Personal Finance Questions: Using Credit Cards

Question: Explain the two types of gift, or stored value, cards

There are two kinds of gift, or stored value, cards
- The first is the single-purpose, or 'closed-loop,' card, which can be used only at one store for one purpose
- The second is the multipurpose, or 'open-loop,' card, which can be used at most locations, just like a credit card
- This type of card is becoming more and more common
- Many employees receive their paychecks on a stored value card
- More than 1,000 companies, including Walmart, FedEx, McDonald's, U-Haul, UPS, Coca-Cola, Blockbuster Video, and Denny's, offer to pay employees with Visa Payroll cards, which are a form of stored value cards, instead of checks.


Question: List one advantage to paying bills automatically
Using automatic withdrawals to pay your bills will prevent late payments
- However, if you do automate bill payment, make sure you take the time to read your bills–you must know where your money is going, and you must know exactly how much money is being withdrawn.

Question: What are some tips to help you start managing your cash and achieving financial control?
create an emergency fund before you have an emergency.
Be careful when you bank online.
Make sure you use a strong password and a secure network.
Never pay bills from public Wi-Fi hotspots.
Pay your bills online.
If possible, have your bills automatically paid.
Use online alerts to your advantage
- Sent to your mobile phone or e-mail address, online alerts can provide you with peace of mind, protect your credit score, and save you money.

Question: Teaser rates are very low - How long do they last? Is there any real benefit in them?
Introductory teaser rates can be as low as 0.0%
- They last from 6 -12 months
- The real benefit in using them is the interest saved during the introductory period
- At the end of the period, the rates will dramatically increase
- At this time, pay the balance off with a lower interest option
- Just be sure to time it right.

Question: Compare and contrast the average, previous, and adjusted balance methods
The average daily balance method calculates interest by summing the outstanding balances owed each day during the billing period and dividing by the number of days in the period
- The previous balance method simply bases interest on the outstanding balance at the end of the previous billing period
- Interest is calculated using the adjusted balance method by charging against the balance at the end of the previous billing period less any payments and returns made.

Question: List the three primary methods used to determine interest charges on an unpaid credit card balance
(1) the average daily balance method
(2) the previous balance method
(3) the adjusted balance method

Question: Describe the three primary methods used to determine interest charges on an unpaid credit card balance.
average daily balance method: Your average daily balance is calculated by adding up your daily balances during the billing period and dividing the sum by the number of billing-period days
- Interest payments are based on this average balance
- The Bankcard Holders Association of America reports that this method is used by about 95 percent of all bank card issuers.

Previous balance method: Interest payments are charged against the amount owed at the end of the previous billing period, without taking into account the amount of the current month's payments
- This method is relatively simple, but it's also expensive for the credit card holder.

Adjusted balance method: Interest is charged against the previous month's balance only after any payments have been subtracted
- Because interest isn't charged on payments, this method results in lower interest charges than the previous balance method.

Question: Using your credit card for a cash advance in an emergency is probably a good idea - Using cash advances for non-emergencies is a terrible idea - Explain the characteristics that make cash advances very dangerous

For starters, it shows that you are not managing your personal finances very well
- Using cash advances for day to day living expenses means that you are not following a budget and you are living outside of your means
- Normally there is an upfront fee of several percent on the amount of the cash advance
- The APR for cash advances is higher than the APR for regular purchases
- None of your payments apply to the cash advance balance until you have paid your other balances in full first
- Since a majority of people never pay off their credit card balance, then they are paying a very high APR on their cash advance balance for a very, very long time.

Question: List the five benefits or advantages associated with credit cards - What are the two major disadvantages?
credit cards are convenient and easy to use when shopping
- They are great for emergency use and they allow for consumption before the purchase is fully paid for.
They allow for consolidation of bills and also act as a source of interest-free credit.
Additional pros include using the cards as a source of free benefits, as identification, for making reservations, a means to purchase before the price goes up.
Two major disadvantages include making it easy to lose control of spending and being an expensive way to borrow money.

Question: List five components of the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act
- Notification of schedule for payoff
- Increased rates apply only to new charges
- Restrictions on over-the-limit transactions
- Caps on high-fee cards
- Protections for underage consumers

Question: List the three types of credit card users
- Credit user
- Convenience user
- Convenience and credit user

Question: Briefly describe the three credit card users.
A credit user generally carries an unpaid balance from month to month
- Most credit users don't use the grace period, and the annual fee pales in comparison to the amount of interest they pay annually
- If you're a credit user, the most important decision factor is the APR, or interest rate, on the unpaid balance, because it will be the largest credit expense you face.
A convenience user is someone who pays off their credit card balance each month, so the interest rate is irrelevant
- Convenience users look for a credit card with a low annual fee and an interest-free grace period.
A convenience and credit user is someone who generally, but not always, pays off all of the balance each month
- Their ideal card is one with an interest free grace period, a low interest rate on the unpaid balance, and no annual fee.

Question: List four ways to avoid credit card fraud
- Save all your credit card receipts and compare them to your bill.
- Use caution and care in giving your credit card number over the phone.
- Never leave a store without your card.
- Do not let the store clerk keep your receipt to throw in the waste basket.

Question: What vital areas are typically evaluated in 'scoring'?
The important vital areas include:
- annual income
- length of residence
- housing situation
- length of time on job
- type of employment
- current age
- number of bank accounts
- number of credit cards
- credit history
- telephone ownership

Question: What is the difference between voluntary and involuntary inquires?
Voluntary inquiries are spurred by your own requests for credit
- Involuntary inquiries occur when lenders request your report so that they can extend you a preapproved credit offer.

Question: What four steps should you take if you think your identity has been stolen?
STEP 1: Contact the fraud department of any one of the three major credit bureaus to place a fraud alert on your credit file.
STEP 2: Close the accounts that you know or believe have been tampered with or opened fraudulently.
STEP 3: File a police report.
STEP 4: File a complaint with the Federal Trade Commission at the federal government's consumer information website (http://www.consumer.gov).

Question: Describe four ways to prevent identity theft
Keep a detailed list of all your credit and debit cards and other accounts, including the 24-hour customer service phone number for each
- This information will help you quickly cancel your accounts and minimize the danger to your finances.
Don't carry documents that include your Social Security number or any PINs, passwords, or access codes for bank or credit cards.
Keep your birth certificate, passport, and Social Security card in a fireproof strongbox in your home or in a safety-deposit box
- If you lose your driver's license, these documents will be your only official forms of identification.
At least once a year, contact the three national credit bureaus, TransUnion, Experian, and Equifax to check your credit report for suspicious activity.

- Your credit score is possibly the most important number that affects your life
- How does your credit score affect you?

Your credit score is used by potential creditors to determine whether or not they are willing to give you credit, what APR they will charge you, and what your credit limit will be
- The Insurance Industry is also now using your credit score to determine whether or not they will insure you, for how much, and at what rate to determine your premiums.
Many employers are using a person's credit score to make hiring or promotion decisions.

Question: Why is it important for young people to establish a good credit history as soon as possible?
People that have not established any credit in their name do not have a credit report or credit score established
- Potential creditors will have to assume that you are a high risk until you actually demonstrate good credit behaviors
- This means you may be denied credit or will pay a higher APR and have a lower credit limit than you may want or need.
You will also pay higher rates for your personal insurance until you have established a good credit score
- Many employers also use credit scores for employment decisions and not having one may place you at a disadvantage.

Question: List five signs that you have the credit card habit.
- You only make the minimum payment each month.
- You have reached the credit/spending limit on one or more cards.
- You are using savings to pay for credit card payments.
- You do not keep track of your credit card spending as it occurs.
- You get cash advances because there is not enough money in your checking account.