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HSFPP Weekly Update # 174—Importance of Paying Credit Card Bills on Time

Message from Bob: A good class follow-up activity is Assignment 5.1; and for teens to bring their own (or their parents’) current credit card agreements—just the agreements—to class to see if they have a universal default clause. “Universal default rate hikes are imposed by credit card companies based on the way customers handle other credit accounts. Last year, 44.68 percent of banks said they have universal default policies.

Message from Charles: Hello, my name is Charlie Sewell. I’m 20 years old and originally from Maysville. After graduating from Mason County High School in May 2004, I spent two years at Bluegrass Community and Technical College taking primarily Pre-Business courses for UK’s Gatton College of Business and Economics. Upon transferring to UK, I changed majors and am currently an undergraduate Pre-Communications student. I will be working with Dr. Flashman on the HSFPP this year and look forward to helping with the weekly updates and learning along with the teenagers how better to manage my finances.

 

Web Site Pick of the Week:

http://www.pbs.org/wgbh/pages/frontline/shows/credit/eight/
PBS’s Web page for the Frontline episode, “Secret History of the Credit Card,” provides all the materials educators need to present a lesson using the show.

Video from Frontline:
http://www.pbs.org/wgbh/pages/frontline/shows/credit/view/

 

Follow-Up Activity:

Business or social studies class: Use Assignment 5.1 on Page 64 in student guide book or on the HSFPP website:
http://www.nefe.org/hsfppportal/files/15410_Assignment%205.1.pdf

The last column of the table says “Other Fees/Notes.”

Fees could include:

• late fees
• over the limit fees

Notes could include:

• universal clause
• what balance finance charges are calculated on (current or previous month, two month balances, etc.)

History class: Write a three-page paper on the history of credit cards, taking into account their beginnings, their growth in popularity and use, and issues with credit cards today. Be sure to include the following: What was the situation for consumers before truth-in-lending laws? Were they able to compare rates accurately? Why or why not? How did truth-in-lending laws change consumers’ ability to compare rates? What might current issues over credit cards mean for the future?

 

In the New$... Adventures with Credit Cards

by Charlie Sewell, Pre-Communications junior – University of Kentucky

“Debit or credit?” For the past two years that question has plagued my mind everywhere, whether I’m eating with friends, at a gas station, or at a movie. In the past I didn’t want to carry my checkbook or very much cash. It also seemed easier to use my credit card instead of my debit card because I was afraid I might forget to subtract the debit card amount in my checkbook when I came home—or I might lose my debit card slip—and, as a result, lose track of how much I have in my checking account and bounce some checks. I usually pay my monthly credit card bill in full and on time to avoid paying late fees and finance charges. Keeping up with my credit card balance has been no problem.

Looking at a just-published study from the Government Accounting Office (GAO), I was surprised to learn that being late making monthly payments on one credit card could not only raise my interest rate on that card, but also on other cards that I always pay on time; this is because all credit card companies can view my credit report at any time. After learning this, I went home to read my credit card agreements to see if they contained a universal default clause that allows them to do this, since about 50 percent of credit card contracts include such a clause.

According Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group (USPIRG), the current regulations give credit card companies a “license to steal.” Credit card companies not only check credit reports before cards are issued, but they also continuously check credit reports while the cards are being used.

I also was shocked to learn that the average penalty for paying late increased from $13 to $34 in eleven years according to the GAO study. What’s worse, we can’t even be sure if our checks arrive late or the credit card company is just posting them late to make more money. Credit card companies are allowed to list a specific date and time for payments to be made; for instance, March 13 at 11:00 a.m. But other factors such as the company receiving mail at noon can cause checks to be posted the following day. Either way, the payment is considered late.

As a student who has taken both micro- and macroeconomics, I find it preposterous that late fees have nearly tripled in eleven years, while the inflation rate has averaged less than 3 percent per year for this period. Although I don’t have a mortgage or children, I do have rent payments, groceries, and utility expenses. The overall cost of living hasn’t tripled in eleven years, and it doesn’t seem that the same penalties apply in other areas of my life. From my observation, credit card companies find loopholes to increase profit and are making it difficult for the average consumer to understand what’s going on.

If you don’t believe it, check out the following:

One of the biggest problems facing consumers with credit cards is the terminology used on the applications. The GAO study reports that about half of the U.S. population reads on an eighth-grade level. What many people don’t realize is that credit card companies use this to their advantage. When writing disclosures, companies use terminology that is too complex for consumers who read on an eighth-grade level to understand; and they put this information in small print. Would they do this if they really wanted consumers to understand the agreements? If you’ve ever heard someone say to “Read the fine print,” now you know why.

After reading this study, I’ve decided to use mainly my debit card and to record these expenses in my checkbook nightly to avoid bouncing checks. Being aware of what I’m spending each day will also help me keep within my budget. Now I’ll only use my credit card in an emergency; this will reduce the likelihood that I’ll go over my limit or have to pay late fees and finance charges.

Although credit cards are convenient, they can also become a financial noose around your neck. Most of us need to become better informed about credit cards in order to use them wisely. Credit cards aren’t magic money and we all have to pay to use them, one way or another. It’s better to know what you’re getting into from the start, rather than having to learn the hard way, by ruining your credit rating with late payments or going into excessive debt.

Sources: Universal default statistics from “2005 Credit Card Survey,” Consumer Action, 7/28/05. http://www.consumer-action.org/news/articles/2005_credit_card_survey/

“Credit Cards: Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosures to Consumers” [Abstract], Government Accounting Office, September 12, 2006. http://www.gao.gov/docsearch/abstract.php?rptno=GAO-06-929. (There are links to the full report.)

Herb Weisbaum, “GAO reports lifts lid on credit card industry,” MSNBC.com, October 16, 2006. http://www.msnbc.msn.com/id/15292149/.

 

Discussion Questions:

1.) If you have a credit card, do you know the interest rate that you are charged? What is your rate?

 

2.) Has your rate changed since you have had your card? If so, what was the reason for the rate change?

 

3.) Have the terms of your credit card agreement changed since you have had your card? If so, what were the changes?

 

4.) How do you feel about any changes to your interest rate and/or credit card agreement? Have those changes made any difference in your life? What changes in your lifestyle can you predict if your credit rating goes down due to late payments?

 

5.) Do you think it is fair for a credit card company to raise a consumer’s rates because of being late in making monthly payments with another credit card? Is this a good way for the financial industry to manage their risk? Why or why not?

 

6.) If you think universal default is not the best way for creditors to manage risk, what would you suggest?

 

Kentucky High School Financial Planning Program

http://www.ca.uky.edu/fcs/hsfp

The purpose of the HSFPP weekly financial updates and Web site is to assist county Extension agents, credit union educators, high school teachers, and parents who home school their teenagers so that they may improve the economic well-being of our teenagers; and also to show educators how the HSFPP and the weekly updates meet Kentucky core concepts. The Web site and weekly updates are provided by the University of Kentucky Cooperative Extension Service, and are free to all educators. The list of core concepts and order form for free program materials including the student guide and instructors manual can be found on the Kentucky HSFPP home page