Credit Cards

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Learn all about using credit cards.

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Credit Cards

  1. 1. Chapter Six Credit Use and Credit Cards
  2. 2. Learning Objectives <ul><li>Explain reasons for and against using credit. </li></ul><ul><li>Describe how people can obtain and build a good credit reputation. </li></ul><ul><li>Compare and contrast types of consumer credit and credit card accounts. </li></ul><ul><li>Recognize the impact of common (but not always beneficial) aspects of credit card accounts. </li></ul><ul><li>Manage your credit card and charge accounts to avoid fees and finance charges. </li></ul>
  3. 3. What is Credit? <ul><li>Credit – Any situation in which goods, services, or money are received in exchange for a promise to pay a definite sum of money at a future date. </li></ul><ul><li>Types of credit ??? </li></ul>
  4. 4. Why People Use Credit <ul><li>For Convenience </li></ul><ul><li>For Emergencies </li></ul><ul><li>For Identification </li></ul><ul><li>To Make Reservations </li></ul><ul><li>To Consume Expensive Products Sooner </li></ul><ul><li>To Enjoy the Good Life </li></ul><ul><li>To Take Advantage of Free Credit </li></ul><ul><li>To Consolidate Debts </li></ul><ul><li>For Protection Against Rip-Offs and Frauds </li></ul><ul><li>To Obtain an Education </li></ul>
  5. 5. The Downside of Credit Usage <ul><li>Interest is costly </li></ul><ul><li>It is tempting to overspend </li></ul><ul><li>Can lead to financial distress </li></ul><ul><li>Use of credit reduces financial flexibility </li></ul>Over 1.5 million bankruptcies filed per year recently!
  6. 6. Interest is Costly! <ul><li>Interest – the price of credit. </li></ul><ul><li>Finance Charge – the total dollar amount paid to use credit. </li></ul><ul><li>Annual Percentage Rate (APR) – the cost of credit on a yearly basis as a percentage rate. </li></ul><ul><li>Variable Interest Rates – go up and down (perhaps monthly) to reflect interest rate changes in the economy. </li></ul>
  7. 7. The Credit Approval Process: Applying for Credit <ul><li>Credit Application – Form or interview that requests information about ability to repay debts. </li></ul><ul><li>Credit Investigation – Conducted by the lender and used to assign a credit rating to the applicant. </li></ul><ul><li>Credit Rating – The lender’s evaluation of the applicant’s creditworthiness. </li></ul><ul><li>Credit Report – A person’s credit history as reported by a credit bureau. </li></ul><ul><li>Credit Bureau – Company that gathers credit behavior information about consumers from lenders and sells reports on a credit applicant. </li></ul>
  8. 8. The Credit Approval Process: The Credit Investigation (continued) <ul><li>Credit Scoring (or Risk Scoring) – Statistical measure used to rate applicants on the basis of factors deemed relevant to creditworthiness and likelihood of repayment. </li></ul><ul><ul><li>300s (worst) to 800s (best) </li></ul></ul><ul><li>Key Factors : </li></ul><ul><ul><li>Payment history </li></ul></ul><ul><ul><li>Amounts owed </li></ul></ul><ul><ul><li>Length of credit history </li></ul></ul><ul><ul><li>Taking on new debt </li></ul></ul><ul><ul><li>Types of credit used </li></ul></ul>
  9. 9. The Credit Approval Process: The Application Decision <ul><li>The lender decides whether to accept the application and under what terms </li></ul><ul><li>Credit Agreement (or Note) – Outlines the rules governing the account. </li></ul><ul><li>Tiered Pricing – Lenders may offer lower interest rates to applicants with the highest credit scores while charging steeper rates to more-risky applicants </li></ul>
  10. 10. Building a Credit History <ul><li>Establish both a checking account and a savings account. </li></ul><ul><li>Have your telephone and other utilities billed in your name. </li></ul><ul><li>Request, acquire, and use an oil-company credit card. </li></ul><ul><li>Apply for a bank credit card. </li></ul><ul><li>Ask a bank for a small short-term cash loan. </li></ul><ul><li>Pay off student loans. </li></ul>
  11. 11. Managing Your Credit Bureau File <ul><li>Fair Credit Reporting Act (FCRA) – Requires that reports contain accurate, relevant, and recent information, and that only bona fide users be permitted to review a file for approved purposes. </li></ul>Question: Who is an approved user?
  12. 12. Managing Your Credit Bureau File (Continued) <ul><li>If you find an error or omission, you should immediately take steps to correct the information: </li></ul><ul><ul><li>Notify the credit bureau that you wish to exercise your right to a reinvestigation under FCRA. </li></ul></ul><ul><ul><li>The bureau must reinvestigate the information within 30 days. </li></ul></ul><ul><ul><li>If the information was erroneous, it must be corrected. </li></ul></ul><ul><ul><li>If the credit bureau refuses to make a correction, you may wish to provide a consumer statement. </li></ul></ul><ul><ul><li>Negative information in you file is generally not reportable after a period of seven years. </li></ul></ul>
  13. 13. Types of Consumer Credit <ul><li>Consumer Credit – Non-business debt used by consumers for expenditures other than home mortgages. </li></ul><ul><li>Installment Credit – Borrower must repay the amount owed in a specific number of equal payments, usually monthly. </li></ul><ul><li>Noninstallment Credit – Includes single-payment loans and open-ended credit. </li></ul>
  14. 14. Types of Consumer Credit and (continued) <ul><li>Open-Ended Credit (or Revolving Credit) – Credit is extended in advance of any transaction, so that the borrower does not need to reapply each time credit is desired. </li></ul><ul><li>Credit Limit – The pre-approved maximum outstanding debt allowed on the credit account by the lender. </li></ul>
  15. 15. Credit Card Accounts <ul><li>Minimum Payment – must be made each month to cover interest and a small payment on the amount owed, if the borrower revolves a balance. </li></ul><ul><li>Principal – the amount owed. </li></ul><ul><li>Default – the borrower has failed to make a payment of principal or interest when due or has not met another key requirement of a credit agreement. </li></ul>
  16. 16. Bank Credit Cards <ul><li>Bank Credit Card Account – an open-ended account at a financial institution that allows the holder to make purchases almost anywhere. </li></ul><ul><li>Cash Advance – a cash loan from a bank credit card account. </li></ul><ul><li>Convenience Checks – customers can use these checks as cash advances to make payments to others. </li></ul>
  17. 17. Bank Credit Cards (Continued) <ul><li>Balance Transfer – a payment is used to make a payment on another credit card. </li></ul><ul><li>Prestige Card – offer enhancements and require that the user possess higher credit qualifications. </li></ul><ul><li>Affinity Cards – standard bank cards with the logo of a sponsoring organization imprinted on the face of the card. </li></ul>
  18. 18. Secured Credit Cards <ul><li>Secured Credit Card (or Collateralized Credit Card) – Backed by collateral in the form of a savings account opened at the financial institution that issues the card. </li></ul>Example: Deposit $1,000 with creditor to borrow $1,000
  19. 19. Retail Credit Card Accounts <ul><li>Retail Credit Card – Allows a customer to make purchases on credit at any of the outlets of a particular retailer. </li></ul><ul><li>Often charge high interest rates (20%+) </li></ul><ul><li>Examples: stores, gasoline companies </li></ul>
  20. 20. Travel and Entertainment Cards <ul><li>Travel and Entertainment (T&E) Cards – Allow holders to make purchases at numerous businesses, but the entire balance charged must be repaid within 30 days. </li></ul><ul><li>American Express </li></ul><ul><li>Diner’s Club </li></ul><ul><li>Carte Blanche </li></ul>
  21. 21. Other Forms of Open-Ended Credit <ul><li>Personal Line of Credit – Lending arrangement that allows the borrower access to a prearranged revolving line of credit provided by the lender. </li></ul><ul><li>Home-Equity Line of Credit – Uses the equity in the borrower’s home as collateral. </li></ul><ul><li>Service Credit – Granted to consumers by utilities, physicians, dentists, and other service providers that do not require full payment when services are rendered. </li></ul>
  22. 22. Figure 6.1: Credit Card Disclosure Information
  23. 23. Teaser Rates and Default Rates <ul><li>Teaser Rate- A temporarily low (e.g., 6 month) APR designed to entice borrowers </li></ul><ul><li>Default Rate – A much higher APR that is assessed whenever a borrower fails to uphold certain rules of the account. </li></ul><ul><li>Universal Default – Occurs when a borrower is in default on one or more other debts and is, thus, considered in default on a debt that is otherwise in good standing. </li></ul>
  24. 24. Credit Card Fees <ul><li>Annual Fee- A fee levied each year just to have a credit card (usually $25 to $50+) </li></ul><ul><li>Transaction Fee - A small charge levied each time a card is used </li></ul><ul><li>Late Fee - Charge assessed if a cardholder is late making a payment </li></ul><ul><li>Bounced Check Fees - NSF check payment </li></ul><ul><li>Over-the-Limit Fees - Charge assessed if cardholder exceeds credit limit </li></ul>
  25. 25. Liability for Lost or Stolen Cards <ul><li>Protection available under the Truth in Lending Act limits a cardholder’s liability if a card is lost of stolen </li></ul><ul><li>The cardholder must notify the card issuer within 2 days of loss or theft </li></ul><ul><li>After 2 days, the maximum liability is $50 prior to notification </li></ul><ul><li>Many creditors waive the $50 fee </li></ul>
  26. 26. Figure 6.2: Sample Statement for a Revolving Charge Account
  27. 27. Credit Card Statements <ul><li>Billing Date - (Sometimes called the Closing Date or Statement Date) is the last date of the month for which any transactions are reported; this is generally the same date each month </li></ul><ul><li>Due Date- Date, specified by credit card company, of when they should receive payment </li></ul><ul><ul><li>The period between the billing date and due date is usually about 20-25 days </li></ul></ul><ul><ul><li>Watch the fine print! (Example: time of payment) </li></ul></ul>
  28. 28. Credit Statements (Continued) <ul><li>Transaction and Posting Dates - Date on which the credit card holder makes a purchase or receives a credit </li></ul><ul><li>Grace Period – Time period between the posting date of a transaction and the due date, within which any new credit card purchases made during the billing cycle will avoid finance charges. </li></ul><ul><li>Minimum Payments - To meet his/her obligations, a cardholder must make a minimum payment each month; finance charges are assessed thereafter </li></ul>
  29. 29. Correcting Errors on Your Credit Card Statement <ul><li>Take several actions when disputing an item on a billing statement: </li></ul><ul><ul><li>Send a written notice of the error to the credit card insurer. </li></ul></ul><ul><ul><li>Provide photocopies (not originals) of any necessary documentation. </li></ul></ul><ul><ul><li>Withhold payment for disputed items. </li></ul></ul><ul><ul><li>After the dispute has been settled, review your credit bureau file. </li></ul></ul>
  30. 30. Golden Rules of Credit and Credit Cards <ul><li>Protect your credit reputation just as you would guard your personal reputation. </li></ul><ul><li>Obtain copies of your credit reports every year, and challenge all errors or omissions. </li></ul><ul><li>Obtain the lowest APRs possible when opening credit accounts. If necessary, move credit card balances to lower-cost accounts. </li></ul><ul><li>Pay your credit cards off each month. </li></ul><ul><li>Always check your monthly billing statements against your receipts to ensure their accuracy. Challenge all discrepancies. </li></ul>

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