Credit Cards

Avoiding the Credit Trap

Credit Cards

Credit cards are a good way to build credit, if used wisely

Receive monthly statements. Can be mailed or digital

Terminology

Revolving Account – A credit card account where the entire bill does not have to be paid each month. (You keep a “revolving” balance. It comes back to “haunt” you every month.)This is the most common type of credit card. Examples: Visa, Mastercard, American Express, and Discover Card.

Terminology

Charge Card – A special type of credit card that allows the card-holder to make purchases as long as the bill for the purchases is paid in full each month. No interest is charged on these cards.

Common type is Diner’s Club.

Terminology

Impulse buying – When a consumer purchases something that they really hadn’t intended to buy. Credit cards allow consumers the flexibility to make purchases that they did not plan for in advance. Many stores offer credit cards to attract customers into the store in the hopes they will find something that they want to buy.

Terminology

Payment due date – the date by which the credit card company must receive your payment

Outstanding balance – the amount of money you still need to repay.

Finance charge – the interest payment you owe on the credit card balance

Terminology Grace period – a period of time,

generally 20-25 days, before a credit card company starts charging you interest on a purchase

Late fee – a penalty you are charged for not making your minimum payment by the established payment due date

Annual fee – the amount of money the credit card issuer charges you for having the credit card account each year

Terminology

Cash advance – money you are allowed to obtain in the form of cash through the use of an ATM or bank

Cash advance limit – the total amount of money you are allowed to take from the account in the form of cash

New purchases/charges – a brief transaction history showing purchases made with the credit card since the last statement

http://www.nyc.gov/html/ofe/html/help/statement.shtml

Terminology

Previous payments – the amount you paid on the last credit card bill received and any other payments you may have made since the last statement

Daily finance charge – the interest rate you pay each day on the outstanding balance

Annual percentage rate – the yearly interest rate you pay on the credit card balance

http://www.nyc.gov/html/ofe/html/help/statement.shtml

Terminology

Fair Credit Billing Act – protects you if there are any errors in your monthly statement.

Fair Debt Collection Practices Act – prohibits the creditor from harassing you or using unfair means to collect the amount owed.

Terminology Truth-in-Lending Act – Protects you if

your credit card is lost or stolen. Maximum liability for a lost or stolen card is $50. You are not responsible for any charges that occur after you notify the creditor.

Terminology Credit Card Act of 2009– Many

changes to credit cards including more time to pay monthly bills, cannot issue to people under 21 unless there is an adult cosigner, clearer due dates, easier to understand statements, extra things included on the statement, etc.

Discussion

A friend of yours needs some new clothes, tires for his car, and a new stereo system for his car. He asks you if it would be okay to borrow your credit card to make the purchases and then you can report the card stolen so you or he won’t have to pay for the purchases. How would you respond to his request? Why?

Terminology

Debit cards are not credit cards. Debit cards are just like checks…the money is taken out of your checking account. No credit is issued with a debit card unless it has the Visa or MasterCard logo. Then the consumer can decide at the time of purchase whether to use the card as a debit or credit card. Some retailers charge a fee if you use a debit card at their location, similar to the fees charged on a debit card used at an ATM.

Terminology

Electronic Funds Transfer Act – protects debit card users against unauthorized use of their cards. If the card is lost or stolen, you are not responsible for purchases made after the card is reported missing.

Discussion

What are some of the ways that consumers get “trapped” by credit cards? How can consumers ensure that they stay out of this credit card trap?