Chapter 6

1. Chapter 6 Using Credit Cards: The Role of Open Credit

2. Definitions and Examples of Credit • Credit -- receiving cash, goods, or services with an obligation to pay later. • Examples -- auto loans or personal loans • Open credit -- credit that you can use and repay at your pace so long as you pay the required minimum monthly payment. • Examples -- Credit cards or department store credit cards

3. Determining the Costs of Open Credit • The balance owed • Interest rates • Balance calculation method • Cash advance costs • The grace period • The annual fee • Additional or penalty fees

4. Interest Rates • Annual percentage rate (APR) – true simple interest rate paid over the life of the loan • Teaser rates – introductory rates used to attract new customers, some as low as 2.9% • Most credit cards compound interest

5. Balance Calculation Methods • Average daily balance, most common • Including new purchases • Excluding new purchases • Two-cycle • Previous balance – most expensive • Adjusted balance – least expensive

6. Buying Money: The Cash Advance • An extremely expensive way to borrow • Interest begins immediately and may be at a higher rate than for purchases • Usually there is a “cash advance fee” of 2% to 4% of the amount advanced • Some cards require payment of the purchase balance before payment of the cash advance balance

7. The Grace Period • Normally 20 to 25 days, excluding cash advances • Doesn’t apply if you carry a balance • With no balance, you could avoid paying for a purchase for nearly 2 months • Not all credit cards offer a grace period

8. The Annual Fee • Range from $0 to $100 (American Express charges $300 for their Platinum card.) • 70%of the 25 biggest card issuers don’t charge an annual fee. • Merchant’s discount fee -- charged to merchants, typically 1.5% to 5.0% of the purchase amount

9. Additional Fees • Cash advance fee • Late fee • Over-the-limit fee • Penalty rates • Be alert-- “Important Notice of Change of Terms”

10. The Pros of Credit Cards • Convenience or ease of shopping • Emergency use • Consume and use before the purchase is fully paid for • Bill consolidation • Can be used in anticipation of price increases

11. The Pros of Credit Cards (cont’d) • Interest-free credit • Make reservations • Use as identification • A source of free benefits

12. The Cons of Credit Cards • It’s too easy to lose control of spending. • It’s, in general, an expensive way to borrow money. • It’s an obligation of future income--you’ll have less to spend in the future.

13. Choosing a Source of Open Credit • Bank credit cards • Bank card variations • Travel and entertainment (T&E) cards • Single-purpose cards • Traditional charge account

14. Bank Credit Cards • Issued by banks, may charge annual fees • Visa and MasterCard franchise credit authorization systems • Offer a variety of benefits • May be “co-branded” or “rebate cards” • Discover card is different

15. Bank Card Variations • Premium or prestige cards • Affinity cards • Secured credit cards

16. Other Sources of Open Credit • Travel and entertainment cards require full payment monthly. • Single-purpose cards may or may not offer revolving credit, but usually have no annual fee. • Traditional charge accounts offer convenience of payment and service before billing.

17. Know Your Credit Card Philosophy • Credit user • Low APR • Convenience user • Low annual fee • Long, interest-free grace period • Free benefits • Convenience and credit user • Balance interest rate and annual fee for the lowest total cost

18. Getting a Credit Card: The Five Cs of Credit • Character • Capacity • Capital • Collateral • Conditions

19. Credit Evaluation: The Credit Bureau • The credit bureau: collects and reports information from creditors, public court records, and the consumer. • Determining your creditworthiness -- credit scoring determines if you qualify for credit and the interest rate offered.

20. National Credit Reporting Bureaus • Equifax Credit Information Services • www.equifax.com • Experian • www.experian.com • Trans Union • www.tuc.com

21. Information on Your Credit Report • Personal demographics • age • Social Security number • addresses • Employment history • Credit history

22. Information on Your Credit Report (cont’d) • Criminal convictions and judgments • Previous two years of inquiries

23. Factors That Determine Creditworthiness • Annual income • Length of time at current residence • Length of time at current job • Type of residence • Age • Employment

24. Factors That Determine Creditworthiness (cont’d) • Number of bank accounts • Number of credit cards • If you have a telephone • Credit history • Note: All the factors provide information historically linked with individuals that are good credit risks.

25. Consumer Credit Rights • Your rights and the credit bureau • If your credit card application is rejected • Resolving billing errors

26. Your Rights With the Credit Bureau • 70% of Americans have at least one negative remark on their credit report and almost 50% of reports contain incorrect or obsolete information. • Review your report and report inaccuracies for investigation. • If applicable, add a statement.

27. If Your Application Is Rejected • Apply for a card with another institution • Find out WHY you were rejected. Then, take steps to correct the problem.

28. Resolving Billing Errors • Fair Credit Billing Act of 1975 • You may withhold payment for a disputed charge. • You must notify the card issuer within 60 days of the statement date if there is a problem.

29. Resolving Billing Errors (cont’d) • Send a description, including amount in dispute, to the billing inquiry address. • You should receive notice from the card issuer that an investigation is under way within 30 days. • The card issuer has 90 days or two billing cycles to resolve the dispute. • You may appeal any unfavorable outcome.

30. Resolving Billing Errors (cont’d) • You may sue the card issuer in small claims court. • Note: During any appeal the card issuer has the right to report your account as delinquent. This could have an adverse effect on your credit rating.

31. Consumer Credit Laws • Truth in Lending Act of 1968 • Truth in Lending Act (amended 1971) • Truth in Lending Act (amended 1982) • Fair Credit Billing Act of 1975

32. Consumer Credit Laws (cont’d) • Equal Credit Opportunity Act of 1975 • Equal Credit Opportunity Act (amended 1977) • Fair Debt Collection Practices Act of 1978

33. Consumer Credit Laws (cont’d) • Fair Credit Reporting Act of 1971 • Fair Credit Reporting Reform Act of 1996

34. Managing Your Credit Cards and Open Credit • Reducing your balance • Protecting against fraud • Trouble signs in credit card spending • Controlling spending • If you can’t pay your credit card bills

35. Reducing Your Balance • Pay more than the 2% to 3% minimum monthly payment • Find a card that offers a lower interest rate

36. Protecting Against Fraud • Save your credit card receipts. • Compare them to your statement. • Destroy old receipts. • Use caution when giving out your credit card number. • Never leave a store without your card.

37. Trouble Signs in Credit Card Spending • Take the Credit Card Habits Quiz. • Evaluate your credit card usage.

38. Controlling Your Credit Card Spending • Set goals • Develop a budget • Track your credit spending • Record all credit purchases in a ledger

39. What to Do If You Can’t Pay Your Credit Card Bills • “Act your wage!!” • Make sure you have the least expensive credit card. • Consider using savings, if possible, to pay off debts. • Consolidate your debts with a home equity loan or secured personal loan.

40. Summary • Two types of open credit • revolving credit lines and credit cards, including bank, T&E, and single purpose cards • Factors that determine the cost of credit • interest rate • balance calculation method • grace period • annual fees • other fees

41. Advantages of using open credit source of interest-free credit making reservations use as identification source of free benefits Disadvantages of using open credit easy to lose control of spending an expensive way to borrow money you’ll have less spendable income in the future Summary (cont’d)

42. Summary (cont’d) • The “five C’s” of creditworthiness • character, capacity, capital, collateral, and conditions • National credit reporting bureaus • Experian, Equifax, and Trans Union • Methods of calculating finance charges • average daily balance, previous balance, and adjusted balance

43. Summary (cont’d) • Monitor credit report information • Control credit spending • Recognize and avoid credit trouble • Understand credit consumer protection laws