© January 23, 2013
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Financial Empowerment Center
Counselor Training Curriculum
Topic 4: Using Credit Wisely
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Questions to Think About
• How do I decide when I should use credit and
when to make payments from my checking or
savings accounts?
• How to choose the right credit card?
• What are the credit card regulations and how
do they benefit consumers?
• What is predatory lending and how does it
affect clients?
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Tips for Building A Good Credit History
•
ALWAYS pay your bills on time. Before taking on any debt, be sure that you have a
repayment plan that you can follow.
•
Pay down your debts with the highest rates and fees first. Whenever possible, try
to pay in full or more than the minimum amount due. This will save you money on
interest in the long run.
•
Always shop around for credit cards and loans to find the most affordable options.
Read the fine print. Monitor your bills closely for errors or increases in your
interest rates.
•
Do not open too many credit cards. This can make it hard to keep track of
payments and could negatively impact your credit history.
•
Ask your lender about repayment plans and about negotiating your interest rate.
•
Never ignore a debt collector! Make sure the debt collector is licensed in
Washington State. Confirm all agreements to resolve the debt in writing. If you
question the debt, write a letter to the company to get verification.
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Paying Through Debit vs. Credit
• Debit Card – Money is withdrawn directly from account
holder’s own funds, e.g. savings or checking: no balance,
no access
• Credit Card – Payment is made by issuer on consumer’s
behalf, to be paid by consumer as invoiced
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What is a Credit Card?
• Card issued by lender or institution which allows the
consumer to access a line of credit to purchase goods,
services or obtain a loan (cash advance) based on a
contractual agreement
• Cardholder must pay amount drawn on as agreed, e.g. in
full, or over time with agreed upon interest and other
costs or fees
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How to Choose a Credit Card
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What is the annual fee?
What is the annual percentage rate?
How is the interest computed?
Is there a grace period before the interest repayment date?
How long is it?
How is the billing period defined?
What is the finance charge?
What is the credit limit?
How much is the late fee?
Is there a balance transfer feature? How much is the transfer
fee? Is there a minimum and a maximum?
What incentives (points, cash back or other additional value)
can the consumer get from using the card?
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Credit Card Protections
The Credit Card Accountability Responsibility and
Disclosure Act of 2009
• Credit card companies must provide consumers
with clear and understandable forms and
statements
• Rules regarding rate increases
• Special protections for students and young
consumers
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Credit Card Protections
• Credit card companies must provide a 45-day written notice
before changing the interest rate on future balances or making
significant changes to the terms of a credit card agreement
• Notice gives consumers the right to cancel and avoid fee increase
• If the consumer cancels, he/she must repay the debt either over
five years or by making monthly payments of up to twice the
current minimum payment
• Exceptions:
 45-day notice is NOT required if change is due to a variable
rate
 The expiration of a promotional rate
 Failure to comply with the terms of a “workout” or “hardship”
agreement
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Credit Card Protections
• Credit card companies cannot raise interest rates on
existing balances
• Exceptions:
 Does NOT apply when minimum payment is 60 days
late
 The change is due to a change in the index tied to a
variable rate
 A promotional rate expires
 The consumer fails to comply with the terms of a
“workout” or “hardship” agreement
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Credit Card Protections
• Interest Rates in First Year: Credit card companies cannot raise
the rates for future purchase for the first year the account is open
• Exceptions:
 Does NOT apply when minimum payment is 60 days late
 The change is due to a change in the index tied to a variable rate
 A promotional rate expires
 The consumer fails to comply with the terms of a “workout” or
“hardship” agreement
• Introductory promotional rates must last at least 6 months and
the go-to rate after expiration must be disclosed
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New Credit Card Protections
• Reasonable Time to Make Payments: Your bill
must be sent within 21 days before the payment
is due
• Reasonable Payment Dates: No weekend due
dates, due dates that change each month, and
payment deadlines that fall in the middle of the
day
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New Credit Card Protections
Time to Repay
Credit Card Statement must disclose:
 How long it will take to pay off the balance and the total
interest if consumer only makes minimum payments each
month
 How much the consumer would have to pay each month
to pay off the balance in three years
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Credit Card Protections
• Over-the-Limit Fees: No fees for going over the card limit may be
charged unless the consumer opts into over-the-limit coverage
• Upfront Fees: Fees in the first year (annual or usage) must not exceed
25% of the credit limit (except for late fees, over-the-limit fees, or
returned-payment fees)
• Fees for Making Payments: Cannot charge a separate fee for making
payments via mail, electronic transfer, telephone authorization or other
means, unless the payment involves an expedited service by a
representative of the creditor, such as same day service
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Credit Card Protections
• Fees and Penalties: Must be reasonable and proportional
• Late fees : Capped at $25 or the minimum payment missed whichever
is lower
• Cure Penalty Interest Rates Triggered by Late Payments: If a consumer
was 60 days late making payments and a legal rate increase was made,
the initial lower rate must be reinstated if the cardholder makes 6
consecutive on-time payments
• Re-Evaluation of Other Rate Increases: For accounts that have had
rates increased after January 1, 2009, creditors must review accounts
every 6 months to determine whether risk factors and market
conditions have changed and determine whether to reduce the APR
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Credit Card Protections
• Protections for Young Adults Under Age 21
 Credit card may not be issued to an applicant unless he/she
provides evidence of independent means to make payments
or has a co-signer 21 years or older with demonstrated
ability to repay
 Cannot offer tangible items (like Frisbees or t-shirts) on
college campuses or at events sponsored by colleges to
induce students to apply for credit cards
 Colleges must disclose marketing relationships
 Credit bureaus are prohibited from providing credit card
companies with young people’s credit reports unless they
have had expressly consented
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High-Cost “Fringe” Lending
Other Forms of Credit
•
Payday Loans: A payday loan is a small, unsecured, high
interest, short-term cash loan. In most cases, consumers
write a post-dated, personal check for the advance
amount, plus a fee. The lender holds the check for the loan
period and then deposits it, or the customer returns with
cash to reclaim the check.
• Informal Lending: Non-institutional lenders/loan sharks
• Refund Anticipation Loans: Usually a high-interest rate,
short-term loan secured by using a taxpayer’s expected tax
refund, and supposedly offers customers immediate access
to funds while waiting for the tax refund
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High-Cost “Fringe” Lending
• Rent to Own: Consumer rents items, such as
furniture or appliances, to own by the end of the
rental period
• Pawnbrokers: Licensed to lend money at a legally
specified rate of interest using articles of personal
property left as security
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Spotlight on High-Cost “Fringe” Lending
Payday Loans
• Amount - $700 or 30% of your gross monthly income,
whichever is less.
• Information registered in a state-wide database; all payday
lenders have up-to-date loan information.
• Maximum of 8 payday loans per 12-month period.
• If unable to repay a loan before the loan is due, an
installment plan with no additional fees can be requested.
• If you currently have an installment plan you may not
receive another loan.
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Payday Loans In Washington State
Department of Financial Institutions (DFI) licenses and
regulates payday lenders and the payday loan industry.
Maximum Loan Amounts & Terms In Washington
Maximum Loan Term: 45 days
Maximum Loan Amount: $700 or 30% of your gross monthly
income, whichever is less
Maximum Fee: 15% on the first $500 and 10% above $500.
Example 1: A loan for $500 + $75 fee = $575
Example 2: A loan for $700 + $70 fee = $770
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Payday Loans In Washington State
• Any payday loan obtained from a lender not licensed with
the DFI, and not repaid to the lender may not be collected
by lender and the lender may not pursue action in
Washington State to collect the debt. See RCW 31.45.105.
• You have the right to change your mind about the loan
within one day.
• You have the right to know all of the costs involved. You also
have the right to a payment plan.
• A payday lender may not threaten criminal prosecution as a
method of collecting a past due loan.
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Payday Loans In Washington State
• A payday lender may not threaten criminal prosecution as a
method of collecting a past due loan.
• A payday lender may not allow a borrower to use a new
payday loan to pay off an existing payday loan by the same
lender or an affiliate of the lender.
• Under the Truth in Lending Act, the cost of credit must be
disclosed, including information outlining the finance
charge and the annual percentage rate (APR). The APR
informs you of the cost of your loan. For example, a 14-day,
$500 payday loan with the maximum fee permitted by
statute would have an APR of 391.07%.
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Spotlight on High-Cost “Fringe” Lending
Refund Anticipation Loans (RAL)
• “Instant,” “Rapid” or “24 Hour Refunds”
• One- to two-week loans made by banks and
facilitated by tax preparers, secured by taxpayer’s
anticipated refund
• Often carry triple digit APRs and expose taxpayers
to risk of unpaid debt if refund does not arrive as
expected
• Offer little benefit to consumers
 When tax return filed electronically, can arrange
direct deposit in as little as 8 days
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Spotlight on High-Cost “Fringe” Lending
Rent to Own Stores
• Rent-to-own (RTO) stores offer a range of new and used
products (appliances, furniture, computers, electronics) for
lease with option to purchase item at end of rental
agreement
 Typically no down payment or credit check required
• Often inflate “cash prices” charged for merchandise, then
offer long-term leases with low weekly or monthly payments
that mask final price
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Spotlight on High-Cost “Fringe” Lending
Rent to Own Stores
• RTO customers in many areas routinely pay
effective annual interest rates of 100% or higher
• Many customers complain that item rented are
misrepresented as new when they are used
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Spotlight on High-Cost “Fringe” Lending
Pawnbrokers
• Also known as collateral loan brokers, lend money to
consumers in return for items of value ranging from
jewelry and electronics to household goods
• Usually lend less than one-half the value of property
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Spotlight on High-Cost “Fringe” Lending
Pawnbrokers
Washington RCW 19.60.060 permits pawnbrokers to
charge interest and receive rates for money on the
security of personal property actually received in a
pledge.
Example: the amount loaned from $100.00 or more interest at the rate of three percent for each thirty-day
period to include the loan date. In addition a fee for the
preparation of loan documents, pledges, or reports may
be charged, plus a storage fee.
http://apps.leg.wa.gov/RCW/default.aspx?cite=19.60.060
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Identity Theft
What is Identity Theft and How Does it Happen?
• Unauthorized use of another person’s name or other
information for fraudulent purposes
• Stealing wallets or purses with identification such as
driver’s license and credit or ATM cards
• Taking bank statements from mailbox
• Diverting mail by filing a Post Office change of address form
• Dumpster diving
• Stealing information from workplace or school records
• Intercepting or obtaining information transmitted
electronically via the Internet or through fax
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Identity Theft Prevention Tips
• Protect your clients’ personal information. Never throw out
papers with sensitive information. Shred documents containing
personal information before discarding them
• Advise clients to protect their personal information. They
should be careful when they receive suspicious telephone and
e-mail offers. Personal information should never be given out
over the phone. They should never click on unfamiliar e-mail
links
• Safeguard computer usage. Utilize antivirus and firewall
software
• Consumers should check their credit report for unusual
activity. They can request a free annual credit report from the
three major credit bureaus at www.annualcreditreport.com
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Steps to Take if Your Client Is Victimized
• Place a fraud alert on the credit report with one of the three
major credit bureaus
• Close all fraudulent accounts
• Notify the local police precinct, the credit bureaus, and the local
DA’s office
• Get a copy of the police report to submit to creditors and others
who may require proof of the crime
• File a complaint with the Federal Trade Commission (FTC). You
can visit www.consumer.gov/idtheft or call toll-free 1-877-IDTHEFT (438-4338)
• Identity Theft Clearinghouse, Federal Trade Commission, 600
Pennsylvania Avenue, NW, Washington, DC 20580
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How Does Credit Affect Your Financial Goals?
• Comparing credit cards’ annual fees, APRs, finance charges,
late fees, credit limits, features, etc
• Credit Card Accountability Responsibility and Disclosure Act
of 2009 will affect a lot of the undisclosed fees credit cards
charge consumers
• Payday loans, RALs, RTOs, Pawnbrokers and loan sharks
often end up costing the consumer more than they expect
to or have to pay
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Topic 4 Exercise #1
Case Study
Marta’s great aunt has just passed away, and left her with
$250,000 in life insurance proceeds.
Marta and Bobby make an appointment to see you as their
financial counselor, and ask you for advice, how would you
advise them to apply the insurance proceeds? What kinds of
items should they be considering to pay off first?
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Topic 4 Exercise #2
Case Study
Marta and Bobby feel that they are finally on their way to being
able to take control of their lives now that they have received the
inheritance from Marta’s aunt, and have paid off debt, and have
set some funds aside for the future.
One day, Bobby was home and received a phone call at 10 pm
from a company claiming that Marta owed them $100,000. The
next morning the caller phoned at 6 am demanding to speak to
Marta. Marta answered the phone and decided to hang up and
ignore it believing it was a crank call.
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Topic 4 Exercise #2 - Continued
That evening, at midnight the caller phoned again. This time
Bobby told him they were going to call the police if he did not
stop calling.
3 months later, Marta received a call from her bank indicating
that all of her funds in all of the accounts that she and Bobby
had, were garnished due to a judgment obtained against her in
upstate New York. The plaintiff, a loan company had sued her for
$100,000 plus interest, based on a personal loan and promissory
note that was in default for over a year.
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Topic 4 Exercise #2 - Continued
Marta has never heard of the loan company, and when she called
the attorneys, was told that she signed the agreement 18 months
ago, and the name, social security number and date of birth were
correct, but she had never lived at the address they had for her.
They said they had a copy of the cancelled check with the loan
proceeds, and that she deposited it into an account she had
upstate.
She and Bobby hurry down to FEC to see you. Their rent and
utility payment checks, along with their credit card payment
checks all bounced. Now everyone was bombarding them with
calls, letters and e-mails. They were penniless.
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