Bob Kraus ‘79 Jed Scala ’89 January 5, 2012

Agenda Overview of Payment Methods Establishing Credit & Selecting a Credit Product Understanding Credit Card Terms Credit Bureaus & Credit Profile Economics of Debt

Overview of Payment Methods Debit Cards Prepaid Cards Credit Cards Charge Cards New Entrants (Paypal, ACH, mobile, etc) PROSCONS Easy to get & wide acceptance No Debt Budget Management Tool Immediate payment Limited Protections Some Travel Challenges Changing Fee Structures Easy to get & wide acceptance No Debt Budget Management Tool Pre- payment of funds “Breakage” Builds Credit History “Float” & flexibility to revolve Rewards Interest Costs & Fees Builds Credit History Spend Capacity & Budget Mgmt Rewards Annual Fees Ease of use Protections & Security

Establishing a Credit Profile Apartment Rentals Access to Services & Utilities Education Loans Mortgages/Home ownership Car Loans, Leasing & Insurance Employment Background Checks Credit Profiles Can ImpactEstablishing a Credit Profile Credit Cards Utilities Student Loans Mortgages Car Loans & Leasing

Selecting a Credit Card… … starts with your intended use:  How much do you intend to spend?  Will you carry a balance?  Are you trying to build credit?

Then consider… Rewards Reward Points Cash Back Frequent Flyer Points Other Loyalty Currency Services Protections (Car/Purchases) Access (Airline, Events, etc) Concierge The Provider Company Brand Service Levels Online capabilities Your Relationships Fees Annual Fees Penalty/Late Fees Service Fees – Cash, Bill pay, FX Interest Rates Annual Percentage Rate Introductory Rates Balance Transfers Cash Rates Penalty Rates Terms Payment Terms Penalty Terms

Fees… Annual Fees: The yearly fee associated with a particular card. These fees can range from nothing for a basic credit card with limited benefits and service, to up to several hundred dollars for a card with elite travel services, rewards programs or other consumer benefits. Annual fees are common on charge cards, rewards cards and airline miles/hotel credit cards. Foreign Exchange Fees: When you make purchases abroad with your card, the card issuer will automatically convert your purchases from the local currency to U.S. dollars on your bill. Most card companies exchange money at rates that are more favorable than what consumers would get on their own. You may, however, incur a charge for foreign currency exchange for each purchase. Late Payment Fees & Overlimit Fees: The amount of money you will be charged for paying late or exceeding your credit limit.

Interest Rates… Annual Percentage Rate (APR) for Purchases: The annual, standard interest rate you will be charged for purchases you make if you carry a balance from month to month. Variable-Rate APR: Means your APR may be adjusted over time due to the cost of credit in the market – typically “Prime + X.XX%”…..e.g 3.25% % = 13.24% Non-Variable APR: An annual percentage rate that is fixed for a stated period of time. Unlike a variable-rate APR, this interest rate does not change if the prime rate changes. Introductory APR: This is the interest rate that is in effect for an introductory period only. Typically, an introductory APR is less than the standard APR and is in effect for six months or a year.

Interest Rates… Cash Advances: Using your credit card to take money out of an ATM. Typically, a fee is assessed at the time of the withdrawal and the withdrawal is charged interest at a higher APR than the standard APR for purchases. You will also be charged interest immediately. Balance Transfers: Transferring a balance from one credit card to another. This practice is usually done to take advantage of a lower, promotional APR on a new account. While the interest savings can be significant, the balance transfer APR may differ from the standard APR for purchases and most credit cards charge fees for balance transfers. Penalty APR: The highest interest rate for a given card product. If you pay your credit card late or bounce checks, this rate may be applied to your account. Unless you are 60 days late, the new rate can't be applied to your balance—only on new purchases and transactions you make on your consumer credit or charge card.

Terms… Convenience checks: Checks linked to your credit card account. They can be used to transfer a balance from another card or to make purchases or payments. Minimum monthly payment: The minimum amount that you are required to pay the credit card company each month. You will be in default if you pay less than this. Payment due date: The last day that payment can be accepted without penalty. Each month, your due date will be the same date in the month. Payment or default Triggers: Terms such paying late or submitting a no-good check that could cause you to incur fees and a higher interest rate

Reviewing Credit Terms…

Credit Bureaus… ExperianTransunion Must have one account – a student loan, credit card, mortgage, auto loan – that is older than six months and one account has been updated within the past six months for credit bureaus to assign you a score. You don't just have one credit score. You have many. Every creditor does not report information to each of the three big credit bureaus. (utilities, for example) may only report to a single bureau Each bureaus computes a score based only on the information in its proprietary report. Scores from one bureau might be higher or lower than at the other two Equifax

Fair Isaac & CO (FICO Score) A numerical translation of your credit reports that predicts risk for future lenders (as well as insurers, employers, landlords and others) FICO Scores range from ; higher is better; below 640 is considered “sub- prime” Lenders use scores as “approval cut-offs” and for interest rate pricing When new information appears on your credit report your FICO score adjusts.

Managing your Credit Score… Payment History Tips Pay your bills on time. Delinquent payments and collections can have a major negative impact on your FICO score. If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your credit score. Be aware that paying off a collection account will not remove it from your credit report. It will stay on your report for seven years. If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor.

Managing your Credit Score… Keep balances low on credit cards relative to the “line size” - High outstanding debt can affect a credit score. Do your rate shopping for a given loan within a focused period of time. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur. Note that it's okay to request and check your own credit report. Have credit cards — but manage them responsibly. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly. Try to avoid closing you oldest credit card account

Debt Economics Credit Cards Car Loans Home Equity Student Loans Mortgages Easy to get, but high cost of credit given “unsecured” Not tax deductible Few economically rational reasons for consumers to take on Rapidly depreciating asset Not tax deductible Generally more favorable rates Potentially good economic investment Somewhat tax deductible Changing market dynamics in the cost/value equation Tax deductible Lower cost, but secured by home Generally variable---borrowing costs may be unpredictable Tax deductible Need to understand types & terms (fixed, ARM, etc.) Leverage can work for and against you!

Concept of Leverage $180k Pay Back (160k) $20k 20k 40k -50% Return Put down 20% (40K) Borrow 80% (160k) $200k Graduate from Williams & Buy a House Move 1 Year Later & Sell House… (60K) Pay Back (160k) $220k 60k 40k +50% Return

Questions & Discussion