Using Credit Cards:

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 own 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
• Doesnt apply if you carry a balance
• Beginning 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 dont charge
  an annual fee.
  
• Merchants 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
  
• The Schumer Box

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 (contd)

• Interest-free credit
• Make reservations
• Use as identification
• A source of free benefits, such as airline tickets

12
The Cons of Credit Cards

• Its too easy to lose control of spending.
• In general, its an expensive way to borrow
  money.
  
• Its an obligation of future income youll have
  less to spend in the future.

13
Choosing a Source of Open Credit

• Bank credit cards
• Bank card variations
• Travel and entertainment (TE) 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
• Ex. Platinum cards
• Affinity cards
• Ex. NRA or MADD
• Secured credit cards

16
Other Sources of Open Credit

• Travel and entertainment cards require full
  payment monthly.
  
• American Express or Diners Club
• Single-purpose cards may or may not offer
  revolving credit, but usually have no annual
  fee.
  
• Chevron, Texaco, or Sears
• 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
• Note See Table 6.2 in text for additional
  Information

21
Information on Your Credit Report

• Personal demographics
• Age
• Social Security number
• Addresses
• Employment history
• Credit history

22
Information on Your Credit Report (contd)

• 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 (contd)

• 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 (contd)

• Send a description, including amount in dispute,
  to the billing inquiry address.
  
• You should receive notice from the card issuer
  that an investigation is underway 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 (contd)

• 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 (contd)

• Equal Credit Opportunity Act of 1975
• Equal Credit Opportunity Act (amended 1977)
• Fair Debt Collection Practices Act of 1978

33
Consumer Credit Laws (contd)

• 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 cant 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, even though your liability for fraudulent
  use is limited to 50.
  
• Never leave a store without your card.

37
Trouble Signs in Credit Card Spending

• Complete the Checklist 6.2 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 Cant 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, TE, and single purpose cards
  
• Factors that determine the cost of credit
• Interest rate
• Balance calculation method
• Grace period
• Annual fees
• Other fees

41
Summary (contd)

• 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
• Youll have less spendable income in the future

42
Summary (contd)

• The five Cs 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 (contd)

• Monitor credit report information
• Control credit spending
• Recognize and avoid credit trouble
• Understand credit consumer protection laws