Weekly notes chapter 6
Weekly notes chapter 6 FACS 320
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This 7 page Class Notes was uploaded by Jenna Dawson on Wednesday May 11, 2016. The Class Notes belongs to FACS 320 at 1 MDSS-SGSLM-Langley AFB Advanced Education in General Dentistry 12 Months taught by Peggy Evans Harrison; Michele Suzanne Marquitz in Fall 2016. Since its upload, it has received 3 views.
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Date Created: 05/11/16
Chapter 6 – using credit cards: the role of open credit Notes What is credit? Buy now, pay more later You are borrowing and spending future income Basically receiving goods, services, or cash now that you pay for later. VIRTUALLY NOTHING IS FREE Consumer credit: __credit that is used to purchase consumer goods or services________ o Credit cards o Automobile loans o Home equity loans o Student loans Types of credit Open-ended credit: in advance of any purchase, you are approved for borrowing up to a specific credit limit and you can borrow and pay back and borrow again o _also called revolving credit ____ Consumer loans (closed ended credit) approved and used for a specific purpose and requires the borrower to pay it back in full with interest with a pay-off date established o Most common examples: _credit cards, home equity, lines of credit _____ Credit cards in America in 2014 Consumers hold 1.5 billion credit cards – approximately 4 ½ cards per man, woman, child in America They are convenient and decrease carrying cash They are very easy to get, especially for college students Almost everyone has a credit card Consumers are carrying $__850 billion__ in debt Consumers in America today would pay $__170__ billion in credit card charges (fees) _per year__ if 20% interest 2014 – average u.s household carried $7281 in credit card debt. But some have no debt making those with debt to be averaging $15,191 Sources of open (revolving) credit Bank credit cards o Prestige credit cards o Affinity cards - _Disney, charity, NRA, MADD__ o Secured credit cards – backed by _collateral_____ Single-purpose/ retail credit cards o Used at specific retailers o Sears, JC Penney, Macys, Texaco Travel and entertainment cards o American express, diners club Smart cards o Money and electronic information is stored in digitized form on the card o Examples: bank cards with chip Advantages of credit cards __convenience__ __necessary__ for some transactions in our society Online purchases or bookings Itemize monthly tracking of expenses Reduces amount of cash needed Emergency funds for _real__ emergencies Easier to return merchandise Consolidate debt on multiple cards onto one card Potential to accumulate frequent flier miles or points Ways to begin building a _credit history___ Some offer extended warranties and travel insurance Disadvantages of credit cards Most expensive way to _borrow___ money Each purchase is a loan from the credit card company obligating future income Negative impact on one’s finances, increased debt, impulse buying, high fees and interest charges If carrying a balance forward, you are paying interest on interest Hassel of marketing – companies sell lists o _mail, phone, advertising___ o _marketing to children__ Reduced privacy of financial information Fraud and identity theft Interest rates varies based on one’s credit score Credit card contract terms Transaction date – date on which you make a credit purchase Billing date – last day of billing cycle Due date – date payment to be received Grace period – time between new charges and due dates Credit limit or credit line - __maximum amount you can borrow__ Minimum payment – payment required to be in good standing Cash advance – borrowing cash instead of making a purchase with credit card subject to different repayment terms Grace period Grace period – the length of time given to make a payment _before interest is charge__ against the outstanding balance on a credit card 21-25 days from date of bill. Some credit cards have no grace period and user begins paying interest immediately No grace period with cash advances _higher__ interest too! On most cards, the grace period is canceled if there is an unpaid balance from previous month May take months of paying on time to get the grace period back Which method is best/ worst? 1. If you are gradually paying down the credit card balance? 2. If your credit card debt is steadily increasing? 3. If you always pay off the balance each month? 4. If you generally have a high balance and make minimum payments each month What if you cards gives you frequent flier miles or other discounts? o Compare value of what you receive to the cost of the credit (_annual fee and interest rate__) What if you have a “card that pays you back”? o E.g., card gives 1% rebate for every dollar spent Cost of credit cards: annual fees and other fees and sneaky penalties A fixed annual fee charge imposed by a credit card Finance charges – (_APR_) Cash advance charge fees Late penalties and over-limit charges Sneaky penalties and fees Merchants “discount” fee – the percentage of the sale that the merchant pays to the credit card __company_ How long to pay back? Example o If you have a balance of $1,00 and an APR of 16%. Your minimum payment is $15 per month. If you continue to make minimum payments, how long will it take you to pay off your card? o Interest rate: 16%/ 12 = 1.33% per month o Monthly interest: 1.33% X $1000 = $13.30 o Month 1 principal: $1.70 ($15.00 – 13.30) o After three years, you still owe $_923__ o Time to pay in full = 166 months (almost 14 years) Credit reports and credit scores part 2 The f c’s of credit The key to determining your credit worthiness: 1. Character: are you the type of person who takes debt responsibility seriously? (credit history) 2. Capacity: are you able to repay the loan? Debt ratio 3. Capital: do you have assets (savings, etc.) that could be liquidated to pay the loan, if needed? 4. Collateral: are you pledging security for the loan? (down payments, repossession value) 5. Condition: any unique circumstances, economic conditions to consider? You only have _indirect__ control of YOUR credit score Personal credit scores Scores are even more important in tough economic times o Lenders want _higher down payments __ and qualifying scores o Risk based interest pricing – the higher the credit score lower interest rates o Use of credit scores by other business (insurance, apartment rentals, _cell phone providers__, _utilities employers __) o Credit scoring system placed subjective loan officer interviews (character and history) Credit scores – formula based Began developing models in the 1970s Several types – may have more than one score o FICO – most well known o Vantage score (2013) – direct competition for FICO o Major lenders may have their own model Three major credit bureaus o Experian (largest) o Transunion o Equifax o Should check each one annually, could be different Credit scores FICO scores determined through a statistical model of one’s credit report o Credit report composed of information provided by lenders & financial institutions; score based on: 35% payment history (character) 30% outstanding debt (capacity) 15% length of credit history (character) 10% pursuit of new credit (capacity) 10% types of credit in use (capacity) o www.myfico.com scores range between 300 ----------------------------------------------600 ----------700-----------850 High risk negative average low risk The credit report – what is on it? Personal information (name, aliases, current & past address, ssn, date of birth, employment history) Trade lines or credit accounts (types of accounts, date opened, credit/loan, limits, account balance, payment history) Credit inquiries (requests for an individual’s credit report) o Two types 1. __involuntary_ (soft) inquiries 2. voluntary___ (hard) inquiries Public record items related to credit (collections, bankruptcy, tax liens, legal suits, foreclosures, judgements, divorce) What is not on the report o Race, religion, nationality, medical conditions o Gender, age, _spouses_ are on the report but not supposed to be used for credit decisions Steps of building a credit history Establish a checking and savings account Establish your character as a steady, responsible consumer (steady job, housing, etc.) Pay utilities, rent, on time each month Don’t __overdraw your account__ Apply for ONE major credit card (VISA, master card, etc.) Use and then pay the card off each month, ON TIME Apply for a loan (care or home) in your own name; pay on time each month Wat if I am denied credit, insurance, or don’t get the terms I want? Ask questions If denied credit, ask creditor to give you a reason, _ask if a credit score was used__ Ask what credit reporting bureau supplied the credit report Contact the credit reporting bureau and obtain the credit report If rejected for credit, this information is free if _requested within 60 days__ days Ways to improve your credit Have a steady job and residence Keep your expenses under control and save Pay bills on time Check your credit report frequently Do not have too many credit cards. One all-purpose credit card is recommended Do not request _credit__ from many sources. Plan the use and pay off, then _close extra accounts__ Reduce outstanding credit Avoid garnishments and judgements Monitoring your credit score Get free copy of your credit report each year from the three major credit bureaus at www.annualcreditreport.com Check to see that all information is correct, all accounts on report are yours (similar/ common names, Jr, Sr., I, II, III: divorces, co-signing etc. can complicate reports) Must write _credit bureaus__ to ask them to investigate and correct Consumers can enter a written _dispute__ Vocabulary Credit; receiving cash, goods, or service with an obligation to pay later Consumer credit; credit purchases for personal needs other than home mortgages, this can include anything from an auto loan to credit card debt Open credit / revolving credit; a line of credit that you can use and then pay back at whatever pace you like so long as you pay a minimum balance each month, paying interest on the unpaid balance Annual percentage rate (APR); the true simple interest rate paid over the life of the loan. It’s a reasonable approximation for the true cost of borrowing, and the truth in lending act requires that all consumer loan agreements disclose the APR in bold print Method of determining the balance or balance calculation method; the method by which a credit card balance is determined, The finance charges are then based on the level of this balance Average daily balance method; a method of calculating the balance on which interest is paid by summing the outstanding balances owed each day during the billing period and dividing by the number of days in the period Previous balance method; a method of calculating interest payment on outstanding credit using the balance at the end of the previous billing period Adjusted balance method; a method of calculating interest payments on outstanding credit in which interest payments are charged against the balance at the end of the previous billing period less any payments and returns made Buying money: Grace period; the length of time given to make a payment before interest is charged against the outstanding balance on a credit card Annual fee; a fixed annual charge imposed by a credit card Merchants discount fee; the percentage of the sale that the merchant pays to the credit card issuer Cash advance fee; a charge for making a cash advance, paid at either a fixed amount or percentage of the cash advance Late fee; a fee imposed as a result of not paying your credit card bill on time Over-the-limit fee; a fee imposed whenever you go over your credit limit Penalty rate; the rate you pay if you don’t make your minimum payments on time Bank credit card; a credit card issued by a bank or large corporation, generally as a Visa or MasterCard Premium or prestige credit card; a bank or travel and entertainment credit card that offers credit limits as high as $100,000 or more in addition to numerous added perks, including emergency medical and legal services, travel services, rebates, and insurance on new purchase Affinity card; a credit card issued in conjunction with a specific charity or organization. It carries the sponsoring groups name and/or picture on the credit card itself and sends a portion of the annual fee or a percentage of the purchase back to the sponsoring organization Secured credit card; a credit card backed by the pledge of some collateralized assets Travel and entertainment cards; a credit card initially meant for business customers to allow them to pay for travel and entertainment expenses, keeping them separate from their other expenditures Single purpose card; a credit card that can be used only at a specific company Traditional charge account Credit bureau; a company that gathers information on consumer’s financial history, including how quickly they have paid bills and whether they have been delinquent on bills on the past. The company summarizes this information and sells it to customers Credit scoring; the numerical evaluation or “scoring” of credit applicants based in their credit history Identity theft; the use of your name, address, social security number (SSN), bank or credit card number, or other identifying information by someone other than you without your knowledge to commit fraud or other crimes Principle