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Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
Credit Cards
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Credit Cards

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Learn all about using credit cards.

Learn all about using credit cards.

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

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