1. Credit Cards and Other Forms of Credit
Chapter 11
Credit Cards and Other Forms of Credit

2. Learning Objectives Explain how credit cards work
Describe different credit card features
Discuss how to use a credit card correctly
Identify other risky credit arrangements

3. Objective 1: Explain how credit cards work

4. How Credit Cards Work
Credit cards provide people with revolving open-end credit, which they can draw from repeatedly up to some preset limit
Credit providers (like a bank) agrees to make a certain amount of credit available to the cardholder
The cardholder can use card as he/she wishes as long as he/she doesn’t go over credit limit
He/she will be a monthly bill listing all purchases
Usually your credit score will NOT be on your credit card statement

5. Credit CARD Act of 2009
Listing the length of time necessary to completely pay the debt when making only minimum payments is a reporting requirement mandated by the Credit CARD Act.

6. Advantages of Credit Cards
You can purchase products without carrying large amounts of cash or a checkbook
As long as you pay the balance in full at the end of each billing cycle, you don’t incur any interest charges
You receive a monthly statement that contains a list of your purchases for that month which helps you keep track of spending

7. Applying for a Credit Card
Lenders will run a credit check on you (look at your credit report in order to look at your credit history and determine your ability to repay)
They will check your cash inflows and outflows
They’ll do an evaluation of your assets
They will NOT ask for personal references

8. Types of Credit Cards
Most popular brands: Visa, MasterCard, American Express, and Discover
Credit cards are accepted by most merchants in the US and globally
There are also retail cards available: Target, Sears, Shell, Exxon Mobil, etc.
Target cards only accepted at Target

9. Objective 2: Describe different credit card features

10. Credit Card Features Credit Limit Overdraft Protection Annual Fee
The maximum that you can borrow at any one time
Example: $5,000
Creditors monitor how much of your limit you keep charged up
If you have a $5,000 limit and keep it near that limit, it negatively impacts your credit score
A feature that allows you to “overdraw” or exceed your credit limit
Overdraft charge can be very high
An overdraft triggers higher interest rates on your remaining balance
Overdraft fees cannot exceed the amount of purchase that caused the overdraft
Many credit card companies charge an annual fee of $20-$70 for the privilege of using their card
Sometimes fee is waived for people with good credit history

11. Features Incentives to Use Card Prestige Cards Grace Periods
Incentives encourage people to use their cards
Cash-back bonuses
Airline miles
Donations to charities
Cash-in points for gifts
Aka platinum or gold cards
Provides additional benefits to cardholders
Special warranties on purchased products
Insurance on travel
Period in which you are not charged interest on your purchases
Credit cards offer a grace period of at least 21 days from the time the statement is closed and the bill is calculated. If you pay your full balance within this grace period, you will not be charged any interest on your purchase.

12. Features Cash Advances Financing Prepaid Cash Cards
You can use your card to get cash out at a bank or ATM
You must pay special transaction fees
Cash advances have higher interest rates
No grace period
Most credit cards charge interest rates 15%-22%
If you’re late on a payment, interest rates will increase more than 30%
Using a credit card as a type of financing is convenient, but it’s also expensive.
Some companies allow you to purchase a card that you can “load” with cash
Example: $100 on a Walmart prepaid cash cared. You can use it until the $100 is gone
Experts estimate that a significant percentage of these cards are lost or never used
The business issuing the cards get to keep the cash

13. Objective 3 - Discuss how to use a credit card correctly

14. Tips on Using Credit Cards
Use credit cards only for convenience and NOT as a source of financing
Set a credit limit for yourself based on the amount you can afford to repay each month
Don’t go over your own preset limit
A savings account generally earns LESS interest than credit companies charge for balances – so pay your debt off first
You need greater cash inflow than outflow to pay off debt

15. If You Experience Problems
Try to negotiate terms (ask lender to lower interest rates – they may do it because they’d rather you not file bankruptcy)
Get credit counseling
Limit your spending and try to increase inflow (work more hours, get a second job)
Debt consolidation: combining several small accounts into one larger account that you may be able to finance at a lower rate at a bank or with another lender
Works best when you have an asset you can pledge as collateral (like a home equity loan)

16. Filing Personal Bankruptcy
LAST RESORT
What it is: process in which the courts provide protection for a person who is unable to pay off his or her debts
Courts help propose a plan to repay at least a portion of his or her debts
Most involve a 3-5 year repayment plan
Reported to the credit bureau and will be on your credit report for seven years (public record)
During that time, the person will likely NOT get approved for new loans, if they do, the interest rate will be extremely high

17. Objective 4 - Identify other risky credit arrangements

18. Other Risky Credit Arrangements
Payday Lending
Tax Refund Loans or Tax Anticipation Loan
A lender provides cash advances at a high cost to customers who provide a check dated for some time in the future
Small loans that last 7-14 days
Advantage: no credit check
Ex: It’s 11/6 and you don’t get paid until 11/13 but you need $400. Payday lending will give you $400 but you must write them a check dated 11/13 for $500.
Short-term loan with the idea that you use your income tax refund to repay what they’ve borrowed
Aka “Rapid Refund”
Fees are high
Refund may be lower than expected
Debt > refund

19. Other Risky Credit Arrangements
Pawn Shops
Cell Phone Leases
Pawnbroker: receives and holds items in exchange for loans that run for 30 days – 3 months
Commonly pawned items = jewelry, vehicles, firearms, etc.
If you don’t repay the loan, they can sell your item
Your pawned item = collateral for pawnbroker
If you pay back the loan before the due date, you get your item back
Cell phone plans = type of debt
Landline services = utilities
Cell phones have a lease of at least a year
When you sign the lease, you’re entering into a contract
If you default on a cellphone lease, it will appear on your credit score