to reconsider the information based on the corrected report. If you can’t get anywhere, contact the Consumer Finance Protection Bureau.
As I later found out, though, I closed my accounts before going through the name change, and consequently, I lost all my credit history associated with it. So, I’m gonna have to start all the way at the beginning, or almost all the way. There are actually some unsecured credit cards with very low credit limits for people with bad credit. I don’t think people with no credit history will ever be able to get one of these, though. But it’s important to only use these cards for emergencies because the goal is to minimise spending and maximise payment to rapidly improve your creditworthiness.
Now, let’s say thatI just met you for the first time, and I didn’t have any prior information about you. Before I loaned you anything, I got permission from you to run a credit check, or hard enquiry. This will generally knock off a few points from your report. Then, to my amazement, I would see that you’ve had an impressive work history and that I would have no reason for denying you credit. That’s right! Employers and schools report information about you to the big three , and more.
But, what if you belong to a low-incidence disability population that is chronically underemployed? Fortunately, besides getting a secured credit card, there are a couple options. You can ask a trusted family member or close friend to add you as an authorised user. Although you will be making the payments yourself, it will still be their legal responsibility if you cannot afford to keep up for whatever reason. If you’ve heard of a cosigner, it doesn’t refer to cosign in math. Rather, it refers to someone whose credit history is better than yours and has agreed to add their signature alongside yours. This is usually done with several types of loans and apartment leases.
Here’s an article from WikiHow that explains how you can run a criminal background check or public records research using two methods: As an employer or land owner, or as a private citizen. The reality is that your credit score only says one thing about you, but your reputation is everything. Check how you can improve it. Unfortunately, a lot of places still require you to register your mother’s maiden name, or your father’s first name. This won’t work well if you have been adopted or raised by surrogates for same-sex couples or groups, or anybody in the trans and non-binary community. So, keep that in mind if you decide to register.
Anyway, with postpaid services like cell phone or MiFi carriers, cable or satellite providers, etc., you usually have to agree to a two-year contract, which simply states that you will stick to it and pay for any extra usage of a limited service that surpasses the agreed-upon plan, and that you would pay for any late fees or things like that. You also agree to pay any early termination fees if you decide to break out of contract for any reason. Except in rare circumstances, the fees cannot be waived. As an example, I’ll tell you a true story. This was a few years ago when I was first starting to understand all this stuff. I was still unclear on it, and it resulted in major issues. So, my mother gave me the internet service, and I started using it non-stop. After a few months, my mother started getting bills that were way over the agreed contract. We didn’t find out why until I made excessive and pressured enquiries, and that’s when they finally told us that we were only limited to ten GB of data each month, but I kept going up to twenty or thirty instead. That’s why you have to be careful when choosing a service. You don’t want to be stuck with something when you know that you would most likely end up needing more than what you thought you needed. So, never go beyond your limit if you know you won’t be able to afford it later. That’s why, when I went with Sprint, I wanted to make sure that they were completely honest with me. As a result, I then had thirty GB of data. When I first signed up with them in November, after the prepaid company I have been with shut down, I got a twelve GB data plan. Unfortunately, I found out that it was too little, so I called in to see if I could have my plan changed. I told them that I tend to average around twenty-five to thirty GB every month, and they finally located a good fit for me.
As long as I stayed within that limit each month, I only had to pay one hundred twenty dollars each month, since that’s how much the plan was. Back in December, when I first got my computer, I downloaded a lot of updates. And since it was early in the month, and I had already used twenty GB, I had to stop using the internet by the mid-part of December. But by the end of December, I couldn’t help it. I needed to use some more internet. So, as a result, I’ve gone over my included GB by five, So I had to pay off two hundred sixty dollars, along with the original one hundred twenty dollars that was agreed upon, for a total of three hundred eighty dollars. Fortunately, though, I had that money squirreled away in a safe place, so I arranged to have that paid off by next week, and it worked, so I basically cleared it off right on the spot. After that, I started making sure that I never went over that limit again.
So, the last thing that I will mention here is what’s called a rate. If you remember from basic arithmetic class, a rate is a change in quantity given over another quantity. For example, your heart beats at a rate of eighty beats per minute. So the rate is beats per minute. So, let’s look at that more closely. For every minute, there are eighty beats. Over two minutes, it would be 160. So your heart rate would be 160 beats per two minutes. When studying ratios and proportions, they will ask you to simplify that rate, so you would divide the top by the bottom, so 160/2=80. That will give you the end result for every one of whatever you’re measuring.
So, now let’s go back to the rate of usage. Suppose you went over your included limit of 3 GB by seven. Let’s say that the rate was five dollars for every GB spent after you’ve gone over the limit. So, to find out how much you have gone over, you would take the total number of GB spent, in this case, ten, and find the difference by subtracting your actual limit, which is three. The answer is seven. So, they would say something like, you’ve gone over your included gigabytes by seven point zero. Since the rate is five dollars per GB after you’ve gone over that 3GB limit, you would multiply the difference (seven), and the rate ($5), for a total of thirty-five dollars. That’s how much you would have to add. Let’s say that your agreed contract bill was twenty-five dollars per month. Since you went over your GB usage by seven, and because the fee is 35 dollars, you would add 25, which is how much you’re billed every month, and 35, which is the fee for the extra usage altogether. So, 25+35=60. So, for that month, you would have to pay sixty, plus any additional taxes and hidden fees that you were not aware of. That’s why it’s important for you to get a breakdown summary of the entire bill, so you know exactly how much you’re paying for, and for what.
There are a number of web sites that allow you to monitor your credit score for free, or add some optional features for a reduced fee. However, the Fair and Accurate Credit Transaction Act (FACTA) poses some restrictions on a credit bureau’s ability to sell credit reports. So, once a year, you can review your credit report for free by going to Annual Credit Report. My recommendation is that you get a report every four months, so that you always have access to the latest activity. Please keep in mind that not all these web sites are accessible to people using screen readers, so make sure you do your research with care. Some companies will provide you with a report in an alternative format. Random fact: credit bureaus and other consumer reporting agencies keep public record information about you for approximately twenty years. This includes things such as who your parents are, their age, where they’ve lived, who they worked for, and stuff like that. This is so that they can trick people and deter any attempts at fraudulent activity. So, keep that in mind when using that site. You’ll see a question like, Your credit report indicates that you may have opened a loan in 2010. Who is the lender for this account? If you do not recognise the question, select None of the above. They usually refer to your parents by their first name.
If your creditor tells you that your billing cycle starts on the eighteenth of the month and it ended on the fifteenth, it doesn’t always mean that they will report your balance to the credit bureaus on those days. For instance, my creditor reported on the last day of the month. It’s always best to use thirty percent or less of your overall credit limit. So, if you have two credit accounts totalling $1000, and you used two hundred in one and a hundred in the other, you have withdrawn $300 out of $1000. If a lender denies to give you credit, they will almost never tell you the exact reason why you were not approved because if they did, it might cause you to think of ways to work the system better, so they want to keep you guessing. Also, keep hard pulls to a minimum, and wait at least six months between each one, so that it won’t look as if you’re desperate for credit.
One thing I forgot to mention: if you failed to pay off your debt past the due date, you will get several notices letting you know that your debt will be handed over to a collections agency. Then a bill collector will try to get a hold of you in different ways to get you to settle the debt. If you default, which means that you fail to pay it off, that will cause severe impact to your credit score. If your debt is far greater than what you can afford, you might not have any choice left except to file bankruptcy. This usually involves having to go to court and possibly seeking legal help. If your only source of income is through things like Social Security or Social Insurance Disability benefits, creditors cannot force you to pay them back because that money wasn’t obtained from a job, and therefore, it’s not considered an asset. So, unless you won the lottery, you are technically judgement-proof. Look out for any notations or remarks surrounded in brackets, as those are adverse.
If you are currently enduring financial hardship, help is available. You can start out with the National Foundation for Credit Counselling. Additionally, you can get in touch with a debt management programme like the one I’m on. Simply click here to visit their web site. If you decide that your debt is still manageable, the programme will ask your creditors to lower the minimum payments in exchange for closing the account to further purchases. In case you die, and you don’t have a will available, your debt will be processed by a probate court along with any assets you might’ve owned. It might be possible to consolidate your debts with one loan or line of credit. Please consider talking to a loan officer or credit analyst before doing that, though.
Let me know if there are any additional questions you may have. Feel free to go over this several times. It might be helpful for you to absorb everything word for word, instead of looking at everything at once. Feel free to ask someone for help, such as a family member or a friend.
Good luck, and happy budgetting!
My favourite web site for learning about anything relating to credit cards, loans, and mortgage is Nerd Wallet. http://www.nerdwallet.com/
How phone contracts affect your credit score: https://www.thebalance.com/does-my-cell-phone-payment-affect-my-credit-score-960537
Should you use your debit card as credit, and what is the difference, anyway? https://finance.yahoo.com/news/happens-swipe-debit-card-credit-113015478.html
The difference between a loan and a mortgage: https://www.diffen.com/difference/Loan_vs_Mortgage