Personal Financial Literacy - Chapter 11

credit card

A financial tool that provides people with revolving open-end access to funds that they can draw from repeatedly up to some preset limit is known as a...

Bankruptcy

A legal process in which a court takes over some of the finances of a person who is unable to pay his or her bills.

Payday lending

A lender provides cash advances at high cost to customers who provide a check dated for some time in the future.

buy a less expensive coat that she can pay for immediately

A person knows that she cannot afford to pay $400 for a coat that she really wants. The financially wise action for her to take is to...

Overdraft protection

A feature that allows a person to "overdraft," or exceed the credit limit. (Overdraft protection is also a feature of checking accounts, where it protects someone in the event that a check is written for more money than is in the account.)

Credit provider

An entity, such as a bank, that agrees to make a certain amount of credit available to a cardholder.

NO. Their use and features vary.

Are all credit cards the same in their use and features?

Annual fee

Charged by credit cards companies for the privilege of using their card.

Debt consolidation

Combining several small accounts into a one larger account that may be able to be financed at a lower rate.

overdraft fees can be high (although they cannot exceed the amount of the purchase that caused the overdraft)

Even though a person has overdraft protection on her credit card, she should avoid using this feature because...

This feature may protect you from the consequences of having credit denied, but it might cost you money and potentially lead to debt problems.

Explain how using overdraft protection may both help and hurt you.

Pawnbroker

Holds items in exchange for loans that run for 30 days to as much as three months.

If you always pay within the grade period, you can avoid paying interest charges on the amount of credit you pay off.

How can the grace period enable you to use a credit card at no direct cost to you?

The credit limit may have little relationship to how much debt you can handle at one time.

How can you use the credit limit to determine how much credit you can safely use?

Credit card companies receive 2%-4% of the purchase price of every good or service that is sold to a cardholder.

How do credit card companies benefit when cardholders pay their bills in full each month and never have to pay interest on balances?

Availability of credit is always there with a credit card, and there is no need to apply for credit on every purchases as with a personal loan.

How does credit from a credit card differ from a personal loan?

Cell phone plans typically require a year-long lease.

How does the financial obligation of consumers to cell phone plans differ from that to landline telephone service?

- credit limit - over-draft protection - annual fee - incentives - prestige cards - grace periods - cash advances - finance or interest charges

Identify FIVE key features of a credit card...

contact each credit card company with which she has an account and try to negotiate new terms such as a lower interest rate.

If a person has mounting credit card debt and cannot pay it down, the first thing she should do is...

Jose's uncle will receive $521.36. 98% = 0.98 x $532 = $521.36

Jose just made a $532 credit sale in his uncle's electronics store. The customer paid with a Visa card. Assuming Jose's uncle receives 98% of the sale after paying a 2% fee. How much will he actually receive from the sale?

Credit check

Performed by potential creditors to access a person's credit report to examine the individual's credit history and the ability to repay.

Credit card

Provides individuals with revolving open-end credit, which they can draw from repeatedly up to some pre-set limit.

The pizza cost Reese $30.39! $15.39 (pizza) + $15 (fees) = $30.39 (total)

Reese charged a pizza on her MasterCard. When she got her bill she was shocked. The pizza cost only $15.39, but the charge put her over her credit limit. Assume the company charges her a $15 over the limit charge. How much did the pizza actually cost Reese?

Since savings accounts typically pay very low interest rate, you are certain to do better financially by using savings to pay down credit card debt. Leave $1,250 in savings alone: 2% average annual return = $25.00 in total interest earned by the end of one year. Use $1,000 to pay off credit card debt: 22% interest on $1,000 credit card balance = $220 saved by the end of one year.

Suppose you have $1,250 in a savings account and an existing credit card debt of $1,000. Should you use your savings to pay off the debt or let it be?

Cash advance

The ability to use a credit card to withdraw cash from a bank or ATM (rather than just purchasing a good or a service).

an easy way to establish a personal credit history

The greatest advantage of using a credit card is that it provides...

Grace period

Time in which credit card companies do not charge interest on purchases. Typical grace periods are 20 days from the time of the statement is "closed", or the bill is calculated and mailed.

Twila would be paying 180% a year in interest if she did this same withdrawal every 20 days! Solution: The $40 advance cost her $4 for 20 days. This amounts to 4/40 or 10% for 20 days use of the money. Assuming there are 18 20-day periods in a year, Twila would be paying 18 x 10% = 180% a year in interest if she did this same withdrawal every 20 days.

Twila used her credit card to get a $40 cash advance at a local ATM. She intended to pay the balance in full when the bill came in. Twila paid the $40 advance back and also paid $4 in fees ($2 for the ATM and $2 for the credit card company) when the credit card statement arrived 20 days later. What is the approximate annual interest rate that Twila paid for this advance?

- carry less cash - pay for purchases all at once - avoid interest charges if used properly - keep records of spending

What are advantages of using credit cards?

- costly - easily abused

What are disadvantages of using credit cards?

- payday lending - pawnbroking - tax refund lending - cell phone plans (leases)

What are some examples of risky types of credit?

A consumer can purchase goods and pay for them later -- even over time.

What can a consumer do with a credit card?

Bankruptcy is a process in which the courts provide protection for a person who is unable to pay off his or her debts. The courts will help a bankrupt person propose a plan to repay at lest a portion of his or her debts.

What happens when a person declares bankruptcy?

The maximum amount you can borrow using a credit card.

What is a credit limit?

A grace period is the time during which the credit card company does not charge you interest after having billed you.

What is a grace period?

A high-interest loan based on the expectation of receiving a tax refund.

What is a tax refund loan?

The process of 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.

What is meant by debt consolidation?

A credit scheme in which a borrower receives cash in return for a promise - the writing of a postdated check - of paying off a significantly larger amount at some point in the future.

What is payday lending?

Paying the bill in full helps protect you from interest charges.

What is paying your credit card balance in full important?

The person can purchase items up to the limit on the cash card without paying any interest.

What is the advantage to a consumer of having a prepaid cash card?

A cash advance from a payday lender involves writing a post-dated check in exchange for a cash advance that is less than the amount of the check. The payday lender will deposit the check on the date it becomes valid. A pawnbroker advances a small loan based on collateral provided by the borrower. If the loan is not repaid in a timely manner then the pawnbroker will sell the collateral to recover the amount of money loaned.

What is the difference between a cash advance from a payday lender and money received from a pawnbroker?

Overdraft protection protects you from borrowing beyond your credit limit.

What is the purpose of overdraft protection?

Creditors are looking for people who have the right balance of inflows and outflows to suggest that they will repay borrowed money.

What kinds of information are creditors looking for?

You should seek to pay off credit card debt as quickly as possible -- by stopping additional charges, using savings, and borrowing from others if necessary.

What should you do if you can't avoid credit card debt?

Breaking a cell phone lease can be reported to the credit bureaus and harm your overall credit rating.

What, besides money, is the major threat from misuse of a cell phone plan?

The credit card company expects that the person will continue to make purchases and carry a balance after the introductory period when interest charges go back to normal rates.

Why would a credit card company offer a person the opportunity to open a credit card account that will charge 0% interest on purchases or balance transfers for 12 months?