credit card apr

Agenda Understanding Credit and Identity Theft: Protecting Your Good Name Margaret Carothers Pitzer College David Levy Scripps College 1 Agenda All About Credit • What is credit? • Credit cards – Rewards – Risks – Terms • Interest rates • Using credit successfully 2 What is Credit? What Is Credit? • Borrowing money – Paying interest – Paying fees • Revolving – Can repeatedly borrow up to a set limit – Minimum payments – Possible fees • A credit card is a loan 3 What is Credit? When to Use Credit or Cash • When the bill is paid off, will: − I remember what I bought? − the item have value? − the total cost be worth it? (item + interest) • Yes to all is a good use of credit • No to one, consider paying cash 4 Credit Card Risks and Rewards Credit Card Benefits • • • • • • • Emergency Convenient Internet purchases Car rental Safer than carrying cash DVD rental membership Travel & cash-back rewards 5 Credit Card Risks and Rewards Rewards of Wise Credit Use • • • • • • Easier to rent an apartment Easier to buy a car Increases job opportunities Better interest rates Saves money Helps establish good credit 6 Credit Card Risks and Rewards Credit Card Risks • • • • • • • Fees High interest rates Short or no grace period Impulse purchases Emotional spending Bad credit Confusing credit terms 7 Reading a Credit Card Offer Reading a Credit Card Offer • Annual percentage rate (APRs) • Other APRs – Balance transfer – Cash advance – Default • Variable/fixed interest rates 8 Reading a Credit Card Offer Reading a Credit Card Offer • Grace period • Method for computing interest charges • Fees – Annual – Cash advance – Over limit – Late – Others • Additional fine print 9 Reading a Credit Card Offer APR • Annual Percentage Rate (APR) – Annual basis – Up-front charges • Origination fees on non-credit card loans – Compounding frequency • Can make shopping easier – Price tag 10 Reading a Credit Card Offer Interest Rate • A charge for a loan – Shown as a percent of borrowed amount • How payment is applied for most loans – Fees – Interest • Lowest interest rate balance • Higher interest rate balance – Principal 11 Reading a Credit Card Offer Fixed or Variable Rate • Fixed Rate – Rate doesn’t change – Risk is on the lender • When rates increase • Variable Rate – Rate changes – Risk is on the borrower • When rates increase 12 Reading a Credit Card Offer Determining Interest Rates • Index + margin = rate • Index (cost of funds) – T-bill, LIBOR, Prime + 4% • Margin (covers expenses) • Rate the borrower pays 6% 10% 13 Reading a Credit Card Offer Adjustment Period • Credit card rate change frequency – Annually, quarterly, monthly • Purpose – Easier budgeting for borrower – Maintain lender’s margin 14 Reading a Credit Card Offer Grace Period • Number of days without interest • Between 20 days & one month • Conditions − Pay new balance in full for billing period − Before due date • Making minimum payments − No grace period − Interest charged from purchase date 15 Reading a Credit Card Offer Calculating Interest Charges • Average daily (most common) – Outstanding balance ÷ number of days • Two-cycle (most expensive) – Outstanding balance for last month and this month ÷ by number of days • Adjusted – Balance at beginning of cycle minus payments during cycle • Previous – Interest based on balance at beginning of cycle 16 Fees and Fine Print Types of Fees • • • • • • • Late Annual ATM Over the limit Cash advance Balance transfer High interest rate 17 Fees and Fine Print Cash Advance Fee On a $20 cash advance, you’ll be charged: • 3% of amount, but − no less than $5 − or more than $50 • A $5 fee on a $20 cash advance is a hefty 25%! 18 Fees and Fine Print The Fine Print Raising your rate to 24.99% or higher • Fail to pay on time • Fail to pay another creditor on time • Bounce a check for a credit card payment • Exceed your credit limit 19 Fees and Fine Print Credit Card Temptations • Bonuses − Free gifts − Miles/points − Cash back − Car discounts − Merchandise discounts • Teasers − Introductory rates − Balance transfers − Limited-time offers 20 Fees and Fine Print Paying for Free Gifts Est. Value Gift Cash Back Airline Miles Shopping $5 $2 $12 $50 Cash Advance Fee $30 $30 $20 $30 Late Fee $29 $29 $29 $29 Over Limit Fee $29 $29 $29 $29 Annual Fee $0 $0 $39 $0 Annual Interest on $1,000 $149 - $229 $149 - $229 $154 - $229 $189 - $240 21 Charging Habits Charging Habits for One Week Expense Morning coffee Eating out Night out with friends Total Cost $20/week $35/week $45/week $100/week 22 Charging Habits True Cost of Charging $100 End of Period 1st month 1 year 5 years 10 years 19 years Balance $400 $4,713 $2,232 $877 $7 Minimum Payment $12 $146 $69 $21 $7 Assumes $100 weekly charge for 52 weeks then borrower stops charging. Payments based on 3 percent minimum payment. Interest rate is 18 percent. No additional charges made in years 2-19. 23 Convenient Alternatives Convenient Alternatives • • • • Cash Checks Debit & check cards ATM cards – Track expenses and avoid usage fees • Loan – Usually less expensive than a credit card – A fixed repayment term 24 Create a Good Credit History • • • • Pay your bills on time Keep your debt load reasonable Understand the basics Know the terms and conditions of all credit • Review your credit history every year 25 Your Credit Report • Visit annualcreditreport.com • One free credit report per year from each reporting agency • Additional reasons for free reports – Unemployed and plan to apply for employment in the next 60 days – Denied credit within 60 days on public assistance – Denied employment or insurance in the past 60 days – A victim of identity theft 26 Credit Reporting Agencies • Equifax, 1-800-685-1111 – www.equifax.com • Trans Union, 1-800-888-4213 – www.transunion.com • Experian, 1-888-397-3742 – www.experian.com 27 Information on Your Credit Report • Personal Information – Name, address (current and prior), SSN, DOB, employment • Credit Information – current open accounts, closed accounts, rating and number of day(s) delinquent, timeliness of repayment, installment or open ended • Public Record Information – bankruptcy, legal judgment, property lien, warrants 28 Information on Your Credit Report • Inquiries – Creditors and agencies who have requested your credit report • Statements of dispute 29 Sample Credit Report 30 Fixing Errors • Document discrepancies in your credit report in a letter to the credit reporting agency, detailing: – Name, address, SSN – Account and account numbers in dispute – The information you are disputing and why – Any documentation to support your claim – A request for an updated credit report reflecting the correct information 31 FICO (Fair, Isaac and Company) Scoring, a.k.a. Credit Scoring • Credit scoring is a system creditors use to help determine – Whether or not to give you credit – The interest rate to charge for the credit they do give • A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt • Your credit score is based on information on your credit report, therefore, make sure your report is accurate 32 What is Your Credit Score? • Forecast of how likely you are to repay a debt as agreed during the next 24 months – The higher the score, the better the score, the better the forecast that you will repay • Snapshot of your credit history at a particular point in time • Only includes factors related to your credit • Always changing 33 Information Considered in Scoring 34 Credit Scoring Does Not Consider: • Race, color, religion, national origin, sex or marital status • Age • Employment history, occupation, salary • Where you live • Non-credit inquiries • Any information not found in your credit 35 Why Credit Scoring? • More than 70% of the top 100 financial institutions use FICO scoring to make billions of credit decisions annually because it is … – Fast – Consistent – Objective – Cost Effective – Reliable and updated regularly – Strong analytical support – Support increase lending 36 FICO Scores - Ranges and Grades • • • • • • 760 and above Excellent A++ 700 to 759 Very Good A+ 680 to 699 Good A 660 to 679 Above Satisfactory B 640 to 659 Satisfactory B620 to 639 Below Satisfactory C 37 Improving Your FICO • Make loan/credit payments on time • Pay down your debt and consider charging less often • Keep balances low • Don’t close old, paid-off accounts • Don’t be afraid of credit counseling • Stay out of bankruptcy 38 Identity Theft Protecting Your Good Name 39 Identity Theft • Identity theft is the deliberate assumption of another person’s identity by using their personal information, such as date of birth, mother’s maiden name and social security number • The theft of identity is usually to gain access to their credit and commit fraud • Most identity theft is committed by people we know like friends, family, or co-workers 40 Protect Yourself • • • • Check financial statements promptly Review your credit report annually Be careful with personal information Say NO – opt out of credit offers – minimize the number of credit cards you carry by calling 1-888-567-8688. 41 Protect Yourself • • • • • Shred and destroy Protect your mail Beware of strange ATM’s Watch “Shoulder Surfing” Keep your eye on your card at restaurants and gas stations. 42 Steps to Take If You Are a Victim • • • • Place a fraud alert Start your search File a police report File and complete the Federal Trade Commission • Identity Theft Affidavit (1-877-ID-THEFT) • Document everything 43 WHAT CAN YOU DO? DETER Deter identity thieves by safeguarding your information DETECT Detect suspicious activity by routinely monitoring your financial accounts and billing statements DEFEND Defend against identity theft as soon as you suspect a problem 44 DETER identity thieves by safeguarding your information. Shred financial documents before discarding them Protect your Social Security number Don’t give out personal information unless you’re sure who you’re dealing with Don’t use obvious passwords Keep your information secure 45 DETECT suspicious activity by routinely monitoring your financial accounts and billing statements. Be alert Mail or bills that don’t arrive Denials of credit for no reason Inspect your credit report Law entitles you to one free report a year from each nationwide credit reporting agencies if you ask for it Online: www.AnnualCreditReport.com; by phone: 1-877-322-8228; or by mail: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281 Inspect your financial statements Look for charges you didn’t make 46 DEFEND against identity theft as soon as you suspect a problem. Place a “Fraud Alert” on your credit reports by calling any one of the three nationwide credit reporting companies: Equifax: 1-800-525-6285 Experian: 1-888-397-3742 TransUnion: 1-800-680-7289 Review reports carefully, looking for fraudulent activity Close accounts that have been tampered with or opened fraudulently File a police report Contact the Federal Trade Commission 47 WHERE CAN YOU LEARN MORE? Online: ftc.gov/idtheft By phone: 1-877-ID-THEFT By mail: Identity Theft Clearinghouse Federal Trade Commission 600 Pennsylvania Avenue, NW Washington, DC 20580 48 Credit Trouble 49 Signs of Credit Trouble • Your credit card balances are rising and your income is decreasing • Only paying the minimum monthly payment • Too many credit cards • Near, over, or at your limit 50 Signs of Credit Trouble • • • • Charge more than you pay monthly Using credit for food or gas Lost job Receiving letters and calls on delinquent debts • Use credit cards because you have no money 51 Steps Toward Resolving Trouble • • • • • Contact your lenders immediately Stop using credit Pay your bills when they are due Consolidate Get help from the professionals 52 Credit Counseling Resources • National Foundation for Credit Counseling (NFCC) and its member agencies – Member agencies known as Consumer Credit Counseling Services (CCCS) – To locate, visit: www.nfcc.org or call (800) 388-2227 53 Review Using Credit Successfully • • • • • • Identify your spending habits Understand the fine print Manage credit wisely Have only one card Pay balance in full each month Ask for help at the first sign of trouble 54 What’s Next? What’s Next • • • • Solving The Financial Aid Puzzle Date: January 2009 Time: 7pm Location: TBA 55 Credit 100 Understanding Credit 56