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Chapter 6 – Credit Cards

Extremely important but deceptively expensive

Revolving – borrow, repay then reborrowMinimum repayment and maximum outstandings

Cost factors: Interest rates, balance calculation, grace periods,

annual fees and other fees and penalties

APR must be disclosed; fixed or floating rates

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Credit Card Definition

“A means for buying something you don’t need at a price you cannot afford with money you don’t have.”

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Credit Card Fees

Annual membership fee Missed payments

Cash advance Bounced checks

Over limit fees Merchant fees

Problem – hard to find feesOften buried in statement stuffers

Grace period – 20 to 25 days but ….

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Cash Advances and ATM's

If charge ATM transaction against credit card = Cash Advance = LoanDebit transaction – money comes from

checking account

Cash Advances: interest rates higher than on purchases; interest starts immediately

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When to Use, When to Avoid

Pros Cons

Convenience Loss of spending control

Emergency Very high cost

Online purchases

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Who Likes What

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Types of Cards

Bank and other cards – Visa and Master CardFranchised – provide authorization, accounting,

statements, advertising

Credit – extended by issuing banks

Variations – Premium/prestige (platinum), affinity (Sierra Club), secured, T&E (non-revolving) and single purpose (stores)

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Credit Bureaus

• Organizations maintaining credit records– Does not make credit decisions; provides info

• Creditworthiness – Do you get credit? Cost?

• Understand credit scoring -required reading

• You also need to obtain your credit report and score for this class – see instructions.

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Credit Scoring

• Credit file and score used to make decisions about loans, interest rates, sometimes employment.

• FICO score (Fair Isaac) between 300 to 850

• Inaccurate info can hurt so verify– Activity you did not initiate may indicate

identity theft

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Score Based On

• Payment history – most important

• Amounts owed

• Length of credit history

• New credit requests

• Types of credit used

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FICO Scores & Loan Rates

500- 560- 620- 675- 700- 720- 559 619 674 699 719 850

30 YearMortgage 9.3% 8.5% 7.4% 6.3% 5.7% 5.6%

48 Month New Car 15.9 14.7 10.5 8.0 5.9 5.1Monthly payment on $500,000 Mortgage

@ 9.3% = $4,132; @5.6% = $2,870Lifetime savings = $454,178

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Credit – More than a ScoreDiffers by Lender and Loan Type

• Ability to pay– Income, time employed, other debt

• Assets and Liabilities

• Personal info: age, schooling, history

• The Five C’s– Character, Capacity, Capital (assets and

investments), Collateral and Conditions

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Identity Theft

• When someone steals your identity and impersonates you to open credit accounts

• One of the fastest growing crimes

• Don’t know when this happens until collector calls or you review your credit report

• Devastating – financially and emotionally

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Credit Bureaus and Your Rights

• Fair Credit Reporting Act (1971)– To ensure accuracy– 70% have negative remarks; 50% inaccurate– You should check every two years

• If inaccurate, bureau must correct

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Rejected ?

• Find out why – just have to ask– Worth the effort. If records inaccurate must

correct.

• Credit repair services – too often fraudulent

• Billing errors– Must notify creditor within 60 days of

statement; lender must resolve within 90 days

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Consumer Credit LawsSomething You Should Know

• Truth in Lending Acts (3)

• Fair Credit Billing Act

• Fair Debt Collection Practices

• Fair Credit Reporting

• Equal Credit Opportunity Acts (2)

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Controlling and Managing Credit

• Reduce balances – how long to pay off?• Protect against fraud

– Report loss immediately• Not responsible if loss reported before use; otherwise $50

– Don't make account number available

• Trouble signs - see page 187• Use card responsibly so it doesn't get out of hand

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