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Chapter Six Credit Use and Credit Cards
Learning Objectives <ul><li>Explain reasons for and against using credit. </li></ul><ul><li>Describe how people obtain and...
Learning Objectives (continued) <ul><li>Recognize the impact of common (but not always beneficial) aspects of credit card ...
Reasons for and Against Using Credit <ul><li>Credit – any situation in which goods, services, or money are received in exc...
Why People Use Credit <ul><li>For Convenience </li></ul><ul><li>For Emergencies </li></ul><ul><li>For Identification </li>...
Why People Use Credit (continued) <ul><li>To Consolidate Debts </li></ul><ul><li>For Protection Against Rip-Offs and Fraud...
The Downside of Credit Usage <ul><li>Interest is costly </li></ul><ul><li>It is tempting to overspend </li></ul><ul><li>Us...
Interest is Costly <ul><li>Interest – the price of credit. </li></ul><ul><li>Finance Charge – the total dollar amount paid...
The Credit Approval Process: Applying for Credit <ul><li>Credit Application – a form or interview that requests informatio...
The Credit Approval Process: The Credit Investigation <ul><li>Credit Investigation – conducted by the lender and used to a...
The Credit Approval Process: The Credit Investigation (continued) <ul><li>Credit Scoring (or Risk Scoring) – a statistical...
About FICO Scores <ul><li>FICO Scores – the factors that are used in them are shared openly by Fair, Isaac and Company on ...
The Credit Approval Process:  The Application Decision <ul><li>The lender decides whether to accept the application and un...
Building a Credit History <ul><li>Establish both a checking account and a savings account. </li></ul><ul><li>Have your tel...
Building a Credit History (continued) <ul><li>Ask a bank for a small short-term cash loan. </li></ul><ul><li>Pay off stude...
Managing Your Credit Bureau File <ul><li>Fair Credit Reporting Act (FCRA) – requires that reports contain accurate, releva...
Managing Your Credit Bureau File (continued) <ul><li>If you find an error or omission, you should immediately take steps t...
Types of Consumer Credit <ul><li>Consumer Credit – nonbusiness debt used by consumers for expenditures other than home mor...
Types of Consumer Credit and (continued) <ul><li>Open-Ended Credit (or Revolving Credit) – credit is extended in advance o...
Credit Card Accounts <ul><li>Minimum Payment – must be made each month to cover interest and a small payment on the amount...
Bank Credit Cards <ul><li>Bank Credit Card Account – an open-ended account at a financial institution that allows the hold...
Bank Credit Cards (continued) <ul><li>Balance Transfer – a payment is used to make a payment on another credit card. </li>...
Secured Credit Cards <ul><li>Secured Credit Card (or Collateralized Credit Card) – backed by collateral in the form of a s...
Retail Credit Card Accounts <ul><li>Retail Credit Card – allows a customer to make purchases on credit at any of the outle...
Travel and Entertainment Cards <ul><li>Travel and Entertainment (T&E) Cards – allow holders to make purchases at numerous ...
Other Forms of Open-Ended Credit <ul><li>Personal Line of Credit – a lending arrangement that allows the borrower access t...
Figure 6.1: Credit Card Disclosure Information
Figure 6.1: Credit Card Disclosure Information (continued)
Teaser Rates and Default Rates <ul><li>Default Rate – a much higher APR that is assessed whenever a borrower fails to upho...
Preapproved Credit Card Offers <ul><li>Some credit card companies ‘prescreen’ people based on certain tests of creditworth...
Annual and Transaction Fees <ul><li>Annual fee- a fee levied each year (usually $25 or $50) </li></ul><ul><li>Transaction ...
Liability for Lost or Stolen Cards <ul><li>Protection available under the Truth in Lending Act that limits a cardholder’s ...
Late-Payment, Bounced Check, and Over-the-Limit Fees <ul><li>Late payment charges of $50 are assessed if the cardholder is...
Credit Card Insurance <ul><li>Credit Life Insurance – pays the unpaid balance of a loan, to the lender, in the event of th...
Managing Credit Cards Wisely
Figure 6.2: Sample Statement for a Revolving Charge Account
Credit Statements  <ul><li>Billing Date- (sometimes called the closing date or statement date) is the last date of the mon...
Credit Statements (continued) <ul><li>Transaction and Posting Dates- date on which the credit card holder makes a purchase...
Credit Statements (continued) <ul><li>Minimum Payments- to meet his/her obligations the cardholder must make a minimum pay...
Correcting Errors on Your Credit Card Statement <ul><li>Chargeback – the amount of the transaction is charged back to the ...
Correcting Errors on Your Credit Card Statement (continued) <ul><li>You should take several actions when disputing an item...
Computation of Finance Charges <ul><li>Periodic Rate – the APR for a charge account divided by the number of billing cycle...
Golden Rules of Credit Use and Credit Cards <ul><li>Protect your credit reputation just as you would guard your personal r...
Golden Rules of Credit Use and Credit Cards (continued) <ul><li>Pay your credit cards off each month.  Never make convenie...
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  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 obtain and build a good credit reputation. </li></ul><ul><li>Compare and contrast the types of consumer credit and credit card accounts. </li></ul>
  3. 3. Learning Objectives (continued) <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>
  4. 4. Reasons for and Against Using 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>
  5. 5. 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>
  6. 6. Why People Use Credit (continued) <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>
  7. 7. The Downside of Credit Usage <ul><li>Interest is costly </li></ul><ul><li>It is tempting to overspend </li></ul><ul><li>Use of credit reduces financial flexibility </li></ul>
  8. 8. 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 as a whole. </li></ul>
  9. 9. The Credit Approval Process: Applying for Credit <ul><li>Credit Application – a form or interview that requests information that sheds light on your ability and willingness to repay debts. </li></ul>
  10. 10. The Credit Approval Process: The Credit Investigation <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 – 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>
  11. 11. The Credit Approval Process: The Credit Investigation (continued) <ul><li>Credit Scoring (or Risk Scoring) – a statistical measure used to rate applicants on the basis of various factors deemed relevant to creditworthiness and the likelihood of repayment. </li></ul>
  12. 12. About FICO Scores <ul><li>FICO Scores – the factors that are used in them are shared openly by Fair, Isaac and Company on the company’s website: </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 more debt and </li></ul></ul><ul><ul><li>types of credit used. </li></ul></ul>
  13. 13. 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>
  14. 14. 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>
  15. 15. Building a Credit History (continued) <ul><li>Ask a bank for a small short-term cash loan. </li></ul><ul><li>Pay off student loans. </li></ul>
  16. 16. 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>
  17. 17. 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>
  18. 18. Types of Consumer Credit <ul><li>Consumer Credit – nonbusiness debt used by consumers for expenditures other than home mortgages. </li></ul><ul><li>Installment Credit – the 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>
  19. 19. 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>
  20. 20. 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 carries a balance from month to month. </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>
  21. 21. 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>
  22. 22. 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>
  23. 23. 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>
  24. 24. 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 or retail chain. </li></ul>
  25. 25. 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>
  26. 26. Other Forms of Open-Ended Credit <ul><li>Personal Line of Credit – a 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 public utilities, physicians, dentists, and other service providers that do not require full payment when services are rendered. </li></ul>
  27. 27. Figure 6.1: Credit Card Disclosure Information
  28. 28. Figure 6.1: Credit Card Disclosure Information (continued)
  29. 29. Teaser Rates and Default Rates <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 loans or debts and is, thus, considered in default on a debt that is otherwise in good standing. </li></ul>
  30. 30. Preapproved Credit Card Offers <ul><li>Some credit card companies ‘prescreen’ people based on certain tests of creditworthiness </li></ul><ul><li>Then they send applications or notices to these people </li></ul>
  31. 31. Annual and Transaction Fees <ul><li>Annual fee- a fee levied each year (usually $25 or $50) </li></ul><ul><li>Transaction fee- a small charge levied each time a card is used </li></ul><ul><li>This causes low-cost cards to sometimes become high-cost cards once all of the fees are assessed </li></ul>
  32. 32. Liability for Lost or Stolen Cards <ul><li>Protection available under the Truth in Lending Act that 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>
  33. 33. Late-Payment, Bounced Check, and Over-the-Limit Fees <ul><li>Late payment charges of $50 are assessed if the cardholder is late in payment </li></ul><ul><li>Bounced check fees are usually $50 </li></ul><ul><li>Over-the-limit fees are usually around $20-$50 </li></ul>
  34. 34. Credit Card Insurance <ul><li>Credit Life Insurance – pays the unpaid balance of a loan, to the lender, in the event of the borrower’s death. </li></ul><ul><li>Credit Disability Insurance – repays the outstanding loan balance if the borrower becomes disabled. </li></ul><ul><li>Credit Unemployment Insurance </li></ul>
  35. 35. Managing Credit Cards Wisely
  36. 36. Figure 6.2: Sample Statement for a Revolving Charge Account
  37. 37. Credit 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 the 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>
  38. 38. 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 – the 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>
  39. 39. Credit Statements (continued) <ul><li>Minimum Payments- to meet his/her obligations the cardholder must make a minimum payment each month; finance charges are assessed after </li></ul><ul><li>Credit for Merchandise Returns and Errors- if the cardholder returns an item or a billing error has been made, the credit appears on the next month’s bill </li></ul>
  40. 40. Correcting Errors on Your Credit Card Statement <ul><li>Chargeback – the amount of the transaction is charged back to the business where the transaction originated. </li></ul><ul><li>Goods and Services Dispute – asserts that the charges were for poor-quality goods and services and you made a good-faith effort to try to correct the problem with the merchant. </li></ul><ul><li>Dunning Letters – notices that make insistent demands for repayment. </li></ul>
  41. 41. Correcting Errors on Your Credit Card Statement (continued) <ul><li>You should 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>
  42. 42. Computation of Finance Charges <ul><li>Periodic Rate – the APR for a charge account divided by the number of billing cycles per year. </li></ul><ul><li>Average Daily Balance – the sum of the outstanding balances owed each day during the billing period divided by the number of days in the period. </li></ul>
  43. 43. Golden Rules of Credit Use 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 bureau reports every year, and challenge all errors or omissions on them. </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>
  44. 44. Golden Rules of Credit Use and Credit Cards (continued) <ul><li>Pay your credit cards off each month. Never make convenience purchases on bank credit cards on which you carry a balance. </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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