Credit
- The two types of credit that
can be utilized
- Types of credit cards and
their characteristics
- Advantages and
disadvantages of credit cards
- Tips on how to handle your
cards
Credit: Two types
• Revolving credit: CREDIT CARDS
– no set payment, credit line doesn’t change,
– interest compounds
• Installment MORTGAGES, CAR LOAN
credit Amortized
loans
– Fixed amount is paid off with a fixed repayment schedule
in regular installments over a period of time
– At the beginning of the loan term, most of the monthly
payment goes toward interest. With each subsequent
payment, a greater percentage of the payment goes
toward the loan's principal.
– Interest is paid off, does not compound
Banking System Peer to Peer Systems
Wells Fargo
Accounts
Checking
$1,000
Savings
$500
Wells Fargo
Visa
Credit Card
Vendors
Other credit cards
• Bank cards 12-16% average rates
• Charge Cards American Express,
• Store Credit cards Macy’s 24.5%
• Credit unions, national associations
• Check for low rates at
– Bankrate.com
– Credit.com
– Cardtrak.com
Characteristics of Credit Cards
• Unsecured debt
• Issuers: banks, stores, PayPal
• Interest Rate on purchases 12-16% on balances
on cash advances much higher
• Minimum payment the minimum amount due, generally a
fraction of the outstanding balance
• Annual Fees: •get one without an annual
• Credit Line: fee available credit
• Grace Period:
•time before interest charged
• Transfer fees:
cost of transferring balances from
• one card to another, usually to
get a lower interest rate
• Rewards:
• cash back, miles
• Secured Card: must have balance on deposit
Advantages of credit cards
1. Emergency funds
2. Allocating costs of larger purchases over time
3. Sign up bonuses
4. Rewards earned for purchases
▪ Flyer miles, goods and services, cash
5. Protection from fraud
▪ money is not deducted from account immediately
▪ Credit card companies offer protection from fraudulent purchases
▪ Credit card companies offer protection from defective goods, services
6. Insurance-travel insurance, warranties, loss protection
7. Universally accepted-for car rentals and hotels
8. One monthly payment
▪ Earn interest on your cash held
▪ Manage your cash flow
9. Building credit
Source: Investopedia
Teaser Rates
• 10% off purchase
– ok, but pay it off!
• O% interest rates
– but for how long?
– What will be the long term rate
• No payment, or skip a payment
– But you will be likely charged interest on balance
• They are trying to lure you in to credit and
interest
Disadvantages of credit cards
1. Do not run up credit card debt to finance an indulgent
lifestyle
▪ One monthly minimum payment is enticing to run up
large balances
▪ Outstanding balances on your credit card-money you
haven’t paid off-are charge interest
▪ Compounding interest!
2. Interest on credit cards can be high
they do little checking on your credit history
they loan is unsecured
lenders are taking a big risk, so will charge high rate
Paying your credit card
• Pay off the full balance to avoid interest charges
• Pay bill when it arrives
• Pay more than the minimum—set up a repayment
schedule
• Never miss a payment,
PENALTIES
• Fees: $40+
• Higher interest rates
• FICO score will be reduced
• Do not get cash advances on credit card—high rates
• SET UP AUTOMATIC PAYMENTS
Credit Situations
• Just call the company
– If payment will be late
– If you want lower rates
– If you want higher credit line
• Call before the crisis!
Think about purchases
• Do you need it?
• Do you want it?
• Is it useful?
• Do you love it?
• Can you afford it?
– Do you have the money now?
– Can you pay it off over its useful life?
– Am I ok financially if something bad happens?
