1. Prentice-Hall, Inc.1 Chapter 6 Using Credit Cards: The Role of Open Credit

2. Prentice-Hall, Inc.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 pace so long as you pay the required minimum monthly payment. –Examples -- Credit cards or department store credit cards

3. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.7 The Grace Period  Normally 20 to 25 days, excluding cash advances  Doesn’t apply if you carry a balance  With no balance, you could avoid paying for a purchase for nearly 2 months  Not all credit cards offer a grace period

8. Prentice-Hall, Inc.8 The Annual Fee  Range from $0 to $100 (American Express charges $300 for their Platinum card.)  70%of the 25 biggest card issuers don’t charge an annual fee.  Merchant’s discount fee -- charged to merchants, typically 1.5% to 5.0% of the purchase amount

9. Prentice-Hall, Inc.9 Additional Fees  Cash advance fee  Late fee  Over-the-limit fee  Penalty rates  Be alert-- “Important Notice of Change of Terms”

10. Prentice-Hall, Inc.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. Prentice-Hall, Inc.11 The Pros of Credit Cards (cont’d)  Interest-free credit  Make reservations  Use as identification  A source of free benefits

12. Prentice-Hall, Inc.12 The Cons of Credit Cards  It’s too easy to lose control of spending.  It’s, in general, an expensive way to borrow money.  It’s an obligation of future income--you’ll have less to spend in the future.

13. Prentice-Hall, Inc.13 Choosing a Source of Open Credit  Bank credit cards –Bank card variations  Travel and entertainment (T&E) cards  Single-purpose cards  Traditional charge account

14. Prentice-Hall, Inc.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. Prentice-Hall, Inc.15 Bank Card Variations  Premium or prestige cards  Affinity cards  Secured credit cards

16. Prentice-Hall, Inc.16 Other Sources of Open Credit  Travel and entertainment cards require full payment monthly.  Single-purpose cards may or may not offer revolving credit, but usually have no annual fee.  Traditional charge accounts offer convenience of payment and service before billing.

17. Prentice-Hall, Inc.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. Prentice-Hall, Inc.18 Getting a Credit Card: The Five Cs of Credit  Character  Capacity  Capital  Collateral  Conditions

19. Prentice-Hall, Inc.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. Prentice-Hall, Inc.20 National Credit Reporting Bureaus  Equifax Credit Information Services –www.equifax.comwww.equifax.com  Experian –www.experian.comwww.experian.com  Trans Union –www.tuc.comwww.tuc.com

21. Prentice-Hall, Inc.21 Information on Your Credit Report  Personal demographics – age – Social Security number – addresses  Employment history  Credit history

22. Prentice-Hall, Inc.22 Information on Your Credit Report (cont’d)  Criminal convictions and judgments  Previous two years of inquiries

23. Prentice-Hall, Inc.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. Prentice-Hall, Inc.24 Factors That Determine Creditworthiness (cont’d)  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. Prentice-Hall, Inc.25 Consumer Credit Rights  Your rights and the credit bureau  If your credit card application is rejected  Resolving billing errors

26. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.29 Resolving Billing Errors (cont’d)  Send a description, including amount in dispute, to the billing inquiry address.  You should receive notice from the card issuer that an investigation is under way within 30 days.  The card issuer has 90 days or two billing cycles to resolve the dispute.  You may appeal any unfavorable outcome.

30. Prentice-Hall, Inc.30 Resolving Billing Errors (cont’d)  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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.32 Consumer Credit Laws (cont’d)  Equal Credit Opportunity Act of 1975  Equal Credit Opportunity Act (amended 1977)  Fair Debt Collection Practices Act of 1978

33. Prentice-Hall, Inc.33 Consumer Credit Laws (cont’d)  Fair Credit Reporting Act of 1971  Fair Credit Reporting Reform Act of 1996

34. Prentice-Hall, Inc.34 Managing Your Credit Cards and Open Credit  Reducing your balance  Protecting against fraud  Trouble signs in credit card spending  Controlling spending  If you can’t pay your credit card bills

35. Prentice-Hall, Inc.35 Reducing Your Balance  Pay more than the 2% to 3% minimum monthly payment  Find a card that offers a lower interest rate

36. Prentice-Hall, Inc.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.  Never leave a store without your card.

37. Prentice-Hall, Inc.37 Trouble Signs in Credit Card Spending  Take the Credit Card Habits Quiz.  Evaluate your credit card usage.

38. Prentice-Hall, Inc.38 Controlling Your Credit Card Spending  Set goals  Develop a budget  Track your credit spending  Record all credit purchases in a ledger

39. Prentice-Hall, Inc.39 What to Do If You Can’t 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. Prentice-Hall, Inc.40 Summary  Two types of open credit – revolving credit lines and credit cards, including bank, T&E, and single purpose cards  Factors that determine the cost of credit – interest rate – balance calculation method – grace period – annual fees – other fees

41. Prentice-Hall, Inc.41 Summary (cont’d)  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 – you’ll have less spendable income in the future

42. Prentice-Hall, Inc.42 Summary (cont’d)  The “five C’s” 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. Prentice-Hall, Inc.43 Summary (cont’d)  Monitor credit report information  Control credit spending  Recognize and avoid credit trouble  Understand credit consumer protection laws