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Credit Cards

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  1. Credit Cards What You Need To KNOW © Consumer Action 2010 An educational partnership between Consumer Action and American Express

  2. Purpose of Training • Most people have credit cards — but do they know the terms of the agreement that they have with their credit card issuers? • This training will help you understand how credit cards work and that how you use your cards can affect your credit history. An educational partnership between Consumer Action and American Express

  3. Objectives • Understand the types of cards available • Sort through card offers • Compare terms and conditions • Avoid penalty rates and fees • Find more information and assistance An educational partnership between Consumer Action and American Express

  4. Credit cards • The average household receives five credit card offers per month in the mail, and more by telephone and the Internet • This array of choices makes it difficult to: • Sort through offers • Understand terms & conditions • Select the right card An educational partnership between Consumer Action and American Express

  5. Wise credit • Not managing your credit wisely can lead to: • Increased annual percentage rates (APRs) • Unnecessary fees • A decline in your credit • Denials of future credit An educational partnership between Consumer Action and American Express

  6. Topics covered • Types of credit cards • Card offers • Card terms and conditions • Credit card billing statements • Using credit cards • Card fees • Optional services and card benefits An educational partnership between Consumer Action and American Express

  7. What are credit cards good for? • Emergencies • Big ticket items • Establishing credit • Safer than cash • More purchasing power • Protection from fraud on the Internet An educational partnership between Consumer Action and American Express

  8. Types of Cards An educational partnership between Consumer Action and American Express

  9. Credit cards • Revolving Credit • Credit line can be used up to the credit limit • Pay charges in full each month, pay just the minimum, or make a partial payment greater than the minimum due • Available credit goes up and down as purchases and payments are made An educational partnership between Consumer Action and American Express

  10. Charge cards • Pay all charges in full every month by the due date • Cannot carry a balance • No balance = no interest • Some charge cards allow a balance carry-over for specific purchases, such as travel charges An educational partnership between Consumer Action and American Express

  11. Secured credit cards • Guaranteed by money deposited in an account • Credit limit usually equals the amount of the deposit • Can be used by people with credit problems to reestablish good credit An educational partnership between Consumer Action and American Express

  12. Sub-prime credit cards • Marketed to people who have poor credit • Typically have very low lines of credit, large upfront fees and high interest rates An educational partnership between Consumer Action and American Express

  13. Prepaid cards • Also called stored value cards • These are used by • retailers as gift cards • travelers as a safe way to get funds on the road • parents who want to give their kids the convenience of a credit card without the risk An educational partnership between Consumer Action and American Express

  14. Card Offers An educational partnership between Consumer Action and American Express

  15. Types of offers • Pre-approved • Invitations to apply • Offers come in the mail, by telephone and online • Instant credit at stores An educational partnership between Consumer Action and American Express

  16. Pre-approved offers • Personalized and based on credit history • Federal law requires that pre-approved solicitations contain a “firm” offer of credit • The only exception is if consumer has experienced a serious decline in creditworthiness since the offer was made An educational partnership between Consumer Action and American Express

  17. Invitations • Ask consumer to apply for a card • Does not require a firm offer of credit • Intended to interest consumers in applying An educational partnership between Consumer Action and American Express

  18. Instant credit • Salespeople often ask you if you want to get the store’s credit card • Get a discount on purchases • If the shopper’s credit is good, credit is issued on the spot An educational partnership between Consumer Action and American Express

  19. Compare basic terms • Look for a box with: • interest rates • grace period • annual fee • This box is: • required by law • often headed with the words “Rates and Fees” or “summary of terms” An educational partnership between Consumer Action and American Express

  20. Look closely • Credit limits • While the offer of credit may be guaranteed, the actual credit limit may not be • Balance transfers • If you don’t know your credit limit, it’s difficult to know if you can transfer balances from another card An educational partnership between Consumer Action and American Express

  21. Credit line • Consumers don’t know when they apply what credit line they will receive • Many offers state “up to” a certain amount (for example: “up to” $25,000) • Key words — “up to” • Company can—and often will—give consumer a lower credit limit An educational partnership between Consumer Action and American Express

  22. Balance transfers • Many offers include the opportunity to transfer a balance from one card to another without a fee • Consumer should ask if this is a limited time offer • Transfer balance after receiving card • If the balance transferred is higher than the new credit limit, the company may only transfer a portion of the balance, or may decline the whole transfer, leaving a balance on the old card An educational partnership between Consumer Action and American Express

  23. Card Terms and Conditions An educational partnership between Consumer Action and American Express

  24. Cardholder agreements • Sent with every new card • Legal contract between consumer and the card issuer • By using the card, consumer agrees to honor the terms and conditions in the agreement An educational partnership between Consumer Action and American Express

  25. Subject to change • Card terms and conditions are subject to change at any time • Change notices are usually sent by mail, along with the monthly statement • Consumers should review everything sent by issuer, even if it looks like junk mail • Notices must be sent at least 45 days before the change takes effect • New rate will apply only to new transactions unless an intro rate has expired, a variable rate has changed, you’re more than 60 days late or haven’t paid as agreed under a workout agreement • If your credit card company is going to make changes in certain fees (but not your APR), it must give you the option to cancel the card before these fee increases take effect. An educational partnership between Consumer Action and American Express

  26. Keep all paperwork • Save card terms and conditions in an easily accessible file for easy reference • When the company updates your cardholder agreement, replace the old copy with the new one An educational partnership between Consumer Action and American Express

  27. Annual percentage rate (APR) • Card’s interest charge, expressed as a yearly rate • The interest rate is the cost of borrowing money from the credit card company • Your card’s interest rate is usually for purchases — if you withdraw cash you might be charged a higher interest rate An educational partnership between Consumer Action and American Express

  28. Variable rates • If card has a variable rate, the APR will change when interest rates go up or down • Variable interest rates change according to a set formula using an “index” and a “margin” • The most common index is the Prime Rate published in the business sections of major newspapers and online An educational partnership between Consumer Action and American Express

  29. Prime Rate • The interest rate banks charge their most qualified borrowers • Prime Rate is the “index” most commonly used to set interest rates on variable rate credit cards • Other indexes used include the London Interbank Offering Rate (LIBOR) • Indexes are published in the business sections of major newspapers and online An educational partnership between Consumer Action and American Express

  30. Fixed rates • If an issuer calls a rate “fixed” the rate can’t change ever, for any reason. So issuers will use terms like “non-variable” for rates that do not vary with the Prime Rate. • Non-variable rates can change at any time after the first year, or whenever you are more than 60 days past due, with 45 days notice An educational partnership between Consumer Action and American Express

  31. Default or penalty rates • Higher interest rates charged for late payments or decline in credit • Default factors • Late payment • Bounced check • You default on another account you have with the same creditor • Higher rate will apply to new transactions only, unless you are more than 60 days late An educational partnership between Consumer Action and American Express

  32. Default with other creditors • Some companies raise your interest if your credit score declines, but they must give you 45 days notice about the change • This is sometimes called “universal default” An educational partnership between Consumer Action and American Express

  33. Cash advance APR • Most cards charge a higher interest rate for cash advances An educational partnership between Consumer Action and American Express

  34. Credit card checks • These special checks - “convenience checks” - are linked to credit card account • They can be used to transfer a balance from another card or to make purchases or payments to companies that do not accept credit cards • Convenience checks are charged the cash advance interest rate, usually higher than the regular rate, plus a cash advance fee An educational partnership between Consumer Action and American Express

  35. Grace period • The time between the close of the billing cycle and the payment due date • If you do not carry a balance from the last credit card bill, interest will not be charged on purchases if the new bill is paid in full by the due date An educational partnership between Consumer Action and American Express

  36. Credit Card Billing Statements An educational partnership between Consumer Action and American Express

  37. Minimum monthly payment • The lowest amount you are required to pay each month • Paying just the minimum amount does very little to reduce the amount owed • Paying more than the minimum helps reduce the amount of interest owed on the card • Excess payment must be applied to higher-rate balances first An educational partnership between Consumer Action and American Express

  38. Periodic interest rate • APR divided by 365 days • The daily periodic rate is used to calculate your daily and monthly interest charge An educational partnership between Consumer Action and American Express

  39. Payment due date • The last day that payment can be accepted without penalty, generally 25-30 days after the close of the billing cycle • Due dates must fall on the same day every month • If payment is not received by 5:00 on the due date, a late fee will be charged An educational partnership between Consumer Action and American Express

  40. Dispute rights • If you find a mistake on your bill, you can formally dispute the charge • You do this by notifying the credit card company • You can dispute charges for • The wrong amount • Something you didn’t accept • An item or service that was not delivered An educational partnership between Consumer Action and American Express

  41. Take a break Free annual credit reports • www.annualcreditreport.com • 877-322-8228 An educational partnership between Consumer Action and American Express

  42. Credit Card Fees An educational partnership between Consumer Action and American Express

  43. Annual fees • Annual fees are common on charge cards, “rewards” and airline miles credit cards • Sometimes an annual fee will be applied if you do not make at least a few charges during the year An educational partnership between Consumer Action and American Express

  44. Annual fee tips • Consider the overall value of a card when comparing fee and no-fee cards • For cards with airline miles or other rewards, make sure the card’s benefits and services are worth the price of the fee An educational partnership between Consumer Action and American Express

  45. Application fees • Many sub-prime cards — and some secured cards — charge a fee when an account is opened • Account-opening fees, including an annual or application fee, cannot exceed 25% of the initial credit limit An educational partnership between Consumer Action and American Express

  46. Application fee tips • Secured credit cards are generally much better deals than sub-prime credit cards • You can find secured credit cards that don’t charge application fees An educational partnership between Consumer Action and American Express

  47. Balance transfer fee • Charge for transferring a balance from another credit card • Commonly assessed as a percentage of the transferred amount (for example, 3%) An educational partnership between Consumer Action and American Express

  48. Balance transfer tips • When applying for a new card, ask about balance transfer fees • Most companies don’t charge balance transfer fees to new cardholders for the first month or two An educational partnership between Consumer Action and American Express

  49. Cash advance fee • Commonly charged as a percentage of the cash advance (for example, 3%) • Minimum charges are common • A maximum charge may limit the amount paid, but these are not as common as minimum charges An educational partnership between Consumer Action and American Express

  50. Cash advance tips • Cash advance fees are an expensive way to get cash – not only do you pay the percentage fee, but interest on cash advances begins to accrue immediately • Instead, use your ATM or debit card to withdraw cash from your checking or savings account at your own bank’s ATMs or point-of-sale terminals An educational partnership between Consumer Action and American Express