CC Ch. 6
What is a debit card? How is it similar to a credit card? How does it differ?
A debit card provides direct access to your checking account and thus works like writing a check Similarities: 1. Looks like a credit card (MasterCard and Visa credit card markings) 2. Works the same Differences: 1. Debit cards have direct access to your checking account 2. Debit cards work like you are paying cash (no finance charges to pay)
What are some key factors that you should consider when choosing a credit card?
Annual fees Rate of interest charged on account balance Length of grace period Method of calculating balances
Many bank card issuers impose different types of fees; briefly describe three of these fees.
Annual fees -- usually around $25-$40 a year Transaction fees -- happens for each (non-ATM) cash advance; usually $5 per cash advance or 3% of the amount obtained Late-payment fees -- charged when you were a bit late in making your payment
What is the most common method used to compute finance charges?
Average daily balance (ADB), including new purchases
How is the interest rate typically set on bank credit cards?
Base rate -- the rate of interest a bank uses as a base for loans to individuals and small to midsize businesses They adjust their interest rate monthly or quarterly and usually have minimum and maximum rates Interest rates of credit cards are higher than any other form of consumer credit
Discuss the steps that you would take to avoid and/or resolve credit problems.
Be disciplined when using credit 1. Reduce the number of cards you carry, and don't rush to accept the tempting preapproved credit card offers in your mailbox Stop making any new charges until you pay off (or pay down) the existing balances, and then commit to a repayment plan
What steps can you take to establish a good credit rating?
Character Capacity Collateral Capital Condition
Describe the basic operations and functions of a credit bureau.
Credit bureau -- an organization that collects and stores credit information about individual borrowers Credit bureaus maintain fairly detailed credit files on you in order make sure you check out as a good candidate for what you are borrowing Collect and store credit information on people living within the community and make it available, for a fee, to members who request it Must provide you with low-cost copies of your own credit report and must have toll-free numbers
Describe credit scoring and explain how it's used (by lenders) in making a credit decision.
Credit scoring -- a method of evaluating an applicant's creditworthiness by assigning values to such factors as income, existing debts, and credit references Used to make the decision on whether or not a store or bank will grant you credit through the given data provided by the credit applicant
Describe the effects of the credit crisis of 2008-2009 on borrowers?
Lenders reduced credit card limits by about 28% during and after the crisis to reduce their exposure to credit risk Debt has been reduced both voluntarily and involuntarily, there is growing demand for more extensive disclosure and transparency in financial contracts in general and mortgage contracts in particular, and there is greater focus on value purchases Discount store and online sales have soared as consumers look for more bargains
How can you use the debt safety ratio to determine whether your debt obligations are within reasonable limits?
Make sure your monthly repayment burden doesn't exceed 20% of your monthly take-home pay Debt safety ratio should be closer to 15% or 10% The closer your total monthly payments are to your desired debt safety ratio, the less future borrowing you can do The lower the debt safety ratio, the better shape you're in and the easier it should be for you to service your outstanding consumer debt
What is open account credit? Name several different types of open account credit.
Open account credit -- a form of credit extended to a consumer in advance of any transaction Types: 1. Credit cards Bank credit cards, 2. Secured and unsecured revolving lines of credit and overdraft protection lines
Why do people borrow? What are some improper uses of credit?
People use credit as a way to pay for goods and services that cost more than they can afford to take from their current income Main reasons: 1. To avoid paying cash for large outlays 2. To meet a financial emergency 3. For convenience 4. For investment purposes Improper uses: 1. To meet basic living expenses 2. To make impulse purchases 3. To purchase nondurable (short-lived) goods and services Product purchased on credit should outlive the payments
Describe how revolving credit lines provide open account credit.
Revolving line of credit -- a type of open account credit offered by banks and other financial institutions that can be accessed by writing checks against demand deposit or specially designated credit line accounts Form of open account credit and often represent a far better deal than credit cards, not only because they offer more credit but also because they can be a lot less expensive Three major forms of open credit are overdraft protection lines, unsecured personal lines of credit, and home equity credit lines
What is the attraction of reward cards?
Reward credit card -- a bank credit card that combines features of a traditional bank credit card with an additional incentive, such as rebates and airline mileage Incentive programs: 1. Frequent flyer programs, automobile rebate programs, and other merchandise rebates (Starbucks, Marriott Hotels, etc.)
What are the basic features of a home equity credit line?
Secured with a second mortgage on the home Allow you to tap up to 100% of the equity in your home by merely writing a check Doesn't provide the lender with much of a cushion should the borrower default From the borrowers' perspective, it provides access to a lot of relatively inexpensive credit, which can lead some homeowners to overextend themselves and thus encounter serious debt service problems down the road Have the annual interest charges on such lines may be fully deductible for those who itemize 1. A homeowner is allowed to fully deduct the interest charges on home equity loans up to $100,000, regardless of the original cost of the house or use of the proceeds Among the cheapest forms of consumer credit
The monthly statement is a key feature of bank and retail credit cards. What does this statement typically disclose?
Shows billing cycle and payment due dates, interest rate, minimum payment, and all account activity during the current period Retail charge cards have similar monthly statements, but w/o a section for cash advances Statement summarizes your account activity: the previous balance, new charges made during the past month, any finance changes on the unpaid balance, the preceding period's payment, any other credits, and the new balance
What's the biggest source of credit card fraud? List at least five things you can do to reduce your chances of being a victim of credit card fraud.
Stolen account numbers are the biggest source of credit card fraud 5 things to reduce chances: 1. Never give your account number to people or organizations who call you (same with the Internet) 2. When paying for something by check, don't put your credit card account number on the check and don't let the store clerk do it -- show the clerk a check guarantee card, a driver's license, or some other form of identification-- but not your Social Security number 3. Don't put your phone number or address on credit/charge slips, even if the merchant insits, just scribble down any number you want 4. When using your card to make a purchase, keep your eye on it 5. Always draw a line on the credit slip through any blank spaces above the total, so the amount can't be altered
Distinguish between a Wage Earner Plan and straight bankruptcy.
Wage earner plan -- an arrangement for scheduled debt repayment over future years that is an alternative to straight bankruptcy; used when a person has a steady source of income and there is a reasonable chance of repayment within 3 to 5 years Straight bankruptcy -- viewed as a legal procedure that results in "wiping the slate clean and starting anew" 1. Does not eliminate all the debtor's obligations, nor does the debtor necessarily lose all of his or her assets
Describe the general guidelines that lenders use to calculate an applicant's maximum debt burden
Watches your credit and your past payment performance closely The more responsible you are as a borrower, the easier it will be to get credit when and where you want it
