Using Credit Cards:

1
Chapter 6

• Using Credit Cards
• The Role of Open Credit

2
Learning Objectives

• Know how credit cards work.
• Understand the costs involved with credit cards.
• Describe the different types of credit cards and
  their advantages and disadvantages.
• Know what determines your credit card worthiness
  and how to secure a credit card.
• Know how to manage your credit.

3
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.

4
Determining theCosts of Open Credit

• The balance owed.
• Interest rates.
• Balance calculation method.
• Cash advance costs.
• The grace period.
• The annual fee.
• Additional or penalty fees.

5
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.

6
Buying MoneyThe 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.
• 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.

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.

12
The Cons of Credit Cards

• Its too easy to lose control of spending.
• Its, in general, 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
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.

15
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.

16
Getting a Credit CardThe Five Cs of Credit

• Character
• Capacity
• Capital
• Collateral
• Conditions

17
Credit EvaluationThe 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.

18
National Credit Reporting Bureaus

• Equifax Credit Information Services
• www.equifax.com
• Experian
• www.experian.com
• Trans Union
• www.tuc.com

19
Information on Your Credit Report

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

20
Information on YourCredit Report (contd)

• Criminal convictions and judgments.
• Previous two years of inquiries.

21
Factors That Determine Creditworthiness

• Annual income.
• Length of time at current residence.
• Length of time at current job.
• Type of residence.
• Age.
• Employment.

22
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.

23
Consumer Credit Rights

• Your rights and the credit bureau.
• If your credit card application is rejected.
• Resolving billing errors

24
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.

25
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.

26
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.

27
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 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.

28
Managing Your CreditCards 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.

29
Reducing Your Balance

• Pay more than the 2 to 3 minimum monthly
  payment.
• Find a card that offers a lower interest rate.

30
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.

31
Controlling YourCredit Card Spending

• Set goals.
• Develop a budget.
• Track your credit spending.
• Record all credit purchases in a ledger.

32
What to Do If You CantPay 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.