Credit Cards 101

In this month's issue of our newsletter we are going to talk how credit cards and todays society.

01.  Credit Cards 101
02.  Frequently Asked Questions
03.  Questions to ask before choosing a credit card
04.  Credit Card Terms

1.Credit Cards 101 and things you should know...

The credit card industry's goal is to replace cash with credit cards and debit cards as much as possible. Credit cards have proven to be very popular because of their benefits. Credit cards are more convenient than cash. If you lose cash, the majority of the time you are out of luck. Whereas, when you lose a credit card you call the issuer and are not responsible for any charges that you did not make. Nowadays it is almost impossible to rent a car or make hotel reservations without a credit card. If you are planning to shop online, you usually must pay with a credit card.

All credit cards are different, but serve the same purpose. Credit is simply a contract between the issuer and the cardholder. It is borrowed money. You buy what you want now and pay back according to the lender's specifics. They all vary with terms. Some offer a fixed interest rate while others carry a variable rate. You may receive an offer with an annual fee, whereas others may not. There are a lot of choices out there when it comes to choosing a credit card.

Credit card companies do a lot of marketing. They use the catchy slogans. I am sure everyone knows at least one of them. Visa uses priceless commercials, American Express is "everywhere you want to be" and there are many more. Companies have gone as far as even offering you incentives to join their program. In other words, some offer airline miles for every dollar you spend, whereas others offer cash back. It all sounds good at first glance, but you must read the fine print to see if there any catches. Each credit card company wants your business and they go to drastic measures to get it.

In recent years creditors have realized that college students are a good source. Creditors know that the majority of people that get into debt are students. Most students who receive credit cards do not realize the impact of charges left unpaid. They use the credit cards to its full potential and are not able to pay them back. This works to the creditors advantage because as the credit card is not paid the fees and interest add up over time. Creditors now advertise outside of universities. They offer free giveaways just for applying. Most students do not realize when applying for a credit card that they are affecting their credit score in a negative way.

Credit cards are very beneficial if used the right way. Everyone needs a credit card for different reasons. Some businesses require you to have a credit card for work related meetings or materials. Parents often want their children to have a credit card when they move far from home for emergencies. Whatever your reason for needing a credit card it is best to research and pick the best card for your situation.

Example

Creditors must disclose all terms. You want to make sure you know the interest rate, fees and any other important rates that your new card may offer. You can look for this information in a chart. Below is a sample of what you will probably see. It may vary depending on the terms that must be disclosed.

Annual Percentage Rate for purchases and cash advances	5.99% APR on purchases and cash advances until the first day of the billing cycle that includes the twelve (12) month date of the opening of your account. After that twelve (12) month period expires the new interest rate will be 19.99%
Annual Fee	The annual fee will be $45.00
Method of computing the balance used in calculating finance charges for purchases	Average monthly balance
Grace period	You will have a minimum of 15 days without a finance charge on new purchases as long as there is no remaining balance on the account.
Miscellaneous fees	Late payment fee: $30.00 Over the limit fee: $30.00

2.Frequently Asked Questions

Is a low fixed rate card better than a low variable rate card?
It all depends on the specific terms, however experts often recommend a low fixed rate. The reason behind this is if a credit card company chooses to raise their interest rates they must give you a 15 day notice with a fixed rate card. A variable card can be raised at any time with no previous notice.

What is a grace period?
A grace period is a lapse of time from the due date to when interest is actually incurred.

Is there a maximum interest rate creditors are allowed to charge?
No, a creditor may charge whatever rate they feel is appropriate. However, they do take into account your credit history.

I filed for bankruptcy and am receiving credit card offers everyday.
Yes, you will continue to receive offers. The reason creditors target people who have filed bankruptcy are because they can hit you with a higher interest rate than someone with a good credit score.

If I am late with my payment what will happen?
Most of the time you will receive a late fee and the interest will be added to your total.

What exactly is credit?
Credit is simply a contract between the issuer and the cardholder. It is stating that if they lend the cardholder money that it will be paid back.

What is a cardholder?
A cardholder is the person who credit is issued to. The cardholder is responsible for any debts made on the card with the exception of fraudulent activity.

What happens if a couple divorces and has a shared credit card account?
Both parties are liable for any charges made. It is usually best to close that account and pay off the balance. Any debts will affect both parties credit.

What is a periodic rate?
The periodic rate is the interest rate the credit card issuer applies to the outstanding balance.

What is an introductory rate?
An introductory rate is a "starter" rate. It is a lower rate to get you interested in getting their card. It will only stay at that rate for a certain amount of time before jumping to a higher rate.

3.Questions to ask before choosing a credit card

1. Is there a fee for submitting an application? If so, what is it?
2. What fees may I encounter (annual, late, over the limit, processing)?
3. When can I change my interest rate and how?
4. Is there a grace period before interest is incurred?
5. Will I be notified if I go over the limit?
6. Is there an introductory rate and for how long? If so,
what will my interest go to after that rate?
7. Is there a fee for balance transfers?
8. What are the steps I must take if my card has been lost or stolen?
9. What is your policy in regards to authorized users?

4.Credit Card Terms

Annual Fees: A yearly fee charged by creditors for use of their card.

Annual Percentage Rate: The cost of credit.

Authorized Account User: Anyone who the cardholder has given permission to obtain credit with the card.

Charge-off: A lender's declaration of a balance as uncollectible bad debt and/or the process of writing off uncollected loans from account receivable books.

Chargeback: The reversal of a credit card transaction in which the merchant is required to pay back the cardholder after the original transactions.

Compliance case: a chargeback in which the issuing bank forces the chargeback because a card transaction was not processed according to specification/regulations.

Co-signer: Person taking full responsibility to repay debt if not paid by cardholder.

Credit: The right granted by a creditor to an applicant to defer payment of a debt, incur debt and defer its payment or purchase property or services and defer payment.

Credit bureau: A reporting agency that assembles information on borrowers to help lenders evaluate credit worthiness. Borrowers are entitled to see their credit report and dispute or add to the information they feel is erroneous. Objective(s) must be filled in writing with the report. Also see credit report.

Credit line: The dollar amount a consumer has available for use.

Credit Limit: Total amount of money that can be charged on the account.

Credit scoring: An objective methodology widely used by credit grantors to make credit decisions.

Credit transaction: Every aspect of an applicant's dealings with a creditor concerning an application for credit or an extension of existing credit, including, but not limited to information requirements; investigation procedure; standards of creditworthiness; terms of credit; furnishing of credit information, revocation, alteration, or termination of credit; and collection procedures.

Credit union: A cooperative association that offers loans to its members at low interest rates.

Creditor: A person who, in the ordinary course of business, (a) regularly participates in the decision of whether or not to extend credit, including a creditor's assignee, transferee, or subrogee who so participates and (b) regularly refers applicants or prospective applicants to creditors, or selects creditors to whom request for credit may be made. (A person is not a creditor concerning any violation of the Act or this regulation.

Date opened: The date when a credit agreement was originally initiated with a credit grantor.

Date reported: The date when a listing of the credit status of an account is place on the credit profile.

Finance charge: The total dollar cost of credit, including interest and other defined charges; certain fees not included in the finance charge must appear separately in the disclosure statement.

High balance charge: A fee assessed when the credit limit on an open-end account is exceeded.

High balance: The dollar amount of credit utilized on a credit line. Also see high credit.

Inquiry: A line of information indicating a request for a credit profile and naming the credit extending agency making the request.

Interest: The cost of borrowing money.

Revolving: Accounts where the outstanding balance can fluctuate depending on usage. Most revolving account payments are tied to the account balance as a percentage of the balance. Most have credit limits that may not be exceeded. When a balance is not paid in full each month a service charge is added to the balance.

We hope you enjoyed our March newsletter, if you have any suggestions or comments please let us know @ education@ufs-debtmanagement.com

Newsletter 04
Rev.1
May, 2005