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Title: Banking and Credit Cards


1
Banking and Credit Cards
  • Presented by the Delaware Bankruptcy Inn of Court
  • Much of what follows is based on information from
    the FDICs Money Smart Adult Education Program.

2
Banking
  • The purposes of this section of these materials
    are to
  • Identify the primary reasons to use a bank.
  • Identify the major types of insured financial
    institutions.
  • Describe the steps involved in opening and
    maintaining a bank account.
  • Describe the main functions of the people who
    work in banks.

3
Reasons to Keep Your Money in Banks
  • There are a number of good reasons to use banks.
    These include
  • Safety
  • Convenience
  • Cost
  • Establishing a Financial History

4
Safety
  • Safety The money you have in the bank is safe
    from theft, loss, fire or any other factor that
    could cause you to lose money you might keep
    elsewhere.
  • Importantly, the Federal Deposit Insurance
    Corporation (FDIC) insures deposits in banks,
    currently up to 250,000 for each depositor in
    each insured institution. The FDIC insures all
    deposit account types at insured banks, including
    checking, savings, money markets and CDs. Since
    the start of the FDIC in 1934, no depositor has
    lot a single penny of insured deposits as a
    result of a bank failure.
  • The FDIC does not, however, insure money invested
    in stocks, bonds, mutual funds, etc., even if
    they are purchased from the insured banks.
  • Most financial institutions we will be discussing
    (all of which we will refer to as banks) and
    which you will be familiar with in Delaware are
    FDIC insured. But, you should ask the bank you
    are considering using to confirm that they are
    FDIC insured. (To learn more about FDIC
    insurance, you may go on-line to www.fdic.gov).
  • You will soon learn that credit unions are a type
    of financial institution similar to a bank. Most
    credit unions are insured by the National Credit
    Union Administration (NCUA). The deposit
    insurance rules are the same for NCUA-insured
    credit unions as for FDIC-insured banks.

5
Convenience
  • Convenience - Using a bank or credit union allows
    you to get money quickly and easily and to pay
    bills by check or on-line conveniently. Other
    features we will mention later, such as direct or
    electronic deposits of your paycheck by your
    employer, save you time and allow you quicker
    access to your money.

6
Cost
  • Cost Using a bank is usually cheaper than using
    other businesses to cash your checks or issue
    money orders. But, banks do charge various fees
    for some transactions and features and you should
    always be aware of and understand your banks fee
    structure.

7
Establishing a Financial History
  • Establishing a Financial History Building a
    relationship with a bank not only allows you a
    convenient, safe way to save money and handle
    your finances, but can establish a good record of
    paying your bills, all of which may be helpful in
    getting a loan from that bank or another if you
    want to do so in the future

8
The Major Types of Financial Institutions
  • There are 3 Major Types of Financial Institutions
  • Banks
  • Credit Unions
  • Thrifts

9
Banks, Credit Unions and Thrifts
  • There are three major types of financial
    institutions that are commonly referred to as
    banks.
  • Traditional banks make loans, pay checks, accept
    deposits and provide other financial services.
  • Credit Unions are non-profit financial
    institutions owned by people who have something
    in common often the same employer. You have to
    become a member of the credit union to keep your
    money there.
  • A Thrift is a savings bank or savings and loan
    association that is similar to a bank.
  • There are many traditional banks, credit unions
    and thrifts in Delaware to choose from. For
    example, a quick internet search or review of the
    Yellow Pages identifies more than 40 banks and 20
    credit unions in the Wilmington area.
  • But, dont be confused by the number of choices
    available. Most banks are providing the same
    basic services and the competition among them
    means generally that the fees they charge will
    also be similar. You should be sure to check to
    make sure those you consider provide the services
    you want at reasonable cost and are federally
    insured, but you will also want to consider
    factors such as the location of the office you
    will most want to use (i.e., is it convenient to
    your home or job), whether there is a convenient
    ATM (automated teller machine) available, etc.

10
Opening and Maintaining a Bank Account
  • Opening and maintaining a bank account is not
    difficult, so dont be put off from entering into
    a banking relationship because you think it will
    be hard.
  • After you have decided on the bank (or banks)
    that look like the best fit for you, you should
    plan a visit to the branch of that bank.
  • To open an account, you will likely talk to a
    customer service representative. This person
    can help you open your account, explain the
    services offered by the bank, answer general
    questions (such as, is the bank federally
    insured), refer you to other bank employees who
    can answer more specific questions you might
    have, and provide written information explaining
    the banks services.

11
Account Verification
  • The first step in opening a bank account is a
    process called account verification. The bank
    wants to confirm that you will be a responsible
    customer. If you have had problems with banks in
    the past, they may not want to risk having you as
    a customer now.
  • The bank may review your history of using
    checking accounts and it may run a credit report
    on you.
  • The bank will need to see a photo identification,
    such as a drivers license, and your Social
    Security or Individual Taxpayer ID number to
    verify your identity.
  • If you are not a U.S. citizen, the bank may
    accept other forms of photo identification, such
    as a passport or a resident alien card (Green
    Card).
  • You might want to call the bank before you visit
    it and ask what types of ID will be required to
    open an account.
  • If the bank determines that you are eligible to
    open an account, you can deposit money into your
    new account.
  • If you are unable to open an account, ask whether
    you are eligible for any second chance checking
    program. The programs may allow you to open a
    checking account after meeting certain
    requirements, such as completing a check-writing
    workshop. There may be fees associated with
    these programs.

12
Deposit
  • A deposit is money you add to your account. To
    do so, you must fill out a deposit slip. The
    deposit slip tells the bank how much money, in
    cash or by check, you are adding to your account.
    If your deposit is by payroll check or a check
    drawn on another bank, you may not have immediate
    use of the money because the bank must make sure
    there are funds in the account at the bank on
    which the check was written to cover the check.
    You can ask your bank when you can use the money
    you deposited.

13
Withdrawals and Balance
  • Withdrawal
  • When you make a withdrawal, you are taking money
    out of your account. You can withdraw funds by
    writing a check, giving a teller a withdrawal
    slip or using an ATM.
  • A withdrawal slip is similar to a deposit slip
    except you are taking money out of, rather than
    adding to, your account.
  • You always need to know how much is in your
    account so you will not try to withdraw for
    example, by writing a check to pay a bill more
    money than you have.
  • If you overdraw your account, or bounce a
    check, you will be charged a fee by the bank.
  • Balance
  • The balance is the amount of money you have in
    your bank account. So it is the difference, at
    any one time, between what you have deposited in
    the account and what you have withdrawn.

14
Fees and Interest
  • Fees
  • Banks charge fees for different services, such as
    a monthly maintenance fee for keeping your
    account open, for ordering checks for you to use
    or for bouncing a check or taking more money out
    than you have in your account. Be sure you
    understand the types and amounts of fees that
    your bank charges.
  • Even though banks charge fees, it is generally
    the case that it is cheaper to use a deposit
    account at a bank than a check-cashing service or
    purchasing money orders.
  • Interest
  • Interest is the percentage of the balance in your
    account that the bank pays you for keeping your
    money at that bank. Not all accounts pay
    interest. Because of the current economic
    situation, the interest banks are paying on
    checking (if any) and savings accounts is very
    low. The interest rate being paid by the bank
    you are considering is one of the factors to
    weigh as you decide with what bank to do business.

15
Additional Banking Services
  • Some banks offer additional services with some
    checking and savings accounts. In some cases, an
    additional fee may be charged. Some services
    that might be useful to you are
  • Direct Deposit Your employer or government
    agency can pay you your pay or benefits check
    directly into your bank account electronically.
    That money is immediately available and some
    banks will not charge monthly fees if direct
    deposit is used.
  • Automated Teller Machines or ATMs An ATM is a
    kiosk or terminal in or outside a bank where you
    can deposit cash and checks, withdraw cash, or
    transfer money from one account to another 24
    hours a day. You can do so literally around the
    world. Although, if you are using an ATM that is
    not your banks, a fee may be charged.
  • Telephone Banking This allows you to
  • check account balances
  • transfer money between accounts
  • obtain account history, such as recent deposits
    or withdrawals and
  • stop payment on a check.
  • Online Banking This allows you to do many of
    the tasks on a computer that you would otherwise
    do in person, such as paying bills, reviewing
    account balances and transferring funds between
    accounts.
  • Debit Card This looks like a credit card, but
    when you use it to buy something from a store,
    the money comes out of your account immediately.

16
Other Bank Employees
  • In addition to the customer services
    representative, whose duties in helping you set
    up your accounts we have discussed, other bank
    employees with whom you may come in contact are
  • Tellers, who deposit your money, cash your checks
    or withdrawal slips, and answer questions or
    refer you to someone who can.
  • Loan Officers, who take applications for loans,
    provide information about loans offered by the
    bank and help you fill out a loan application.
  • Branch Manager, who supervises all the banks
    operations that take place at that branch and
    help resolve questions that other bank employees
    cant.

17
  • Hopefully, the information we have discussed has
    given you a better understanding of what services
    banks offer, how they may be advantageous to you
    and how to go about entering into a relationship
    with a bank best suited for your needs.

18
Credit Cards
  • The purposes of this section are to
  • Identify the primary reasons to obtain and use a
    credit card.
  • Identify the major types of credit cards.
  • Practical ways to manage the use of a credit
    card.
  • Identify which reason to use a credit card is
    most important to you.

19
Reasons to Obtain and Use a Credit Card
  • There are a number of good reasons to obtain and
    use a credit card. These include
  • To Do Things that Require the Use of a Credit
    Card
  • To make small daily purchases without having to
    use cash or a check each time
  • To help you keep track of your expenses
  • To purchase a large item by paying for it later

20
To Do Things Requiring a Credit Card
  • A credit card also enables you to do transactions
    --- such as buying things on the internet,
    renting a car, or reserving a hotel room --- that
    require a credit card.

21
To Make Small Daily Purchases Without Using Cash
or a Check
  • A credit card gives you the convenience of not
    always having to have cash on you, or your
    checkbook. It comes in handy for time when you
    need money fast and you dont have cash on you.
    For example, if you are running out of gas and
    have no cash, you can go to the nearest gas
    station and pay for gas with your credit card. A
    credit card also lets you make purchases or
    rentals that typically require a credit card,
    such as purchases on the internet or renting a
    car. A credit card gives you a revolving line of
    credit. This means you can make an unlimited
    number of purchases up to a preapproved dollar
    amount, such as 3,000.00. Essentially, a credit
    card gives you a convenient way to borrow money -
    - - that is, money that you have to pay back. As
    long as you have the money to pay the bills, and
    you are disciplined enough to pay off your
    balance, a credit card is a useful tool.

22
To Help Keep Track of Expenses
  • When you use a credit card, you receive a
    statement that lists all of your charges,
    including where you spent money and how much.
    For many people, this is a convenient way to keep
    track of small and large purchases.

23
To Purchase a Large Item by Paying for it Later
  • For some people, a credit card will help in
    making large purchases. Essentially, a credit
    card gives you a convenient way to borrow money
    --- that is, money that you have to pay back.
    Because of the relatively high rate of interest
    on most credit cards, though, large purchases
    made using a credit card will require payment of
    substantial interest until the balance is repaid
    in full. For this reason, using a credit card
    for this purpose can be very expensive and other
    alternatives, or delaying the purchase until you
    have the money, should be considered.

24
The Major Types of Credit Cards
  • There are many types of credit cards. Banks,
    department stores, and even gasoline stations
    offer credit cards. But, lets suppose that you
    are interested in getting a credit card for your
    daily necessities, such as food, clothing, and
    drugstore items. Which type of credit card would
    be best for this use?
  • Grocery Store Loyalty Cards.
  • No. A grocery store savings club card is not the
    same as a credit card. It is normally free and
    gives you special offers at the particular
    grocery store where you received the card.
  • Department Store and Gasoline Credit Cards.
  • Nice try, but a department store credit card
    limits you to purchasing items in one particular
    store. You are looking for a credit card that
    give you the most flexibility to use in various
    stores, for almost any type of purchase.
  • Bank Credit Cards.
  • Yes. A bank credit card would make the most
    sense in this case. When a bank issues a credit
    card to you, you can use it for purchases at most
    any retail store. It gives you flexibility and
    convenience. Like all credit cards, you will be
    given a revolving line of credit. This means you
    can make an unlimited number of purchases up to a
    certain amount of money such as 3,000. You must
    pay at least a portion of the bill every month.
    This is called a minimum payment.

25
Types of Bank Credit Cards Include
  • Secured Credit Card
  • Unsecured Credit Card
  • Rewards Card
  • Smart Card
  • Debit Card

26
Secured Credit Card
  • A secured credit card is a good choice if you
    have no credit history or have had credit
    problems in the past. A problem with your credit
    may be, for example, if you have not been able to
    pay your bills on time. Then, the bank may
    consider it risky to loan you money. If this is
    the case, to get a secured card you need to use a
    bank savings accounts as collateral. This means
    the bank will hold the money in the savings
    account as security for you to pay back the loan
    for purchases.
  • For people with
  • No credit history
  • Credit problems
  • Requires
  • Bank savings account with minimum balance
    maintained.
  • Savings account as guarantee to bank.
  • Application and processing fees.

27
Unsecured Credit Card
  • Most credit cards are unsecured, meaning that you
    do not have to provide collateral. Collateral is
    what you promise to give the bank if you do not
    pay back the loan. Items like homes, cars, or
    savings and investment accounts can serve as
    collateral.
  • Most credit cards.
  • No collateral needed.

28
Rewards Card
  • One kind of credit card is a rewards card. A
    rewards card combines a bank credit card with a
    reward system and will have the name of the
    participating merchant, airline or hotel on the
    card. When you use these credit cards, you earn
    points toward goods or services, and you may also
    receive cash rebates. You may be charged annual
    fees for reward cards.

29
Smart Card
  • Another kind of a credit card is a smart card. A
    smart card resembles a standard credit card in
    size and shape, but inside it is completely
    different. The inside of a smart card usually
    contains an embedded microprocessor or computer
    ship. The chip is under a gold contact pad on
    one side of the card. Think of the computer chip
    as replacing the usual magnetic strip on a credit
    card or debit card. A smart card can be used for
    the following
  • Credit cards.
  • Electronic cash.
  • Computer security systems.
  • Wireless communications.
  • Loyalty systems (like frequent flyer points).
  • Banking.
  • Government identification.

30
Debit Card
  • A debit card resembles a credit card except that
    it is tied to your checking account. When you
    use it to make purchases or to withdraw money at
    an automated teller machine (ATM), the money is
    immediately taken out of your checking account.
    You need to be sure you have money in your
    checking account before you use a debit card.

31
Comparing a Credit Card with a Debit Card
  • Lets compare a credit card and a debit card.
    Your credit card is a buy now, pay later card.
    You can make purchases with it through the
    billing period, then pay for them when your
    statement arrives. Your debit card, on the other
    hand, immediately removes money from your account
    when it is presented as payment. Credit cards
    can offer freebies, such as rebates and bonus
    points. Many credit cards may include additional
    purchase protections. Credit cards also have
    fees and penalties attached, and some do not have
    grace periods for payment. It can be easy to
    accumulate debt. By comparison, using a debit
    card is like writing a check.

32
Credit Cards and Debit Cards
Credit Cards Debit Cards
Payments Buy now, pay later. Buy now, pay now.
Interest Charges Yes if you carry a balance on your card offers no grace period. No.
Other PotentialBenefits Freebies, such as cash rebates and bonus points good for travel deals. Some purchase protections. Easier and faster than writing a check. Avoid debt problems. More cards now offering freebies. Some purchase protection.
Other PotentialConcerns Fees and penalties. Also, not all cards offer grace periods (time to repay without incurring interest). Over-spending can cause debt problems Fees on certain transaction. You may overdraw your account and incur additional fees if you are lax about recording debit card transactions.
33
Key Credit Card Terms.
  • Whether you have an unsecured or secured credit
    card account, there are many options to choose
    from. If you understand some of the key terms
    associated with credit card options, it will make
    the process of deciding which one to use much
    easier. Here is an example of some of the
    important terms of a bank credit card offer.

34
Key Credit Card Terms Described
  • Annual Percentage Rate (APR) The interest rate
    per year on all outstanding balances. A variable
    rate of interest means the credit card company
    can change your rate of interest. Cards also
    provide for a higher rate of interest, or a
    penalty APR if you do not pay on time.
  • Annual Fee The fee (in addition to interest and
    other charges) that you must pay each year to
    have the use of the credit card.
  • Monthly Minimum Payment The minimum amount that
    you must pay each month to not be in default and
    owe late charges.
  • Minimum Finance Charge The minimum amount of
    finance charge that will be charged against your
    account each billing period. This is not the
    maximum amount of interest, which can be much
    higher.
  • Method for Computing Interest The method the
    credit card company uses to compute the interest
    charged.
  • Billing Cycle The length of time between each
    months bill.
  • Grace Period The period of time within which
    you can pay the amount owing for purchases before
    interest starts being charged on these purchases.

35
Examples of Credit Card Terms
Important Disclosures Example
Annual Percentage Rate (APR) 18 (Variable)
Annual Fee 30
Monthly Minimum Payment 4 of balance or 10.00, whichever is higher
Minimum Finance Charge 0.50
Method for Computing Interest Average daily balance (including new purchases)
Billing Cycle 30 Days
Grace Period 20 Days
36
Some Things to Watch Out For
  • Some Things to Watch Out For In a Credit Card
    Offer
  • Terms for Which You Might Qualify Credit card
    offers often state that you may qualify for
    attractive terms. There is no guaranty that the
    credit card company will continue to offer those
    terms to you once it has processed your
    application.
  • Teaser Rates New credit cards may have a
    teaser rate - - - a low initial rate that later
    increases to a substantially higher rate.
  • Some Things to Watch Out For After You Have Your
    Credit Card
  • Late Fees Late fees are expensive, can add up,
    and are payable even if your payment is minutes
    late. A new law requires your credit card
    company to give you at least 21 calendar days
    from the date the statement is mailed to you for
    you to make at least the minimum payment to avoid
    the late fee.
  • Changes in Interest Rate A new law restricts
    interest rate increases on existing balances and
    retroactive increases due to late payment.

37
New Protections for Credit Card Holders
  • The Credit Card Accountability, Responsibility
    and Disclosure Act (CARD) Gave Credit Card
    Holders new protections and imposed certain
    limitations regarding
  • Retroactive Rate Increases
  • Advance Notice of Rate Increases
  • Limitations on Fees
  • Billing and Payment Times
  • Application of Payments
  • Cards to Minors Under 21 Years Old

38
Retroactive Rate Increases
  • Your credit card company cannot increase your
    interest rate for the first 12 months after you
    open your card account, unless
  • Your card has a variable rate and the index for
    the rate goes up
  • You agreed to an introductory interest rate, but
    you are entitled to that interest rate for at
    least 6 months
  • You are more than 60 days late paying or are in a
    workout agreement and do not make the required
    payments on time.

39
Advance Notice of Rate Increases
  • Your credit card company must send you a written
    notice at least 45 days in advance of its raising
    the interest rate on your credit card or change
    certain fees, such as annual fees, cash advance
    gees and late fees, or make other major changes
    to your account
  • If the credit card company wants to make such
    changes it must give you the option of cancelling
    your credit card account
  • The 45-day notice requirement does not apply if
    you are more than 60 days late paying or are in a
    workout agreement and do not make the required
    payments on time

40
Limitations on Fees
  • If the credit card company increases your
    interest rate, the new rate applies only to new
    purchases and not to the old credit balance
  • Over-the-limit transactions must now be declined,
    and no fee charged, unless you previously
    contacted the credit card company and asked that
    such transactions be honored, and then the
    company is allowed only one fee per billing cycle
    and you can revoke at any time
  • Annual or application fees cannot add up to more
    than 25 of the initial credit card limit

41
Billing and Payment Times
  • Credit card company must mail or deliver your
    credit card bill at least 21 days before the
    payment due date

42
Application of Payments
  • If you pay more than the minimum monthly payment,
    then the additional amount must be applied
    against the balance with the highest interest
    rate, unless you made a purchase under a deferred
    interest plan (such as no interest if paid in
    full by a specified date)
  • Credit card company cannot do double-cycle
    billing, and can only charge interest on balance
    due in current billing cycle

43
Cards to Minors Under 21 Yrs. Old
  • Card applicants under 21 years old must now show
    that they can make payments, or must obtain a
    co-signer to open a credit card account
  • Co-signer must provide written permission for any
    credit limit increases

44
What New CARD Rules Dont Do
  • Credit card company can reduce your credit limit
    without notice, unless the limit would trigger a
    penalty
  • New rules do not limit the interest rate that a
    credit card company can charge

45
What to Do About Errors In Your Credit Card
Statement
  • If you find a difference between one of your
    credit card receipts and how it is listed on your
    monthly statement, what would you do?
  • Dont pay the specific charge where you found the
    difference?
  • Hold onto the bill to see if it is corrected in
    next months statement?
  • Contact your credit card company in writing
    within 60 days?
  • The answer is no. 3. As soon as you locate the
    difference or error between your receipts and the
    monthly statement you should notify your credit
    card company immediately by phone. But to be
    fully protected, you must report a discrepancy to
    your credit card company in writing within 60
    days from the day the bill was sent to you. When
    you speak to the credit card company, ask them
    exactly what information you need to include in
    the letter.

46
What to Do If You Cannot Pay Your Balance in Full
  • If you are unable to pay the total balance on
    your credit card, what is you best option?
  • Pay as much as you can according to your monthly
    budget?
  • Pay nothing now and wait until your pay check
    next month to pay off the total amount?
  • Pay the minimum payment amount of 10?
  • The best answer if you are unable to pay the
    balance in full, is to pay as much as your budget
    allows. The faster you can pay off your bill,
    the less interest you have to pay, and the less
    money youll pay over time.

47
Minimum Payment or More --- What a Difference!
Original Balance APR Monthly Payments Total Number of Monthly Payments Total Years to Pay Off Total Amount of Payments
2,500 18 3 or 10 404 34 8,781
2,500 18 50 94 8 4,698
2,500 18 100 32 3 3,163
48
What Should You Do If You Have Balances on More
Than One Credit Card That You Cannot Pay In Full
  • Even when trying to stick to your personal budget
    and minimize your spending, having too many
    credit cards can make it tempting to overspend.
    Theres nothing wrong with having credit cards,
    but be careful not to overspend.
  • If you have balances on more than one credit card
    that you cannot pay in full, what should you do?
  • 1. Get a cash advance on another credit card to
    pay part of the bill?
  • 2. Pay for future purchases using cash or check?
  • 3. Reduce your expenses by paying off the
    balance on your highest rate loans first?
  • The best answers are 2 and 3. You should pay off
    the credit card that is costing the most in
    interest. For example, if you are paying 18 APR
    on a 4,000 loan and 5 APR on a 5,000 loan, you
    are paying more for the 4,000 on a monthly
    basis. You may want to also start using cash or
    check for your minor purchases, so you can avoid
    finance charges from the credit card bills.

49
What To Do If You Simply Cannot Pay Your Credit
Cards
  • The first think you should do if you are having
    trouble paying your credit card debt is contact
    your credit card company and try to negotiate a
    settlement, even if you have been turned down
    before. If at first you dont succeed, be
    persistent.
  • Another option is to contact a credit counselor.
    Credit card statements direct cardholders to
    information about finding nonprofit counseling
    agencies. Reputable credit counseling
    organizations advise people on managing money,
    bills and debts, help them develop a budget, and
    usually offer free information and workshops.
  • If you decide to pay a company to negotiate your
    debt, do some research. Consider other peoples
    experiences. One way to do that is to enter the
    company name with the word complaints into a
    search engine. Read what others have said.
  • The FTC suggests that it is best to avoid any
    company that promises to settle your debt if it
  • touts a new government program to bail out
    personal credit card debt
  • guarantees it can make your unsecured debt go
    away
  • tells you to stop communicating with your
    creditors
  • tells you it can stop all debt collection calls
    and lawsuits
  • guarantees that your unsecured debts can be paid
    off with pennies on the dollar
  • requires that you pay the full fee within the
    first few months.
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