Learning Objectives (part 1 of 3)
Discuss the pros and cons of paying with cash versus credit
Describe the various features that different cards have to offer
Analyze whether the card with the cheaper rate is always the better deal
Learning Objectives (part 2 of 3)
Describe how debit cards and secured credit cards
work List the protections a consumer has with
credit cards Compute whether a home equity line of
credit would be beneficial Compute how large of a home equity line
of credit could be obtained
Learning Objectives (part 3 of 3)
Describe the difference between a credit counselor and a credit "doctor"
Describe what a FICO score means and how it is computed
Discuss the role of the credit bureaus in the credit granting process
Types of Credit Cards
Bank Credit Cards Visa, Mastercard, Discover
Travel & Entertainment Cards American Express, Diners
Store Charge Cards Macy’s, Neiman Marcus
Pros of Using Credit Cards Fair Credit Billing Act gives several
protections Limited liability if lost or stolen
Especially if reported promptly Cash is usually unrecoverable
One month free float
Cons of Using Credit Cards Painless ability to pay may induce
one to buy more than can be paid for later
Interest rates can run as hign as 19 percent
Various fees can really be exhorbitant
How Banks Profit from Credit Cards Charge vendor for processing the
transaction Charge vendor for verifying a
transaction Charge interest Charge user annual fee and other
fees
Features of bank credit cards (part 1 of 2) Annual fee (sometimes negotiable) Teaser rate Differential rates on advances and
unpaid balances Over the limit fees Late payment fees
Features of bank credit cards (part 2 of 2) Fee for paying over the phone Transaction fee for a cash advance Lack of use fee How balance is computed on which
interest is paid Average daily balance, Previous
balance, Adjusted balance Length of grace period
Which card(s) to obtain? (part 1 of 2)
Depends on style of use If carry a balance due on a regular
basis, interest rate critical If incur fees, fee structure critical
Which card(s) to obtain?(part 2 of 2)
Value of special benefits Frequent fly miles Cash rebates Special discounts at particular stores Affinity cards
Strategy: Decide what features want and then seek best fit with search on the Internet
Debit Cards Online:
ATM card Need Pin number
Offline: like a check Direct charge against checking
account Receipt is like a cancelled check Takes a few days for transaction to be
processed
Debit vs. Credit Card Credit card
Provides “float” Debit card:
Cash substitute Spending constraint: Won’t clear if
balances aren’t in checking account Great for college age children
Secured Cards Prepay for credit limit Option for people with poor credit
records Critical for making reservations at
hotels, etc.
Protections with Credit Cards Right to cancel Limit of $50 if card lost or stolen Covered by Fair Credit Reporting
Act Right to refuse payment to
merchants under certain conditions
Debt Consolidation Loans Attractive if can achieve at least
one of the following: Lower effective interest rates Smaller monthly payments Tax deductibility of interest (if home
equity or HELOC) Disadvantage: Can be locked into
payment schedule for many years
Maximum size of home loan Start with appraised value of home Multiply this by the standard loan to
value ratio of 80 percent Subtract all existing mortgage
balances What is left over is the typical
maximum amount for a new home equity loan or HELOC
Credit Doctor vs. Credit Counselor Credit doctor:
Claims to resurrect your credit Schemes are usually expensive and
sometimes fraudulent Credit Counselor:
Focuses on getting spending under control
Evaluates options such as debt cons. loans
FICO Score Score used by lenders to
determine your credit worthiness Key elements of credit decision:
Character Capacity Capital Collateral
Tips for improving FICO Score Stick at the same job Stick at the same address Own rather than rent Have a reasonable number of
credit cards Keep oldest credit accounts open Avoid having people run credit
checks on you