Sometimes the process of getting a credit card seems mysterious. Occasionally, people who have been granted a $20,000 loan (e.g., to buy a car) are then rejected for a credit card with a $5,000 limit.

This can be confusing. The misunderstanding arises because most people see a credit card (which is revolving credit) as being the same as a personal loan (which is instalment credit). These two types of credit have very different characteristics and are treated differently by financial institutions when they are determining whether or not to approve your application.

While an instalment loan is for a fixed dollar amount and term with a regular payment schedule, a revolving credit account, such as a credit card, is open-ended and may be used whenever you want for a variety of purchases or a cash advance. As well, credit cards are generally completely unsecured. (Some are secured and we'll look at these later.)

While most people don't see the difference, statistics show that people treat them quite differently when it comes to repayment. People's priorities in terms of repayment are usually:

1. mortgages
2. installment loans
3. revolving lines of credit, such as credit cards

This means that should your financial circumstances change, you will be more likely to make your mortgage and instalment loan payments than your credit card payments. So credit cards run the highest risk of default. As a result, financial institutions consider all the information on your credit application very carefully before giving you a card.

Credit cards offer people what appears to be easy credit. With minimum payment requirements, credit cards can actually be detrimental to your credit rating if misused.

Some people don't even think of using a credit card as borrowing. After all, there's no long approval process each time you want to charge something. You just charge it and cachunk, cachunk. That's why financial institutions are so careful. That's also why credit limit increases are only considered once you have demonstrated an ability to manage your current limit. And that's one reason the interest rate charged on a credit card is so much higher than on other forms of credit. The second reason is fraud.

Credit card issuers experience enormous problems with fraud. They have to cover their losses in some way, and a higher rate of interest is one way to do it. Perhaps if the use of a Personal Identification Number (PIN) or a photo ID on the card becomes a standard, issuers will see fraud costs drop and we will benefit with reduced interest rates. But that's the future.

Most financial institutions use a sophisticated tool to help make the best credit-granting decision. Referred to as "credit scoring," the system assesses a number of items on your application form and gives you points for each item based on the institution's past experience with similar customers. The points are totalled to obtain a credit score. Using credit scoring, the credit decision is based on a combination of factors, rather than just one or two factors. Customers who meet the minimum score requirement are granted a credit card and assigned a starting credit limit.

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