1. Economics Ms. McRoy-Mendell
Credit Cards
Economics
Ms. McRoy-Mendell

2. Aim
Why do people use credit cards?

3. Do-Now

4. Types of Credit Cards
Consumer/Standard credit cards: Most common and are readily available from most banks and financial groups.
Unsecured (non-collateralized) debt obligation: you do not have to put down a security deposit to prove the money can be repaid.

5. Types of Credit Cards (cont’d)
Specialty credit cards
Student Credit Cards
Compared to consumer credit cards, student credit cards are often scaled back somewhat in terms of rewards, features and other benefits.

6. Types of Credit Cards (cont’d)
Credit cards with rewards programs
Reward credit cards allow users to earn incentives for making purchases with their credit card.
Reward cards usually require better-than-average credit for approval.

7. Types of Credit Cards (cont’d)
Bad credit and/or credit repair cards:
Prepaid credit cards: A type of secured credit card. Prepaid cards are
Can be used at all places that credit cards can, but really act as a debit card (e.g. a “credit card on training wheels”
Secured credit card - A security deposit of a predetermined amount is needed in order to secure the credit card, and the security deposit generally needs to be of equal or greater value than the credit amount. Or collateral can come in the form of a car, boat, jewelry, stocks or anything else of monetary value.
Pre-paid credit card - With these cards you determine the credit line by transferring however much money you'd like to have available to spend to the card. 

8. Truth in Lending Act The Truth in Lending Act (TILA) of 1968
United States federal law designed to promote the informed use of consumer credit, by requiring disclosures about its terms and cost to standardize the manner in which costs associated with borrowing are calculated and disclosed.
Schumer Box: an easy-to-read table or “box” that discloses the rates, fees, terms and conditions of a credit card agreement as required under the federal Truth in Lending Act (TILA). 

10. Key Definitions:
APR (annual percentage rate): the amount of interest you pay, on an annual basis, on an unpaid balance.
Note different levels are offered for different levels of creditworthiness.
Look out for introductory rates!
APR for Balance Transfer: the interest rate you pay, on an annual basis, when you transfer a balance from another credit card.
Note: Look out for fees, especially with balance transfer APR’s of 0%!

11. Key Definitions (cont’d):
APR for Cash Advances: the interest rate you pay, on an annual basis, when you withdraw money, in the form of cash, from your credit card. (e.g. via an ATM)
Again, look out for fees!!
This is all assuming you made at least the minimum required payment on-time, if not…

12. Key Definitions (cont’d):
Penalty APR: a higher APR that the company can charge you if…
Pay your bill late
Go over the credit limit
Make a payment that is returned
Do these on another account that you have with the same company! (Yep, you heard me right!)
Note: If you trigger the penalty rate, your credit card company must tell you that they will be raising your rate 45 days in advance of the increase and they must tell you how long it will be in effect for, but there’s no guarantee it will automatically go back!

13. Key Definitions (cont’d):
Grace Period: the time between the end date of your statement and the due date of the payment. During this time you are allowed to pay your credit card bill without having to pay interest.
Legally required to be at least 21 days from the time you receive your bill to pay off the new balance before incurring finance charges.
(e.g. Statement ending 05/11; Payment due 06/09)
Minimum interest charge: the least amount of interest a borrower will have to pay their credit card company in a particular billing cycle if a balance has not been paid off (e.g. $2)

14. Fees!!! General Transaction Related Annual Fee Account Set-up Fee
Participation Fee
Transaction Related
Balance Transfer
Cash Advance
Foreign Transaction

15. Fees!!!
Penalty
Late Payment Fee
Over Limit Fee
Returned Payment Fee

16. Potential Losses
The Fair Credit Billing Act (FCBA) and the Electronic Fund Transfer Act (EFTA) offer protection if your credit, ATM, or debit cards are lost or stolen.
For credit cards:
If you report…
Your maximum loss…
Before any unauthorized charges are made with the credit card or if only the number is stolen and not the card. $0
Within 60 days of your statement being sent to you
$50

17. Potential Losses
The Fair Credit Billing Act (FCBA) and the Electronic Fund Transfer Act (EFTA) offer protection if your credit, ATM, or debit cards are lost or stolen.
For debit cards:
If you report…
Your maximum loss…
Before any unauthorized charges are made. $0
Within 2 business days after you learn about the loss/theft
$50
More than 2 days after you learn of the loss/theft but fewer than 60 days after your statement is sent to you
$500
More than 60 days after your statement is sent to you
All transactions undertaken

18. Types of Credit Two main categories
Closed-ended (aka installment credit): This form of credit is used for a specific purpose, for a specific amount, and for a specific period of time. Payments are usually of equal amounts
Open-ended (aka non-installment credit): Revolving credit

19. Types of Credit (cont’d)
Closed-ended
Loans
Mortgages
Open-ended
Credit Cards
Personal Lines of Credit

20. Typical Loan Characteristics
Interest Rates
Fixed: When the interest rate does not fluctuate during the duration of the loan
Variable: When the interest rate varies during the duration of the loan (typically anchored to the prevailing discount rate)
When initiating a loan, the fixed rate presented is typically higher than the starting variable rate.

21. Consequences of Default
Repossession: When a financial institution takes back an object that was either used as collateral, rented, or leased.
Eviction: The removal of a tenant from rental property by the landlord.
In some jurisdictions it may also involve the removal of persons from premises that were foreclosed by defaulting on a mortgage

22. Consequences of Default
Foreclosure: The process of taking possession of a mortgaged property as a result of the mortgagor's failure to keep up mortgage payment
Lien:  A legal claim that someone or something has on the property of another person until a debt has been paid back

23. Consequences of Default
Bankruptcy: Filing for bankruptcy is a legal proceeding in which the debtor petitions the court for forgiveness of existing debt.

24. Fair Debt Collection Practices Act
Established legal protection from abusive debt collection practices
E.g. When attempting to collect debt, the creditor must NOT do to the following

25. Credit CARD Act
The Credit Card Accountability Responsibility and Disclosure Act (CARD Act) of 2009 
Banned credit card issuers from issuing credit cards to anyone under 21 unless they have adult co-signers or can show proof of income to repay the debt
Credit card companies must stay at least 1,000 feet away from college campuses if that are offering gifts to entice students to apply for credit cards
Significant changes in terms on account cannot occur without 45 days’ advance notice of changes

26. Credit CARD Act (cont’d)
Banned unfair rate increases.
Existing Balance APR’s can’t be raised “any time, for any reason”
Promotional Offers need to last more than a few days
Banned Unfair Fee Traps
Late fees based on shifting due dates
Over-limit fees automatically charged
Limits fees on gift cards
Plain language in plain sight
Opening an account: Terms and Conditions
Once account is active: Monthly Statement
Financial consequences of decisions
Increased accountability
Increased penalties

27. Aim
Why do people use credit cards?

28. Types of Credit Cards (cont’d)
Specialty credit cards These types of cards are for consumers with unique needs for their credit use, such as business professionals and students.
Business Credit Cards: Available for business owners and executives and have many of the same features as traditional credit cards:
i.e. low introductory rates, cash back programs, and airline rewards.
The difference is these cards come with many additional benefits and perks exclusively for those in the business world.
Some of these bonuses include: Business expenses kept separate from personal expenses; special business rewards and savings; expense management reports; additional cards for employees; and higher credit limits.

29. Other Sources of Credit
Consumer Finance Company
A financial institution that specializes in providing loans directly to consumers who are unable to secure bank loans. A consumer finance company generally charges a higher interest rates than a bank.
E.g. HSBC Finance, CitiFinancial, Wells Fargo Financial

30. Typical Loan Characteristics
Principal
Interest
Term
The larger each of these is, the more expensive the loan. The smaller, the cheaper