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Chapter 6 – Credit Cards

Chapter 6 – Credit Cards. Extremely important but deceptively expensive Revolving – borrow, repay then reborrow Minimum repayment and maximum outstandings Cost factors: Interest rates, balance calculation, grace periods, annual fees and other fees and penalties

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Chapter 6 – Credit Cards

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  1. Chapter 6 – Credit Cards Extremely important but deceptively expensive Revolving – borrow, repay then reborrow Minimum 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

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

  3. Credit Card Fees Annual membership fee Missed payments Cash advance Bounced checks Over limit fees Merchant fees Problem – hard to find fees Often buried in statement stuffers Grace period – 20 to 25 days but ….

  4. Cash Advances and ATM's If charge ATM transaction against credit card = Cash Advance = Loan Debit transaction – money comes from checking account Cash Advances: interest rates higher than on purchases; interest starts immediately

  5. When to Use, When to Avoid ProsCons Convenience Loss of spending control Emergency Very high cost Online purchases

  6. Who Likes What

  7. Types of Cards Bank and other cards – Visa and Master Card Franchised – 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)

  8. 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.

  9. 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

  10. Score Based On • Payment history – most important • Amounts owed • Length of credit history • New credit requests • Types of credit used

  11. FICO Scores & Loan Rates 500- 560- 620- 675- 700- 720- 559 619 674 699719850 30 Year Mortgage 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 5.1 Monthly payment on $500,000 Mortgage @ 9.3% = $4,132; @5.6% = $2,870 Lifetime savings = $454,178

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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)

  17. 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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