Learning Objectives part 1 of 2

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Chapter 6
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Learning Objectives (part 1 of 3)

• Discuss the pros and cons of paying with cash
  versus credit
• Describe the various features that different
  cards have to offer
• Analyze whether the card with the cheaper rate is
  always the better deal

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Learning Objectives (part 2 of 3)

• Describe how
• debit cards and secured credit cards work
• List the protections a consumer has with credit
  cards
• Compute whether a home equity line of credit
  would be beneficial
• Compute how large of a home equity line of credit
  could be obtained

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Learning Objectives (part 3 of 3)

• Describe the difference between a credit
  counselor and a credit "doctor"
• Describe what a FICO score means and how it is
  computed
• Discuss the role of the credit bureaus in the
  credit granting process

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Types of Credit Cards

• Bank Credit Cards
• Visa, Mastercard, Discover
• Travel Entertainment Cards
• American Express, Diners
• Store Charge Cards
• Macys, Neiman Marcus

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Pros of Using Credit Cards

• Fair Credit Billing Act gives several protections
• Limited liability if lost or stolen
• Especially if reported promptly
• Cash is usually unrecoverable
• One month free float

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Cons of Using Credit Cards

• Painless ability to pay may induce one to buy
  more than can be paid for later
• Interest rates can run as hign as 19 percent
• Various fees can really be exhorbitant

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How Banks Profit from Credit Cards

• Charge vendor for processing the transaction
• Charge vendor for verifying a transaction
• Charge interest
• Charge user annual fee and other fees

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Features of bank credit cards (part 1 of 2)

• Annual fee (sometimes negotiable)
• Teaser rate
• Differential rates on advances and unpaid
  balances
• Over the limit fees
• Late payment fees

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Features of bank credit cards (part 2 of 2)

• Fee for paying over the phone
• Transaction fee for a cash advance
• Lack of use fee
• How balance is computed on which interest is paid
• Average daily balance, Previous balance, Adjusted
  balance
• Length of grace period

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Which card(s) to obtain? (part 1 of 2)

• Depends on style of use
• If carry a balance due on a regular basis,
  interest rate critical
• If incur fees, fee structure critical

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Which card(s) to obtain?(part 2 of 2)

• Value of special benefits
• Frequent fly miles
• Cash rebates
• Special discounts at particular stores
• Affinity cards
• Strategy Decide what features want and then seek
  best fit with search on the Internet

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Debit Cards

• Online
• ATM card
• Need Pin number
• Offline like a check
• Direct charge against checking account
• Receipt is like a cancelled check
• Takes a few days for transaction to be processed

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Debit vs. Credit Card

• Credit card
• Provides float
• Debit card
• Cash substitute
• Spending constraint Wont clear if balances
  arent in checking account
• Great for college age children

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Secured Cards

• Prepay for credit limit
• Option for people with poor credit records
• Critical for making reservations at hotels, etc.

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Protections with Credit Cards

• Right to cancel
• Limit of 50 if card lost or stolen
• Covered by Fair Credit Reporting Act
• Right to refuse payment to merchants under
  certain conditions

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Debt Consolidation Loans

• Attractive if can achieve at least one of the
  following
• Lower effective interest rates
• Smaller monthly payments
• Tax deductibility of interest (if home equity or
  HELOC)
• Disadvantage Can be locked into payment schedule
  for many years

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Maximum size of home loan

• Start with appraised value of home
• Multiply this by the standard loan to value ratio
  of 80 percent
• Subtract all existing mortgage balances
• What is left over is the typical maximum amount
  for a new home equity loan or HELOC

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Credit Doctor vs. Credit Counselor

• Credit doctor
• Claims to resurrect your credit
• Schemes are usually expensive and sometimes
  fraudulent
• Credit Counselor
• Focuses on getting spending under control
• Evaluates options such as debt cons. loans

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FICO Score

• Score used by lenders to determine your credit
  worthiness
• Key elements of credit decision
• Character
• Capacity
• Capital
• Collateral

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Tips for improving FICO Score

• Stick at the same job
• Stick at the same address
• Own rather than rent
• Have a reasonable number of credit cards
• Keep oldest credit accounts open
• Avoid having people run credit checks on you

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Credit Bureaus

• Big Three
• Experion TRW)
• Equifax
• TransUnion Corp.
• They only collect information

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Protecting your Credit Record

• Regularly review your credit file
• normally involves a fee
• Fee waived under certain circumstances
• Apply for credit at least once per year to make
  sure you are able to get it
• Close out inactive credit accounts