Foundation Concepts:
- A credit card is a loan and like other loans it can be used to help improve your quality of life. Few of us would be able to purchase a home, a car, or even a college education if we first had to save all the money that was needed. Borrowing lets consumers receive the benefit of products and services even while they are paying them off. Best Practice demands that we don’t buy anything with our debt that won’t last at least as long as it takes to pay the debt off. For example, you can’t get a 30 loan on a car because cars don’t last 30 years. Likewise, you should not be putting things on your credit card that will be long gone by the time the bill comes: vacations, entertainment, eating out, etc.
- Credit card companies make their money in two ways: the interest rate they charge you (which is initially based on your credit score) and the fees they charge. Fees are charged for cash advances, balance transfers, going over your credit limit, and late payments. In addition, late payments will also cause them to adjust your interest rate to almost 30%.
- Credit card companies love borrowers who only make the minimum monthly payment each month. In this way they will maximize the amount of money that they make on their loan to you. In most cases, if you only make the minimum monthly payment, you will end up paying interest almost equal to the purchase price of the item you originally bought.
- Credit cards are unsecured loans. That means that if you default on the loan, the company cannot come and take back anything that you have bought with the credit card. This is different than a car loan or a mortgage on a house. If you default on those loans, they will repossess your car or foreclose on your house. That makes credit card debt a lower priority when families are in financial distress.
- If you fail to make payments to your credit card lenders, a number of things may happen: your interest rate will go up and you will incur late fees; your credit score will go down and negative information will be entered in your credit report; your lender may begin to call you about your missed payments; eventually, your lender may turn your debt over to a collection agency which will begin to call you; they may file a lawsuit against you a secure a judgment against you in court; finally, a judgment might lead to garnishment of your wages.
NB: In regard to Universal default, this is a costly practice that many lenders have previously engaged in. It involves using a late payment to another creditor as justification for imposing the default rate on a customer, even if that customer has never made a late payment to you. Happily, this practice will be outlawed when new credit card regulations go into effect in late 2009.
Discussion Questions:
What are some of the benefits of debt? What are some of its disadvantages?
Was using his credit card a good choice for Dave to pay for his vacation? Why or why not? What about Dave’s point that later in his life, when he has the money, he may not have the time?
What are some of the fees that credit card users might face:
- Annual fee
- Interest charges
- Balance Transfer fees
- Over the credit limit fees
- Cash Advance fees
- Late fees
How much area some of these fees and can they be avoided?
Why do you think credit card companies set the minimum monthly payment amount to be so low? Why would they allow credit card users to take so much time to pay back their loans? How will you feel five years from now if you are still making payments on a pair of shoes that have long since gone into the trash?
What is the worst case with regard to Dave’s credit card debt – if he lost his work study job and couldn’t pay off his credit card, what might happen? Would it be different if this was a car loan instead?
What risk is Dave’s brother agreeing to when he says he is willing to be a co-signer on a car loan for Dave in the future? What if Dave cannot make those car payments? What will his brother’s responsibility be? |
