One day, bankers in Pakistan will stop being intellectually lazy and actually do their jobs for a change and provide access to capital to ordinary Pakistanis like you. At that point, you will need what is called a credit history, and the easiest way to get one is to have a credit card.

The previous few articles in this series have explored the asset side of personal finance. This article begins the conversation on liabilities, with an introduction to the credit card as a starter. There are over 735,000 credit cards in Pakistan according to the latest available data from the State Bank and consumers have a collective balance of around Rs21 billion on them.

A credit card is essentially just access to a line of borrowing: when you use it, you are borrowing money from the bank that issued it and will be liable to pay it back. If you do not pay it back within a relatively short period (usually 20 days or so), you will end up having to pay interest rates in the range of 35 per cent or higher. At this point, you are probably thinking to yourself: “Let me get this straight. The bank is giving me a card that looks an awful lot like my debit card and they are also giving me the ability to borrow a significant sum of money. And if I forget to pay that money back on time or if I cannot pay it back on time, I will have to pay interest rates that compete with loan sharks? Why on earth would I get one of those?”

If that is what you are thinking, you are absolutely right. Credit cards are an incredibly stupid idea. They usually end up getting a lot of people into financial trouble by tempting them to spend more than they should. But you should get one anyway. Because, as I said earlier, they are still the easiest way to build a credit history and you will need one, just as soon as Pakistani bankers get their act together.

Credit cards are the easest way to build a credit history which you may need when seeking bank loan

Credit history is a record of all borrowing transactions you have engaged in with any financial institution in the entire country. Why should such a record exist? Because it would probably be useful for Bank Alfalah to know if you’ve previously defaulted on a loan with Soneri Bank. The more information banks have about your borrowing habits — especially your propensity to repay loans on time — the more they should, in theory, be willing to lend to you.

Now, you should probably not borrow money for a quick vacation to Malaysia. But it is probably not a bad idea to borrow money to buy a house. In order to persuade a bank to lend you enough money for such big ticket items, you first need to build a track record of steady, on-time repayments on a smaller line of credit like a credit card.

In Pakistan, there are two repositories of consumer credit history. The first — and largest — is maintained by the State Bank of Pakistan itself, called the Credit Information Bureau (CIB). The second is a private sector entity called Credit Chex and was started as a collaborative effort between the JS Group, one of Pakistan’s largest financial conglomerates, and Experian, one of the largest consumer credit agencies in the world.

How do they get the data about your borrowing habits? All banks share their data with these institutions, on the understanding that they will get access to the data from all the other banks as well.

It is a useful system. But it has one small problem. In order for the bank to be willing to issue you a credit card, you need to have borrowed from at least one other bank and have at least a year-long history of on-time repayments. So how would you get the first bank to issue you a credit card? That’s the hard part, and admittedly, there is no perfect answer to that question.

I do, however, feel the need to dispel some myths about the credit card system. There are rumours going around that banks are unwilling to lend to people from certain professions. I have heard this rumour persistently but found no evidence to support it. On the contrary, I have found considerable evidence against it. Foremost amongst the professions being mentioned as “blacklisted” are journalists.

I was a journalist for four years. And the first time I applied for a credit card, Habib Bank issued me not just an ordinary card but a gold card, which has a higher credit limit than standard credit cards. I was not asked to show any proof of assets which is good for me because I do not have any. So how was I able to get the card despite being from a “blacklisted” profession? Because my employer deposited my salary in a Habib Bank account and so the bank was reasonably sure that they would be getting money deposited into my account on a regular basis.

I did, however, get rejected for a credit card from Standard Chartered Bank, despite having maintained an account at the bank since 2008. The reason they gave was that my employer was not on the list of companies with which the bank did business and I did not have a credit history in Pakistan (the debts I mentioned in my last article are in the United States).

The lesson I took away from that experience is that the banks are very cautious when it comes to lending to first-time borrowers, but are more willing to take a risk with you if they have more information about your personal financial circumstances. Habib Bank knew exactly how much I made every month, and so was willing to lend to me. Standard Chartered did not, and so they did not lend to me. The difference in treatment had nothing to do with my profession.

If you are a salaried professional, it is relatively easy to get a credit card, provided you start with the bank in which you get your salary. For self-employed individuals, it is somewhat harder, though it is considerably easier for entrepreneurs who have registered businesses that publish audited financial statements and pay their taxes. Yes, it turns out there really are benefits to playing by the rules.

This article is meant only to provide information about financial services products. It is not meant as a solicitation or recommendation to buy or sell securities or other financial instruments of any kind. Readers should do their own research carefully before making personal investment or financial decisions.

Published in Dawn, Sunday Magazine, June 29th, 2014