Credit Cards 05 13 2013 Study Guide Answers are highlighted in PINK IF a Study Guide was provided by Dr Peterson Key Terms are in highlighted in YELLOW Examples are in highlighted in GREEN Credit Cards Borrowing money Basic Understanding Credit Scores FICO credit reports Different They use data likely hood of repaying debt Indication of financial responsibility Most common score model 300 850 Lower High Risk Higher Low Risk Snap Shots in time Example different people will pay different rates on a cell phone based on your credit score Example 2 If you don t handle your money properly you won t drive safely and therefore have a higher insurance rate DOES CORRELATE Credit Report data gathered by credit bureaus used to compute credit scores Include Identification Name Address Employer DOB Social Security Number Spouses name Trade Lines Detail information on credit history Name of Creditor and partial acct number Account Status Current Balance Payment history Date Creditor last reported to Credit bureau Date you opened account Type of Credit revolving installment or collection account Repayment length and monthly payment Original amount borrowed Who is responsible for paying the account Public Records Bankruptcies evictions repossessions judgments foreclosures and court ordered child support Inquiries can be Hard or Soft Hard application or transaction initiated by you Such as applying for a new credit card Soft pulling your credit or credit report is checked for pre approval offers No one can see Soft inquires but YOU Truisms 1 Nothing s Free Firms must make to survive 2 The interesting stuffs in the footnotes 3 Habits Frequently repeated behaviors people tend to exert min effort lazy or forgetful 4 Advertisers believe they can sell you if they can get to you 5 Everything is a trade of you get something and give something up Credit Bureaus Collect information on individuals There are 3 Credit Bureaus 1 Experian 2 Transunion 3 Equifax they should all have the same information but that doesn t mean that it does You have 3 credit scores Usually averaged into 1 1 Humans involved in data entry Humans make mistakes Other Consumer Reports ChexSystems is a report frequently used by financial institutions when determining to open a checking or savings account Information can remain on your report for up to 5 years National Tenant Network complies information on lease violations and evictions to landlords who are subscribed to their service Credit Score is on Credit Report made by Credit Bureaus Credit Cards Example Card 1 Owe 200 Limit 1500 Card 2 Owe 500 Limit 750 Total Owed 700 Total Limit 1750 Total Owed Total Limit 40 If you are applying for credit keep it UNDER 20 Pie Chart Length of Credit History 15 Types of Credit Used 10 New Credit 10 Amounts Owed 30 Payment History 35 1 Payment History The Most Important Public information Late payments hurt Bankruptcies foreclosures and judgments No history No credit No one will take a risk and lend money without history No Interest Payment Never paid for credit Doesn t mean you have to pay If you are Card Hopping applying for a new card and closing the OLD credit card to get a lower interest rate you will hurt your CREDIT HISTORY It will lower your credit score 2 Ratio of Amount Owed to Available Credit Credit Cards with no balances help Ratio of Amount Owed to Available Credit Ratio Total Amount owed Total credit available 3 Length of Credit History How long you ve had credit for Average time accounts stay open 4 New Credit Appearances Inquiry Types Don t hurt you If you Check your credit report doesn t harm you AKA SOFT INQUIRIES Obtaining Credit from a company Company Checks your Credit Report Hurting your credit score AKA HARD INQUIRES By a little bit 5 Types of Credit Used Revolving Credit Cards Extending you credit purchase a good limit goes down pay if off more credit to your limit REVOLOVING Credit Short term loan Unsecured Merely a promise to repay Secured Backed by Collateral something of value Advantages Convenience occasional necessity rewards Disadvantages Temptation cost of irresponsible use Facts Don t increase Income Obligate future pay checks Installment A open Credit for one time use Pay it off and your done Open lines of credit Open line of credit can be used or not used over a certain period of time Some people took Open Line of credits for equity loans Example Home Equity Line of Credit based off your mortgage How many credit card should you have 2 or 3 is Efficient Take as many as you NEED not WANT The more things you have the HARDER it is to control KISS Principle KEEP IT SIMPLE STUPID Websites Free Credit Scores Always give something up No free Credit Scores Can get 1 Free Credit Scores from the 3 bureaus annually Credit Bureaus merely collect the data Kick Start a positive credit rating Always Pay on time Pay down existing Debt Avoid taking on additional Debt Pay accounts in Collection Keep your old accounts Avoid frequent balance transfers Avoid excess credit applications Establish or Reestablish Credit Obtaining a secured credit card Asking someone with good credit to co sign Disputing Credit Report Mistakes Step 1 Order current copies of your credit reports Step 2 Dispute the mistake Step 3 Wait for a response Step 4 Escalate your dispute Step 5 Talk with a consumer law attorney Step 6 Keep Records of your dispute Step 7 Monitor your credit reports Debit Versus Credit Cards Compounding Compounding money is when interest earns interest Loan Borrowed money Debt Principal Owed Interest the cost of money The shorter amount of compounding period the more compounding there will be Compounding Annual Example Year 1 100 08 8 R Interest rate 100 1 08 108 Year 2 108 08 100 1 08 1 08 116 69 Year 3 116 64 08 100 1 08 3 125 97 Debit Cards Use your OWN money Thief can access Your total account Liability Greater 50 w in 2 days 500 w in 60 days 60 days unlimited Blocking Can Remain up to 15 days Credit Cards Use BORROWED money Thief steals the card issuers money Liability Less 50 liability limit Blocking Usually lifted quickly Product Purchase protection Builds Credit Record Grace Period The time when you buy the item and when you have to pay for it Benefits Rewards Programs Credit Card Rules Interest Rate on new cards can t change for 1 yr unless Told otherwise Variable as opposed to fixed interest rate card Payments late by 60 days After 1 yr interest rates can rise on new purchases You must be told you can decline the higher rate