Credit Cards 101

1
Credit Cards 101
2
Types of Credit

• Single Payment Items or service are paid for in
  a single payment, within a given time period.
• Usually does not carry interest
• Utility companies and some retail businesses
• Installment Credit Merchandise and services
  are paid for in two or more regularly scheduled
  payments of a set amount
• Interest is charged
• Car loans, appliance dealers

3
Types of Credit (contd)

• Revolving Credit Many items can be bought using
  this plan. Repayment is made at regular time
  intervals for any amount at or above the minimum
  required amount
• Interest is charged on the outstanding balance
• Issued by retail stores and most financial
  institutions
• AKA credit cards

4
Types of Credit (contd)

• Secured credit the amount of credit is
  secured by an asset that would be sold by the
  creditor upon default (non payment)
• Car loan, mortgage
• Unsecured credit the amount of credit extended
  is only secured by the borrowers willingness and
  ability to pay
• Most credit cards
• Secured credit carries a lower interest rate than
  unsecured credit.

5
Shopping for A Credit Card

• Comparison shop credit cards
• Dont take the first offer that comes to you
• Pre-approval
• Means nothing
• No special rates

6
Card Holder Agreement

• Written statement that gives the terms and
  conditions of a credit card account.
• Look here for all info before signing up
• Required by Federal Reserve
• Card issuers can change terms at any time with 15
  days notice

7
Billing Statement

• The monthly bill sent by a credit card issuer to
  the customer.
• It gives a summary of activity on an account.
• Important changes to a credit card account are
  included in small-print fliers that are sent with
  the statement.
• Schumer box Important to look here once youve
  selected a card.

8
Annual Percentage Rate (APR)

• Annual Percentage Rate (APR)
• Interest
• F (Fixed) rate
• V (variable) rate
• Prime ___
• Libor ___
• Wont go below floor
• Introductory rate
• How long?
• What will the rate
• go to afterwards?

9
Grace Period

• Interest-free time between
• Transaction date
• Billing date
• Usually 20 30 days
• No grace period if
• Carry a balance
• No stated grace period

10
Billing Methods

• Average Daily Balance
• Most common
• Calculated by totaling each days balance,
  dividing by the number of days in the billing
  cycle and multiplying by the periodic rate
  (APR/12)

• Two Cycle Billing
• Finance charge is calculated on the average daily
  balance over the last two billing periods
• Ends up costing more than ADB if you dont pay
  your balance in full

11
Credit Limit

• The maximum amount you can charge on a credit
  account.
• You're approved up to 25,000!
• Up to is the key phrase
• Enticement offer
• Actual credit limit based on credit score
• Recommended limit
• 20 of net income

12
Default and Universal Default

• Default
• A designation that indicates a person has not
  paid a debt that was owed.
• Universal default
• If you are more than 30 days late on a payment to
  anyone, your credit card company can raise your
  interest rate.

13
Payment Allocation

• How your payments will be applied when you have
  differing rates
• Matters when you
• Use card during and after promotional period
• Purchases and cash advances
• Payments will pay off lower rate first
• Costs you money. Makes the bank money.

14
Annual Fees on Reward Cards

• Paying for the privilege of using a credit card
• Many cards offer rewards without an annual fee
• Weigh cost of annual fee to value of reward
• Mileage
• Avoid annual fees

15
Late-Payment Fee

• Charge imposed for not paying on time
• Know your payment due date time
• 9 a.m.
• 12 noon
• 5 p.m.
• 1159 p.m.?
• Pay via U.S. mail, phone, online, automatic bill
  pay, etc.

16
Over-the-Credit-Limit Fee

• You can exceed your credit limit but it will cost
  you
• Fee
• Higher interest rate

17
Currency-Exchange Fee

• Credit Cards have replaced traveler's checks.
• Fee will be
• Flat amount
• Percentage of withdrawal
• Important only if you travel internationally
  frequently

18
Cash-Advance Fee Interest

• Dont take cash advances
• Fee
• Flat amount
• Percentage of withdrawal
• Cash advance interest rate is always higher and
  has no grace period
• Payments are applied to lower-interest balance
  first

19
Balance-Transfer Fee

• Balance Transfer
• The process of moving an unpaid credit card debt
  from one issuer to another
• Cards charge to transfer balance to or from one
  card to another.

20
Minimum Finance Charge

• Also called No Balance Fee
• Fee charged for using the credit card even when
  you pay off the balance in full every month.
• Dont select this card
• 1.50 12 18
• Similar to an annual fee

21
What You Dont Need in a Credit Card Offer

• Credit Card Insurance
• Theft Insurance
• Life Disability Insurance
• Unemployment Insurance

22
Credit Laws

• Federal laws designed to protect consumers and
  insure equal access to credit
• Fair Credit Reporting Act (1971)
• Fair Credit Billing Act (1975)
• Fair Debt Collection Practices Act (1978)
• Equal Credit Opportunity Act (1975)
• Truth in Lending Act (1969)
• Fair Credit and Charge Card Disclosure Act (1989)

23
Fair Credit Reporting Act

• Covers the reporting of debt repayment
  information
• Requires the removal obsolete information (7 to
  10 years old)
• Consumer access to credit report information and
  to dispute incorrect information
• Requires credit bureau and information provider
  to correct errors

24
Fair Credit Billing Act

• Applies to all open-end credit accounts
• Consumers should send a written billing error
  notice to creditor within 60 days after receipt
  of bill
• Creditors must acknowledge within 30 days
• No negative impact on consumer credit rating
  while dispute is pending

25
Fair Debt Collection Practices Act

• Prohibits debt collectors from engaging in
  unfair, deceptive, or abusive debt collection
  practices
• Collectors must send written notice that includes
  the amount and creditor
• Collectors must identify themselves on the phone
  and only call between 8 am and 9 pm unless a
  consumer agrees to another time
• Collectors must not call consumers at work

26
Equal Credit Opportunity Act

• Prohibits discrimination on the basis of gender,
  race, marital status, religion, national origin,
  age, or receipt of public assistance
• Consumers have a legal right to know why they are
  denied credit

27
Truth in Lending Act

• Mandates disclosure of information about the cost
  of credit
• Schumer box information as required in the Fair
  Credit and Charge Card Disclosure Act
• Provides for criminal and civil penalties for
  violations
• Protects consumers against unauthorized use of
  credit cards
• 50 maximum exposure for lost or stolen card

28
Proposed Changes in Credit Card Laws

• Will go into effect on July 1, 2010
• Consumers will receive 45 days notice of changes
  to their terms and conditions
• Consumers will have 45 days notice of a rate
  increase due to non payment
• Cut off times for mailed in payments will be
  500pm
• Payments will be allocated to those items
  carrying the highest rate of interest

29
Additional changes

• Two cycle billing will be eliminated
• Credit card statement will be reformatted to be
  more understandable
• Fees will be eliminated on subprime credit cards,
  which had reduced the amount of available credit
• These changes were adopted by the Federal Reserve
  Board of Governors, the Office of Thrift
  Supervision and the National Credit Union
  Administration