Bob Kraus ‘79
Jed Scala ’89
January 5, 2012
Agenda
 Overview of Payment Methods
 Establishing Credit & Selecting a Credit Product
 Understanding Credit Card Terms
 Credit Bureaus & Credit Profile
 Economics of Debt
Overview of Payment Methods
PROS
 Debit Cards
 Prepaid Cards
 Credit Cards
 Charge Cards
 New Entrants
(Paypal, ACH,
mobile, etc)
 Easy to get & wide acceptance
 No Debt
 Budget Management Tool
CONS
 Immediate payment
 Limited Protections
 Some Travel Challenges
 Changing Fee Structures
 Easy to get & wide acceptance
 No Debt
 Budget Management Tool
 Pre- payment of funds
 “Breakage”
 Builds Credit History
 “Float” & flexibility to revolve
 Rewards
 Interest Costs & Fees
 Annual Fees
 Builds Credit History
 Spend Capacity & Budget Mgmt
 Rewards
 Ease of use
 Protections & Security
Establishing a Credit Profile
Credit Profiles Can Impact
 Apartment Rentals
 Access to Services & Utilities
 Education Loans
 Mortgages/Home ownership
 Car Loans, Leasing & Insurance
 Employment Background Checks
Establishing a Credit Profile
 Credit Cards
 Utilities
 Student Loans
 Mortgages
 Car Loans & Leasing
Selecting a Credit Card…
…starts
with your intended use:
 How much do you intend to spend?
 Will you carry a balance?
 Are you trying to build credit?
Then consider…
The Provider
 Company Brand
 Service Levels
 Online capabilities
 Your Relationships
Fees
 Annual Fees
 Penalty/Late Fees
 Service Fees – Cash,
Bill pay, FX
Rewards
 Reward Points
 Cash Back
 Frequent Flyer Points
 Other Loyalty Currency
Interest Rates
 Annual Percentage Rate
 Introductory Rates
 Balance Transfers
 Cash Rates
 Penalty Rates
Services
 Protections (Car/Purchases)
 Access (Airline, Events, etc)
 Concierge
Terms
 Payment Terms
 Penalty Terms
Fees…
 Annual Fees: The yearly fee associated with a particular card. These fees can
range from nothing for a basic credit card with limited benefits and service, to
up to several hundred dollars for a card with elite travel services, rewards
programs or other consumer benefits. Annual fees are common on charge
cards, rewards cards and airline miles/hotel credit cards.
 Foreign Exchange Fees: When you make purchases abroad with your card,
the card issuer will automatically convert your purchases from the local
currency to U.S. dollars on your bill. Most card companies exchange money at
rates that are more favorable than what consumers would get on their own. You
may, however, incur a charge for foreign currency exchange for each purchase.
 Late Payment Fees & Overlimit Fees: The amount of money you will be
charged for paying late or exceeding your credit limit.
Interest Rates…
Annual Percentage Rate (APR) for Purchases: The annual, standard interest rate
you will be charged for purchases you make if you carry a balance from month to
month.
Variable-Rate APR: Means your APR may be adjusted over time due to the cost of
credit in the market – typically “Prime + X.XX%”…..e.g 3.25% + 9.99% = 13.24%
Non-Variable APR: An annual percentage rate that is fixed for a stated period of
time. Unlike a variable-rate APR, this interest rate does not change if the prime rate
changes.
Introductory APR: This is the interest rate that is in effect for an introductory period
only. Typically, an introductory APR is less than the standard APR and is in effect for
six months or a year.
Interest Rates…
Cash Advances: Using your credit card to take money out of an ATM. Typically, a fee
is assessed at the time of the withdrawal and the withdrawal is charged interest at a
higher APR than the standard APR for purchases. You will also be charged interest
immediately.
Balance Transfers: Transferring a balance from one credit card to another. This
practice is usually done to take advantage of a lower, promotional APR on a new
account.
While the interest savings can be significant, the balance transfer APR may differ from
the standard APR for purchases and most credit cards charge fees for balance
transfers.
Penalty APR: The highest interest rate for a given card product. If you pay your credit
card late or bounce checks, this rate may be applied to your account. Unless you are
60 days late, the new rate can't be applied to your balance—only on new purchases
and transactions you make on your consumer credit or charge card.
Terms…
 Convenience checks: Checks linked to your credit card account. They can be
used to transfer a balance from another card or to make purchases or payments.
 Minimum monthly payment: The minimum amount that you are required to
pay the credit card company each month. You will be in default if you pay less
than this.
 Payment due date: The last day that payment can be accepted without
penalty. Each month, your due date will be the same date in the month.
 Payment or default Triggers: Terms such paying late or submitting a no-good
check that could cause you to incur fees and a higher interest rate
Reviewing Credit Terms…
Credit Bureaus…
Experian
Transunion
Equifax
 Must have one account – a student loan, credit card, mortgage, auto loan – that is
older than six months and one account has been updated within the past six
months for credit bureaus to assign you a score.
 You don't just have one credit score. You have many.

Every creditor does not report information to each of the three big credit bureaus.

(utilities, for example) may only report to a single bureau

Each bureaus computes a score based only on the information in its proprietary report.

Scores from one bureau might be higher or lower than at the other two
Fair Isaac & CO (FICO Score)
 A numerical translation of your credit reports that predicts risk for future lenders
(as well as insurers, employers, landlords and others)
 FICO Scores range from 300-850 ; higher is better; below 640 is considered “subprime”
 Lenders use scores as “approval cut-offs” and for interest rate pricing
 When new information appears on your credit report your FICO score adjusts.
Managing your Credit Score…
Payment History Tips
Pay your bills on time. Delinquent payments and collections can have a major
negative impact on your FICO score.
If you have missed payments, get current and stay current. The longer you
pay your bills on time, the better your credit score.
Be aware that paying off a collection account will not remove it from your
credit report. It will stay on your report for seven years.
If you are having trouble making ends meet, contact your creditors or see a
legitimate credit counselor.
Managing your Credit Score…
Keep balances low on credit cards relative to the “line size” - High
outstanding debt can affect a credit score.
Do your rate shopping for a given loan within a focused period of time.
FICO scores distinguish between a search for a single loan and a search for
many new credit lines, in part by the length of time over which inquiries occur.
Note that it's okay to request and check your own credit report.
Have credit cards — but manage them responsibly. Someone with no credit
cards, for example, tends to be higher risk than someone who has managed
credit cards responsibly.
Try to avoid closing you oldest credit card account
Debt Economics
Credit Cards
• Easy to get, but high cost of credit given “unsecured”
• Not tax deductible
• Few economically rational reasons for consumers to take on
Car Loans
• Rapidly depreciating asset
• Not tax deductible
Home Equity
• Tax deductible
• Lower cost, but secured by home
• Generally variable---borrowing costs may be unpredictable
Student Loans
• Generally more favorable rates
• Potentially good economic investment
• Somewhat tax deductible
• Changing market dynamics in the cost/value equation
Mortgages
• Tax deductible
• Need to understand types & terms (fixed, ARM, etc.)
• Leverage can work for and against you!
Concept of Leverage
Graduate from Williams
& Buy a House
$200k
Move 1 Year Later
& Sell House…
$220k
$200k
(60K)
$180k
Put down
20%
(40K)
$20k
Borrow
80%
Pay
Back
(160k)
(160k)
20k
40k
-50%
Return
Pay
Back
(160k)
60k
40k
+50%
Return
Questions & Discussion