Borrowing on Open Account: Credit Card Facts

1
Chapter 6

• Borrowing on Open Account Credit Card Facts

http//www.hoffmanbrinker.com/credit-card-debt-sta
tistics.html
2
Credit Card Statistics
Statistical Abstract of the United States, 2012
3
Number of Credit Cards
Statistical Abstract of the United States, 2012
4
Debt by Card Type
Statistical Abstract of the United States
5
Credit Card Facts

• 8 of 10 households have 1 or more credit cards
• 56 have 1 or more Visa cards
• 47 have at least 1 MasterCard
• 1/3 of users pay off balance monthly avg. pay
  14-16 of balance monthly
• Credit card delinquency rate for 2003 was 2.68
• Consumer debt 103 of annual disposable income vs
  65 20 years ago.

6
The Pros of Credit Cards

• Convenience or ease of shopping
• Emergency use
• Allows for consumption before the purchase is
  fully paid for
• Source of interest-free credit
• Buyer protection
• Source of free benefits
• Some protection against vendor

7
The Cons of Credit Cards

• Easy to lose control of spending (Its only
  plastic!)
• Expensive way to borrow money
• Reduce discretionary income in the future

8
Credit Card Features

• Interest rates
• Calculating the balance owed
• Buying money -- the cash advance
• Grace period
• Annual fee
• Additional fees

9
Interest Rates

• Affinity cards
• Teaser rates
• Transfer fees!
• 4 on a 5,000 transfer is 200
• Some firms cap fees at 25 to 50
• Get lower interest rate but may pay more with fees

• Annual percentage rate (APR)
• National average credit card rate in 1997 was
  17.1
• Credit card companies can sell your account.
  Interest rates and fees change so WATCH OUT!
• Bank can raise rate if it believes you are
  greater credit risk EVEN if youve never paid
  late

10
Negotiate for Better Interest

• Call your credit card company
• Ask for
• Lower rate
• Lower fee
• Likely to get it if you have good credit

11
Calculating the Balance Owed

• Average daily balance method -- most common
• Previous balance method -- most expensive
• Adjusted balance method

12
The Grace Period

• Normally 22 to 25 days (was 31)
• Could result in not having to pay interest on a
  purchase for nearly two months
• Doesnt apply if you carry a balance
• Does not apply to cash advances
• Information float technique where banks send
  out statements late resulting in more consumers
  paying late so bank collects late fees

13
The Annual Fee

• Range from 0 to 100 (can be hidden minimum
  monthly finance charges to ALL consumers even if
  pay off balance monthly)
• 70 of the 25 biggest card issuers dont charge
  an annual fee.
• Merchants discount fee -- typically 1.5 to 5.0
  of the purchase amount

14
Additional Fees -- 31 Billion/Yr.

• Fees are 33.4 of credit card revenue in 2003, up
  from 27.9 in 2000 and 16.1 in 1996.
• Cash advance fee up to 3 of cash advance but
  not less than some minimum, e.g., 5. Interest
  charged immediately and may be ATM fee.
• Over-the-limit fee banks will approve
  transaction without telling consumer, then charge
  fee (as high as 39 per month), increase rate,
  and increase rates on other loans with consumer.

15
Additional Fees, Continued

• Late fee reduce grace period resulting in
  paying late banks charge fee (15 to 39),
  change rate, change credit limit, consumers lose
  frequent flier miles
• Balance transfer fee may be up to 3 of
  transferred balance interest starts immediately
• Fees for telephone bill payment requesting stop
  payment, returned payments transactions in
  foreign countries.

16
Hidden Fees for Overseas Travel

• Credit card and exchange rates 1 fee
• American Express 2
• Visa 3
• Folded into cost of item charged
• Best to use Capital One, MBNA

WSJ 4/23/02
17
The Choice Its a Matter of Your Credit Card
Philosophy

• Credit user -- find low interest rate
• Convenience user -- find low fee
• Convenience and credit user -- find best
  combination
• Go to www.cardratings.com for independent ratings
  of credit cards

18
Credit History Credit Report Info

• Name, SS, age, dependents, address
• Employers and salary
• loans, credit lines, credit cards
• Payment record and account balances

• Bankruptcies, tax liens, foreclosures, civil
  suits, criminal convictions
• Name of organizations recently requesting your
  file
• Unpaid rent or medical bills

19
Rights

• Free annual copy of credit report
• Consumers place fraud alert in credit reports
• Prevents merchants from printing all credit card
  digits on receipts

• Increases maximum penalty for identify theft
• Prohibits credit reports from containing medical
  information
• Consumers see credit scores

20
Medical Data in Credit Reports

• How they get it
• Charges to cancer unit
• Insurer and bank merge
• How they use it
• Poor credit risk if ill
• Deny credit or limit credit line
• Congress investigating to amend Fair Credit
  Reporting Act

WSJ 8/6/03
21
Credit Insurance

• Credit card firms want to sell you insurance to
  pay off your balance.
• 0.75 per 100 loan per month (.0075 x 12 9)
• Interest rate is 15 then add 9 on top
• TOO HIGH!!!

22
Questions