Chapter 5 Flashcards
Credit
Receiving goods, services, money based on an agreement between lender and borrower
Pros of credit cards
Convenience
Take advantage of sales/interest free promotions
Accumulate rebates, points, gifts, other benefits
Identification
Emergencies/big ticket items
Simplifying record keeping
Insurance benefit: purchase protection, travel insurance etc.
Cons of credit cards
Overextending High interest/finance charges Add on fees Lost cards loss of privacy loss of freedom
What qualifies as overextending on credit cards?
If over 20% of monthly take home pay goes toward paying off debt
Five C’s of credit
Capacity: current and potential income (ability to pay off debt)
Capital: measure of your net worth
Character: past credit history and reliability
Collateral: property you own to secure the loan (what lender can take)
Conditions: economy at time of loan
Establishing credit
Open checking and savings
Use credit by opening one or two charge accounts
Make payments when due
Pay off existing loans
Get steady job
Buy or rent and stay for year or more: establish stability
Application process for opening an account
Applications: name, address, sources of income, amount of income, bank info
Credit investigation: references and credit bureau
Credit bureau
Reporting agency that collects, stores, and sells information to potential lenders
Equifax: atl, GA
Trans-Union corp: PA
Experian: TX
All transactions immediately informed to all 3
How to manage credit:
- Use only when necessary
- Know what the agreement says
- Make payments on time
- Pay off in full each month
- Inform creditors if you cannot make all or part of payment
How many cardholders actually pay off their credit card charges in full each month?
36%
FICO score
Fair Isaac Company: algorithm for score (300-850)
Built on past history for many years
Measure of how much risk you are to lender/employer
- good score >720
- median 623
-
When does personal financing start?
At birth when your social security number is established
Affinity card
Marketed to students
Credit cards offered by institutions and organizations (school or charity) that lend their names for percentage of return
Generally high interest rate
Good if you pay in full
how much credit is affordable?
10-15%
but can also depend on the persons risk
debt safety ratio
total monthly consumer credit obligations: monthly take home
types of credit
open-ended: pre approved limit (i.e. credit card/charge account)
Installment credit: agreement that requires FIXED, REGULAR payments of principal and interest (car loan)
noninstallment: RARE- single payment due at the end of loan period
cash advance
credit limit
credit statement
cash advance: a loan that can be obtained by cardholder at any participating financial institution through a credit card
credit limit: set max limit that can be charged to credit card
credit statement: monthly statement listing all transactions charged to the card
What is a good interest rate?
the lowest one you can find that also offers services and benefits that you want
ranges 4-21%
bank CC’s typically lower than retail CC’s
usury laws
prime rate
grace period
usury law: some states limit interest rates to certain maximum
prime rate: rate that a bank uses to determine loans to individuals and small businesses
grace period: amount of time to pay for purchases without incurring finance charges
How do issuers keep up with changes in prime rate?
What must be disclosed to cardholder?
they adjust interest rate quarterly and provide a range with the prime rate within it (i.e. prime rate of 10% with minimum of 13% and max of 20%)
These ranges MUST be disclosed to cardholder
any changes MUST be disclosed to current cardholder
what are additional fees that lenders/issuers make extra money off of?
annual fees
cash advance/loan fees
transaction fee
overrun fee: if you exceed cash limit
annual percentage rate
actual or true rate of interest paid over the life of credit
- lenders must disclose rate of interest that they charge
- lower the APR the lower the cost of credit
- I=PRT
I: interest
P: principal
R: rate of interest
T: time
4 variations of Average Daily Balance Method
ABD excluding new purchases: pay interest on left over from last month
ABD including new purchases with grace period: left over from prev. month and any charges made during billing cycle (grace period can exclude those new charges if balance from prev. cycle was zero)
ABD including new purchases without grace period: left over balance from prev. moth and charges made during billing cycle
Two cycle ABD including new purchases: no grace period on new purchases during billing cycle and no grace period for previous month each time account carries a balance.
how to find the best deal of Credit card
RATE OF INTEREST: most important rebates and gifts fees length of grace period method of calculating balances consumer credit legislation
