DCPF Chapter 6 Review

credit score

Credit bureaus collect, maintain, and provide information to lenders. The credit bureau confirms information provided on the lender's credit application as well as supplying additional data from other creditors or public court records. Some lenders use the credit-bureau-provided information to calculate their own of this, while other lenders simply purchase these from the credit bureau. Either way, most of these are calculated using models developed by Fair Isaac Corporation, hence the name FICO score, although credit bureaus may use their own proprietary, or "brand name," for this

how Principle 10: Just Do It apply to protections again identity theft

Requesting your credit report from all three bureaus or calling to establish a fraud alert takes consumer action—only you can "Just Do It." Invoking these protections requires you to act, not procrastinate

affinity credit card

a bank credit card benefits the issuing organization or charity through a rebate of a small part of the annual fee or a percentage of the annual purchase amount. Although holders of these cards want to support the issuing organization or charity, the cards generally carry more expensive fees and rates of interest

secured credit card

a bank credit card that is required by the bank to issue collateral, such as a CD or a savings account. If the bill is not paid on time, the bank can claim the assets securing the account. People who are a bad credit risk and could not otherwise qualify for a credit card use these cards.

premium (prestige) credit card

a bank credit card with a credit limit as high as $100,000 or more and additional benefits (e.g., emergency medical or legal services) or rebates; the low end of the spectrum are standard cards followed by Gold cards with a higher credit limit and user benefits

bank credit card

a credit card issued by a bank or large corporation, in cooperation with the Visa or MasterCard franchise organization. Visa or MasterCard offer a system for credit authorization, billing, and advertising, while the issuing bank or corporation sets the policies for interest, grace periods, fees, and other related services or benefits

grace period

a period of 21 to 25 days from the date of the bill during which interest is not charged on the outstanding balance

open/revolving credit

an open line of credit with a specified limit that is continuously available to the consumer as long as an agreed-upon payment is submitted monthly; charges and payments "revolve" over time (e.g., credit cards, store charge agreements)

consumer credit

any agreement to pay in the future for goods/services/cash received today, excluding mortgages, made by a consumer for personal, and not business, purposes

how the CARD Act of 2009 has changed the way college students apply for and access credit cards

bans credit card companies from providing free goods and services within 1,000 feet of a college or university campus. In addition, card issuers are no longer allowed to issue cards to anyone under age 21, unless the person qualifies for credit independently or if someone older than age 21 co-signs the application. It is important to note that credit card companies may still solicit applications from students under age 21 if the student has been prescreened

adjusted balance method

bases the interest calculation on the balance at the end of the previous billing cycle after deducting payments during the current cycle

previous balance method

bases the interest calculation on the balance at the end of the previous billing cycle, ignoring both payments and charges made during the current cycle

APR relevance when shopping for credit

by including all relevant costs, consumers can better judge the "real" cost of credit from one lender to another

how is APR calculated?

by taking into account all costs, including interest, the cost of credit reports, the cost of all associated fees, other expenses, and the method of interest calculation

single-purpose cards

can only be used for purchases at the issuing company (e.g., ExxonMobil), unlike a bank card that can be accepted at a variety of business establishments around the world

Fair Credit Reporting Reform Act of 1996

federal law designed to protect consumers from unfair credit billing practices; provides guidelines for both consumers and creditors including procedures to manage disputes regarding billing statements

identity theft

occurs when fraud or other crimes are committed by someone using your name, address, Social Security number, bank or credit card account number, or any other personal information; occurs from lost/stolen wallets, information retrieved from household mail or trash, or from a change of address form used by thieves to divert household mail; Phone or e-mail solicitations for personal or other account information as part of a survey or to confirm account activity are examples of thieves collecting personal information under the "pretext," or guise, of some other purpose

conditions

one of the five C's of credit that reflect the possible impact the current economic situation might have on your ability to repay the debt. Favorable conditions that do not negatively affect job security or earning potential increase creditworthiness

character

one of the five C's of credit that reflects stability in your lifestyle (e.g., residence, job) and your previous handling of credit. Responsibly handling debt repayment in the past increases creditworthiness

collateral

one of the five C's of credit that reflects the availability of assets for security, should you default on the loan. Collateral that is worth more increases creditworthiness

capital

one of the five C's of credit that reflects the level of savings and investments held. Managing income to meet current debt obligations and still save to accumulate assets increases creditworthiness

capacity

one of the five C's of credit that reflects the relationship between earnings and debt. Having the capacity to take on and repay more debt given your current debt/income situation increases creditworthiness

types of bank credit cards

premium or prestige card, affinity card, and a secured card

the steps involved when attempting to resolve a billing error

provides procedures for resolving billing errors. A credit user may withhold payment for the item in question while the issue is under investigation. The first step in resolving a billing error is to notify the card issuer in writing within 60 days of the statement date. The letter must include your name, address, account number, and a description of the error. The letter should be sent to the billing inquiry address on the credit card. The issuer will notify you within 30 days that an investigation has begun. The issuer has 90 days or two billing cycles to complete the investigation. Upon completion, your account will either be credited or you will receive an explanation why the complaint is not deemed to be legitimate. If you are still not satisfied, you may contact a regulatory agency or file a claim in small claims court

travel and entertainment (T&E) cards

require full payment of the balance each month, unlike bank credit cards that offer revolving credit or the option to pay the balance over an extended period of time. The only consumer advantage is the interest-free grace period, but a high annual fee is a disadvantage (most bank credit cards offer an interest-free grace period)

average daily balance method

the mathematical average calculated from summing the individual daily balances and dividing by the number of days in the billing period; some methods include new purchases when determining the daily balance, while others exclude the new purchase amounts.

annual percentage rate (APR)

the simple interest paid over the life of a loan

credit user (most important decision factors in choosing a credit card)

this user carries a balance, so finding the lowest possible interest rate is most important

convenience user (most important decision factors in choosing a credit card)

this user wants the convenience offered by the card but pays the bill in full each month. Interest rate is irrelevant, but no or low annual fee, a long interest-free grace period, and added free benefits from the card are important.

previous balance method

which balance calculation method results in the highest interest charge?

adjusted balance method

which balance calculation method yields the lowest charge?

protections against identity theft offered by the FACT Act

• Access to one free credit report annually from each of the three major credit bureaus: Experian, Equifax, and Trans Union. • Designation of a fraud alert on your account and improved security of your credit rating by calling one of the credit bureaus. • With the fraud alert in place, creditors must take additional precautions to ensure that you are in fact opening the account by confirming your identity. • Electronic receipts cannot show the entire account number, but only the last five digits.

Fair Credit Reporting Act protection to your credit information

• Consumers must be informed of the name of a credit bureau providing information that causes credit denial. • Consumers have access to their report information and the right to challenge incorrect information. • Written permission is required from consumers before an employer or prospective employer can access credit report information. • Consumers may sue creditors for not correcting reporting errors.

benefits associated with credit card use

• Convenience of shopping in person, by phone, or over the Internet, without the risk of carrying cash • Availability of a temporary source of emergency funds • Use of the good, service, or cash before it's fully paid for • Convenience of a complete, itemized bill for a month's worth of shopping • Opportunity to buy a needed item before an anticipated price increase • Interest-free use of funds, for cards with a grace period, from date of purchase to payment • Convenience of making reservations or guaranteeing reservations for late arrival • Form of identification • Availability of a variety of free benefits

five factors considered in the calculation of the FICO score

• Payment history, 35 percent of the score, reflects the pattern of payments for other credit accounts. • Amount owed and available credit, 30 percent of the score, reflects the amount currently owed on all credit accounts, including mortgage, as well as the percentage of available credit currently used. For example, do your credit card balances reflect 25 percent of your available credit lines or 85 percent? • Length of credit history, 15 percent of your score, reflects how long accounts have been open and if accounts have continued with the same creditors. • Types of credit used, 10 percent of your score, reflects the ability to manage money across a variety of account types (e.g., credit card, retail accounts, auto loan, mortgage, student loan). • New credit, 10 percent of your score, reflects your efforts to acquire new accounts. Recent attempts to add multiple accounts will lower your score.

strategies for dealing with overuse of credit cards

• Planning a budget to ensure that credit card payments are made and additional charges are not made • Shopping for the least expensive credit card that best meets your usage habits • Using savings to pay off the credit card balance—only if it is cost effective and does not become a habit • Using a secured loan or home equity loan to pay off credit card debt that is charging a higher interest rate

four ways to avoid credit card fraud

• Save all credit card charge receipts, compare them to the monthly statement, and then destroy them to avoid someone getting your card number from a receipt. • Don't disclose your account number over the phone unless you initiated the purchase. • Never disclose your account number over a public phone. • Never leave a store without your card

most common fees and penalties imposed by credit card issuers

• The annual fee is a fixed annual charge imposed on a credit user. • A merchant's discount fee is typically a fixed percentage of sales that a merchant pays to a credit card issuer. • Cash advance fees are a charge for making a cash advance. • Late fees are charges imposed as a result of not paying on time. • Over-the-limit fees are imposed whenever a credit user spends more than the credit limit. • A penalty rate is a higher interest rate assessed on your account if the minimum payment is not paid on time. This rate may be applied in addition to the late payment fee

eleven credit card rules resulting from the CARD Act of 2009

• Credit card companies must tell you when they plan to raise your interest rate or other fees. Credit issuers must provide 45 days' notice before increasing interest rates, changing fees, changing account terms, or make other significant changes. • Credit card companies must disclose how long it will take to pay off an outstanding balance. • Credit card companies can no longer increase interest rates during the first 12 months after an account is opened. Although, if you are 60 days late paying the credit card bill, the rate can be increased. • Increased interest rates apply only to new charges, which means that if you carry a balance, the old interest rate applies to the old balance. • You must now tell the credit card company that you wish to allow transactions that will take you over your credit limit; without pre-permission, the transaction will be denied. If you have not given permission, and the charge does go through, the credit card may not charge penalties or additional fees. • Credit card companies can no longer issue high fee cards. Total fees, such as an annual fee, cannot total more than 25 percent of the initial credit limit. • Most consumers under age 21 will require a co-signer in order to open a credit card account or show documentation that their income is high enough to qualify for credit. • Credit card companies must now mail or deliver credit card statements at least 21 days before a payment is due. • When making a credit card payment (more than the minimum), the credit card company must apply the excess amount, over the minimum, to the balance with the highest interest rate. • Credit card companies can no longer charge fees in excess of $25 unless one of your last six payments was late (resulting in a $35 charge) or the credit card company can show that its costs associated with late payments exceeds $25. • Credit card companies are no longer allowed to charge inactivity fees.

reasons for a grace period to be canceled or eliminated

• For about one-fourth of cards, interest charges start from the day of purchase. • For cash advances, interest charges start immediately—for almost all cards. • For accounts carrying a balance from the previous month, no grace period is allowed for current purchases—almost all cards.

disadvantages associated with credit card use

• Loss of spending control • High interest charges for unpaid balances • Credit repayment commits future income and limits financial flexibility

warning signs that someone may be having trouble with credit or may be a credit card abuser

• Paying only the minimum monthly payment each month. • Reaching, or exceeding, the maximum spending limit on one or more cards. • Charging group expenses (e.g., dinner out with friends) on your card in exchange for the cash paid by your friends. • Failing to keep an accurate record of current credit card charges. • Using credit cards for impulse purchases as well as necessities such as food, rent, or other credit payments. • Getting cash advances to cover expenses when your checking account runs low. • Being turned down for a new credit card or having an old card canceled. • Using savings to pay off credit card bills. • Failing to know how much interest you are accumulating on the account, or how the interest affects your monthly bill. • Worrying about your credit card bill before or after it comes in the mail

warning signs of identity theft

. Active accounts that are not actually your accounts but are listed on your credit report may be one indication of identity theft. Other indicators include the following: • A new credit card that you did not apply for. • Credit denial or unfavorable credit terms on a new account for no apparent reason or change in your financial situation. • Inquiries from debt collectors or businesses for products/services you did not purchase. • Undelivered bills or other mail that you expected.

how credit scores affect the availability and cost of credit

Lenders use the numerical score, or FICO score, to determine the access to and cost of credit. The higher the score, the greater the availability of credit and the lower the interest rates charged. With lower scores, interest rates increase and at some predetermined score, credit is denied

convenience and credit user (most important decision factors in choosing a credit card)

this user wants the best of both—low interest for when a balance is carried, a long interest-free grace period for when the bill is paid monthly, and no annual fee to keep other costs low.

average daily balance method, previous balance method, adjusted balance method

three commonly used balance calculation methods

types of credit used, new credit, length of credit history, amounts owed, payment history

factors that determine your credit score

character, capacity, capital, collateral, conditions

five C's of credit

credit

involves any agreement to pay in the future for goods, services, or cash received today