Consumers and credit cards: A credit cards: A review of the ...
Chapter 6 – Credit Cards
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Transcript of Chapter 6 – Credit Cards
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Chapter 6 – Credit Cards
Extremely important but deceptively expensive
Revolving – borrow, repay then reborrowMinimum 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
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Credit Card Definition
“A means for buying something you don’t need at a price you cannot afford with money you don’t have.”
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Credit Card Fees
Annual membership fee Missed payments
Cash advance Bounced checks
Over limit fees Merchant fees
Problem – hard to find feesOften buried in statement stuffers
Grace period – 20 to 25 days but ….
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Cash Advances and ATM's
If charge ATM transaction against credit card = Cash Advance = LoanDebit transaction – money comes from
checking account
Cash Advances: interest rates higher than on purchases; interest starts immediately
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When to Use, When to Avoid
Pros Cons
Convenience Loss of spending control
Emergency Very high cost
Online purchases
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Who Likes What
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Types of Cards
Bank and other cards – Visa and Master CardFranchised – 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)
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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.
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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
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Score Based On
• Payment history – most important
• Amounts owed
• Length of credit history
• New credit requests
• Types of credit used
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FICO Scores & Loan Rates
500- 560- 620- 675- 700- 720- 559 619 674 699 719 850
30 YearMortgage 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 5.1Monthly payment on $500,000 Mortgage
@ 9.3% = $4,132; @5.6% = $2,870Lifetime savings = $454,178
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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
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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
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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
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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
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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)
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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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