Dangers of Credit Cards

1. Dangers of Credit Cards Created by Alexander Antipov

2. My story with a credit card • Got my first credit card during Sophomore year with $1000 credit line • Didn’t know much about interest or how credit cards worked, at the time felt like free money • Had some expenses, tuition, car trouble, books, etc. • Next thing I knew, I went over my limit • Credit card company increased my limit, interest, and monthly payment, and charged me for going over limit • Now my balance was around $1400 with high monthly payments and much higher interest rate then I started with

3. My story with a credit card • I slowed down the spending but still managed to miss a payment or two for which they charged me again • I went over limit again and they increased the limit again and again with all the charges attached • In a couple of years I accumulated a debt of around $7000, this includes the interest, and any other charges • The actual money I spent was around $4000 • Now you see how credit companies make their money

4. Credit Card Terminology • Annual Fee An annual (yearly) fee charged by a credit card company each year for use of a credit card • Annual Percentage Rate (APR) The interest rate charged on credit card balances expressed in a standardized, annualized way. This rate is applied each month that an outstanding balance is present. • Card Member Agreement The card member agreement provides the terms and conditions of a credit card account. • Credit Line (Credit Limit) The amount of money that can be charged to a credit card account. A credit line on which little has been borrowed -- leads to a higher credit score. • Due Date Credit card bills have a due date. If your credit card payment does not arrive -- and get posted -- by the due date, you will be charged a late fee. • Finance Charge A finance charge is the total cost of borrowing, including interest and fees, expressed in a dollar amount.

5. Credit Card Terminology • Fixed Rate (Fixed APR) An annual percentage rate that does not change throughout the year, unlike an introductory APR that changes after a specific period of time • Grace Period The grace period is the time during which you are allowed to pay your credit card bill without having to pay interest. • Minimum Finance Charge You will be charged a minimum finance charge if the calculated amount of your finance charge is less than the minimum finance charge set by your credit card company for a billing cycle. • Minimum Payment The lowest amount of money that you are required to pay on your credit card statement each month. • Over The Limit Fee A fee charged when your balance goes over your credit limit. • Secured Credit Card Secured credit cards are those that require collateral (property, such as a house, car or deposit of money) for approval . Can be dangerous if used without caution.

6. Credit Card Terminology • Terms and Conditions Common name for the document in which credit card issuers describe in detail their practices. • Universal Default Universal default is a common practice among credit card issuers that allows them to increase cardholders' interest rates for any change in risk profile with any lender. • Unsecured Credit Card The most common type of credit cards, they are not secured by collateral. • Variable Interest Rate With variable-rate cards, the APR changes when interest rates or other economic indicators change. Also known as a floating rate.

7. Credit Card Dangers • Credit cards are a disease! • Starts out with you putting dinner or things from Wal-Mart onto your credit card • You pay your months balance in full for month or couple of months • Next thing you know you are charging bigger items onto your credit account and all of a sudden your car breaks down! • You pay for the card in cash but at the end of the month realize you’ve got no money for that credit card bill so you pay half • Now your interest rate is not 0% but around 18% or worse • Month after month it gets harder for you to pay your balance and you’re officially in debt

8. Credit Card Dangers Facts Profits or Losses at Top 10 U.S. Credit Card Issuers in 20081. Chase: $780 million profit 2. Bank of America: $520 million profit3. Citi: $530 million loss4. American Express: $850 million profit5. Capital One: $1.00 billion profit6. Discover: $710 million profit7. Wells Fargo: $990 million profit8. HSBC: $520 million profit9. US Bank: $1.07 billion profit10. USAA: Not listed(Source: Nilson Report, March 2009) 93 % of credit cards allowed the issuer to raise any interest rate at any time by changing the account agreement. (Source: Pew Safe Credit Cards Project, March 2009) In 2006, there were nearly 1.5 billion credit cards in use in the U.S. with a population of 300 million. A stack of all those credit cards would reach more than 70 miles into space -- and be almost as tall as 13 Mount Everests. (Source: NY Times, Feb. 23, 2009) The average credit card indebted young adult household now spends nearly 24 percent of its income on debt payments. (Source: "Generation Broke: Growth of Debt Among Young Americans")

9. Hidden Credit Card Dangers • Universal Default Penalties • Card issuers regularly check their customers' credit reports for late payments on any of their bills • Teaser Rates • A lot of times those low interest rates are simply introductory rates that last for a few months and then jump to 20%. • Shrinking Grace Periods • Historically, grace periods -- the time during which your transactions don't accrue interest -- were 30 days long. They now average 23 days. • Two-Cycle Billing • While most card issuers use the standard one-month method to calculate interest charges, some use a method that calculates interest on two previous months' balances.

10. Hidden Credit Card Dangers • Inactivity Charges • Keeping your card in your wallet could incur a hefty fee, as much as $15 if you haven't swiped your card in six months, but charges may be incurred for shorter intervals. • Late Payment Fees • The national average is $29. MBNA (one of the largest issuers of credit cards), Bank of America and Providian are among the steepest chargers. Their late-paying customers get squeezed $39, according to Consumer Action. • Over-Limit Fees • Exceed your credit limit by even one cent and you'll be hit with over-limit fees of $25 to $39. And don't forget -- charges such as a $39 late fee can then trigger a $39 over-limit fee. • Balance Transfer Fees • It's the big tease: A rock-bottom introductory rate to transfer your balance, but that low rate may come with a steep transaction fee, 3 to 5 percent, for transferring your balance to their card, which means transferring $1,000 at 4 percent will cost you $40. .

11. Hidden Credit Card Dangers • Payment Allocation • Cash advances carry a much higher interest rate. If you use your credit card for purchases and cash advances, the credit company will apply your payment to charges with lower interest first. • Stay Clear of “Checks” • Don’t be tempted to use the “free” checks the credit card company sends you, they often have high APRs associated with them and this could put you in even more of a financial bind. • Stay clear of RFID credit cards • When getting a credit card make sure to get one that is not “express pay” “pay pass” or “zip”: the ones which doesn’t have to swiped

12. How to chose a credit card Source: Sallie Mae, "How Undergraduate Students Use Credit Cards," April 2009

13. The 8 Step Program • Know that several kinds of credit cards are available. There are travel and entertainment cards such as Diners Club card, bank credit cards such as Citibank and Standard Chartered and retail stores card such as Macy’s and Mobil. Compare their features before choosing one. • Think about how you will use your credit card. If you are sometimes tight on bank balance and may not be able to pay your credit card bills in full every month but instead paying only minimum amount, you will want to choose a card with a low interest rate. If you expect to use your card to get cash advances, choose a card with a lower interest rate as well as lower fees on cash advances.

14. The 8 Step Program • Verify the APR (Annual Percentage Rate) and the periodic rate for purchases, cash advance and balance transfers. See whether or not the APR is worth choosing by comparing it with the monthly rate schemes. • Ask if there are interest free or grace periods and whether they're grouped with the cash advance plans. Most grace periods last 30days, but some are less. • Figure out whether a monthly payment or periodic payment plan suits you. If your purchases tend to be heavy, the periodic plan might be better.

15. The 8 Step Program • Find out whether the rate or interest (APR) is fixed or variable. If it is variable, make sure to check out the range of variation and go for the fixed if your purchases tend to be moderate. Variable is calculated based on Treasury bill rate , Federal funds rate or Federal Reserve discount rate. • See whether the card you want to opt for is nationally and regionally acceptable or will facilitate purchases only in some specific store or state. • Confirm whether they have attractive packages with certain levels of credit such as travel and accident insurances, guarantees or warranties, cash discounts combined with credit card purchases.

16. Instant Approval for Students • Show you can save • Talk to the financial institution in person • Don't worry about rejection • Ask someone to co-sign

17. Getting out of Debt • Resolve to spend less than you make • Distinguish between Bad Debt and OK Debt • OK Debt has an interest rate well under 10% • Pick a winner • Gather the latest bills from all Bad Debt accounts • Pick the highest interest rate account and: Attack! • Ask for a lower interest rate • Be sensible • Commiserate with others  • Dance!

18. Useful Links • www.creditcardassist.com • www.cardratings.com • www.federalreserve.gov/Pubs/shop/surveyapr.htm#survey • www.pueblo.gsa.gov/cic_text/money/creditscores/your.htm • www.helpwithmybank.gov/faqs/credit_cards.html • www.scambusters.org/CreditCardFraud.html • www.zug.com/pranks/credit/

19. Summary • Don’t let the credit card companies treat you like a sucker! • If you don’t have a credit card, follow the 8 step program to get a card and use it for around 5 times for medium purchases for which you have money • Buy a fridge for the dorm with a credit card, then go home and put the the cost of the fridge in cash into an envelope and seal it • A week later or so pay the credit card off in full • DON’T SPEND WHAT YOU DON’T HAVE! • DON’T LET THE CREDIT CARD COMPANY MAKE MONEY ON YOU!!

20. QUESTIONS