Chapter 6
Credit: Receiving cash or good services with an obligation to pay later
Consumer credit: anything purchased for personal needs that is not a home mortgage- can be an auto loan or credit card debt.
Open credit/revolving credit: a line of credit you can pay back and whatever pace you choose as long as you pay minimum balance each month- and then pay interest on unpaid balance.
Annual percentage rate (APR): true simple interest rate paid over the life of the loan. Truth lending act makes all consumer loan agreements disclose APR in bold print.
Variable Rate APR: the rate you pay is tied to another interest rate. Generally charge prime rate plus percentage
Fixed Rate APR: this rate does not change with different bank interest rates.
Rates may indeed change the credit card company needs only to let you know 15 days in advance
“Teaser rates” are introductory rates that only last 6 months to a year
Credit account compounds interest so you could end up paying interest on interest.
If you pay off you balance at the end of the month there is no interest charge, though 71% of cardholders do not pay off their balance every month
Balance Calculation method: Varies from each credit card due to varying rates
Average daily balance method: Used by 95% of bank card issuers- which adds up your daily balances for each day in billing period then divides this sum by number of days in billing period.
Previous Balance Sheet: interest payments are charged against what you own at the end of the previous billing period. Relatively expensive method because you are charged on the whole amount if its left only partially paid.
Adjusted balance method: interest is charged against the balance only after payments have been subtracted.
Cash Advance: Buying money
Expensive way of borrowing money, can be retrieved from an ATM
Interest begins immediately
Carry upfront fee of 2 to 4 %
Grace period: Period of 20-25 days that lender does not charge the APR
Cash advances have no grace period
Some credit cards have not grace period which means you start paying interest right away
Some cards waive the grace period if you don’t pay off your balance.
Annual Fee: A fee charged to use lenders service. (American express) 70% of 25 biggest lenders do not have a annual fee
Some credit cards avoid annual fee through high interest rates, and merchant discount fee which is an percentage of sale merchant pays ranges typically for 1.5 – 5%
Additional fees:
Cash advance fee/late fee/ penalty fee for not paying minimum, over limit fee
Pros and Cons of credit Cards
Pros:
Itemized billing
Reduced risk of theft
Temporary emergency funds
Purchase item before you pay for it
Frequent flier miles and other warranties and bonuses
Cons:
Too easy to spend money
Easy to lose track of spending
Pay hefty interest charges if you overspent
Obligating future income
CARD ACT: 2009
Notification of interest rate 45 days in advance (not if you have variable rate)// Notification of schedule for pay off// No interest rate increases first year(not including introductory rates)// increased interest rate only applies to new charges// restrictions on over the limit transactions// caps on fee cards// protection for under aged consumers // standard payment days and times// payments directed to highest interest balances first// fee limits// no inactivity fees
Source of open credit:
Bankcard: issued by bank or large corp.
Premium or Prestige CC: offers high limits (100,000)- bank or travel and entertainment:
Affinity Card: A card issued in conjunction with a specific organization. (MAAD NRA) – sends a portion of annual fee to the charity of choice.
Secured Credit Card: a credit card backed by collateralization of an asset.
T&E Travel and entertainment: meant for business customers to allow them to pay for travel and other travel and entertainment expenses.
Require full payment at end of month/ interest free grace period