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					Chapter 6

                       Borrowing on Open Account:
                             Credit Card Facts




Based on Personal Financial Planning by Gitman and Joehnk, Thompson, 11e, 2008. Slides by Dorla Evans, FIN 100, The University of Alabama in Huntsville.

                                                                                                                                                 1
Credit Card Statistics

                      Annual Credit Charges

                    $1,000
      In billions
      of dollars




                     $500

                       $0
                             1970   1980   1990    2000
                             Year (2000 is an estimate)



              Statistical Abstract of the United States
                                                          2
Credit Card Population

              1,500
   millions




              1,000

               500

                 0
                          1970              1990          2000

                      credit card holders    credit cards held


                  Statistical Abstract of the United States
                                                                 3
Credit Card Debt
                           Credit Card Debt

  bank cards
  retail store
       travel
        other
           oil
      phone
                 $0     $100    $200   $300   $400   $500   $600

                               billions of dollars

                                                                   4
                      Statistical Abstract of the United States
Credit Card Facts
            8 of 10 households have 1 or more
             credit cards
            56% have 1 or more Visa cards
            47% have at least 1 MasterCard
            1/3 of users pay off balance monthly;
             avg. pay 14%-16% of balance monthly
            Credit card delinquency rate for 2003
             was 2.68%
            Consumer debt 103% of annual
             disposable income vs 65% 20 years
             ago.

                                                     5
The Pros of Credit Cards
 Convenience or ease of shopping
 Emergency use
 Allows for consumption before the
  purchase is fully paid for
 Source of interest-free credit
 Buyer protection
 Source of free benefits
 Some protection against vendor
                                      6
The Cons of Credit Cards
 Easy to lose control of spending (It’s
  only plastic!)

 Expensive way to borrow money

 Reduce discretionary income in the
  future

                                           7
Credit Card Features
   Interest rates
   Calculating the balance owed
   Buying money -- the cash advance
   Grace period
   Annual fee
   Additional fees


                                       8
Interest Rates
 Annual percentage rate         Affinity cards
  (APR)
                                 Teaser rates
 National average credit
  card rate in 1997 was
  17.1%                          Transfer fees!
                                    4% on a $5,000 transfer is
 Credit card companies can          $200
  sell your account. Interest
  rates and fees change so          Some firms cap fees at
  WATCH OUT!                         $25 to $50

 Bank can raise rate if it
  believes you are greater          Get lower interest rate but
  credit risk EVEN if you’ve         may pay more with fees
  never paid late

                                                                   9
Negotiate for Better Interest
                 Call your credit
                  card company

                 Ask for
                    Lower rate
                    Lower fee

                 Likely to get it if
                  you have good
                  credit

                                        10
Calculating the Balance Owed
 Average daily
  balance method --
  most common
 Previous balance
  method -- most
  expensive
 Adjusted balance
  method


                               11
The Grace Period
 Normally 22 to 25 days (was 31)

 Could result in not having to pay interest on a
  purchase for nearly two months

 Doesn’t apply if you carry a balance

 Does not apply to cash advances

 “Information float” – technique where banks send
  out statements late resulting in more consumers
  paying late so bank collects late fees

                                                     12
The Annual Fee
 Range from $0 to $100 (can be hidden
  minimum monthly finance charges to ALL
  consumers even if pay off balance
  monthly)

 70% of the 25 biggest card issuers don’t
  charge an annual fee.

 Merchant’s discount fee -- typically 1.5%
  to 5.0% of the purchase amount


                                              13
Additional Fees -- $31 Billion/Yr.
 Fees are 33.4% of credit card revenue in 2003, up from
  27.9% in 2000 and 16.1% in 1996.

 Cash advance fee – up to 3% of cash advance but not
  less than some minimum, e.g., $5. Interest charged
  immediately and may be ATM fee.

 Over-the-limit fee – banks will approve transaction
  without telling consumer, then charge fee (as high as
  $39 per month), increase rate, and increase rates on
  other loans with consumer.




                                                           14
Additional Fees, Continued
 Late fee – reduce grace period resulting in paying late;
  banks charge fee ($15 to $39), change rate, change
  credit limit, consumers lose frequent flier miles

 Balance transfer fee – may be up to 3% of transferred
  balance; interest starts immediately

 Fees for telephone bill payment; requesting stop
  payment, returned payments; transactions in foreign
  countries.




                                                             15
Hidden Fees for Overseas Travel
           Credit card and exchange
            rates 1% fee
           American Express 2%
           Visa 3%
           Folded into cost of item
            charged
           Best to use Capital One,
            MBNA


           WSJ 4/23/02
                                       16
The Choice: It’s a Matter of Your
Credit Card Philosophy
 Credit user -- find low interest rate

 Convenience user -- find low fee

 Convenience and credit user -- find best
  combination

 Go to www.cardratings.com for
  independent ratings of credit cards

                                             17
Credit History – Credit Report Info
 Name, SS#, age, #         Bankruptcies, tax
  dependents, address        liens, foreclosures,
                             civil suits, criminal
 Employers and salary       convictions


 # loans, credit lines,    Name of
  credit cards               organizations recently
                             requesting your file

 Payment record and
  account balances          Unpaid rent or
                             medical bills


                                                      18
Rights
 Free annual copy of         Increases maximum
  credit report                penalty for identify
                               theft
 Consumers place
  fraud alert in credit       Prohibits credit
  reports                      reports from
                               containing medical
 Prevents merchants           information
  from printing all credit
  card digits on receipts     Consumers see credit
                               scores


                                                      19
Medical Data in Credit Reports*
                 How they get it
                      Charges to cancer unit
                      Insurer and bank merge
                 How they use it
                      Poor credit risk if ill
                      Deny credit or limit credit
                       line
                 Congress investigating to
                  amend Fair Credit
                  Reporting Act
      * WSJ 8/6/03                                   20
Credit Insurance
 Credit card firms want
  to sell you insurance
  to pay off your
  balance.
   $0.75 per $100 loan per
    month (.0075 x 12 = 9%)
   Interest rate is 15% then
    add 9% on top
   TOO HIGH!!!


                                21
Questions




            22

				
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