Chapter 6 Part 1 Definitions and Examples of Credit Credit -- receiving cash, goods, or services with an obligation to pay later. Open credit -- credit that you can use and repay at your pace so long as you pay the required minimum monthly payment. Examples -- Credit cards or department store credit cards Examples -- auto loans or personal loans Determining the Costs of Open Credit The balance owed Interest rates Balance calculation method Cash advance costs The grace period The annual fee Additional or penalty fees Interest Rates Annual percentage rate (APR) B true simple interest rate paid over the life of the loan Teaser rates B introductory rates used to attract new customers, some as low as 2.9% Most credit cards compound interest Balance Calculation Methods Average daily balance, most common Including new purchases Excluding new purchases Two-cycle Previous balance B most expensive Adjusted balance B least expensive Buying Money: The Cash Advance An extremely expensive way to borrow Interest begins immediately and may be at a higher rate than for purchases Usually there is a Acash advance fee@ of 2% to 4% of the amount advanced Some cards require payment of the purchase balance before payment of the cash advance balance The Grace Period Normally 20 to 25 days, excluding cash advances Doesn=t apply if you carry a balance With no balance, you could avoid paying for a purchase for nearly 2 months Not all credit cards offer a grace period The Annual Fee Range from $0 to $100 (American Express charges $300 for their Platinum card.) 70%of the 25 biggest card issuers don=t charge an annual fee. Merchant=s discount fee -- charged to merchants, typically 1.5% to 5.0% of the purchase amount Additional Fees Cash advance fee Late fee Over-the-limit fee Penalty rates Be alert-- AImportant Notice of Change of Terms@ The Pros of Credit Cards Convenience or ease of shopping Emergency use Consume and use before the purchase is fully paid for Bill consolidation Can be used in anticipation of price increases The Pros of Credit Cards (cont=d) Interest-free credit Make reservations Use as identification A source of free benefits The Cons of Credit Cards It=s too easy to lose control of spending. It=s, in general, an expensive way to borrow money. It=s an obligation of future income--you=ll have less to spend in the future. Choosing a Source of Open Credit Bank credit cards Bank card variations Travel and entertainment (T&E) cards Single-purpose cards Traditional charge account Bank Credit Cards Issued by banks, may charge annual fees Visa and MasterCard franchise credit authorization systems Offer a variety of benefits May be Aco-branded@ or Arebate cards@ Discover card is different Bank Card Variations Premium or prestige cards Affinity cards Secured credit cards Other Sources of Open Credit Travel and entertainment cards require full payment monthly. Single-purpose cards may or may not offer revolving credit, but usually have no annual fee. Traditional charge accounts offer convenience of payment and service before billing. Know Your Credit Card Philosophy Credit user Low APR Convenience user Low annual fee Long, interest-free grace period Free benefits Convenience and credit user Balance interest rate and annual fee for the lowest total cost Getting a Credit Card: The Five Cs of Credit Character Capacity Capital Collateral Conditions Credit Evaluation: The Credit Bureau The credit bureau: collects and reports information from creditors, public court records, and the consumer. Determining your creditworthiness -- credit scoring determines if you qualify for credit and the interest rate offered. National Credit Reporting Bureaus Equifax Credit Information Services www.equifax.com Experian www.experian.com Trans Union www.tuc.com Information on Your Credit Report Personal demographics age Social Security number addresses Employment history Credit history Information on Your Credit Report (cont=d) Criminal convictions and judgments Previous two years of inquiries Factors That Determine Creditworthiness Annual income Length of time at current residence Length of time at current job Type of residence Age Employment Factors That Determine Creditworthiness (cont=d) Number of bank accounts Number of credit cards If you have a telephone Credit history Note: All the factors provide information historically linked with individuals that are good credit risks.