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HSFPP Weekly Update # 150—The Importance of Paying Bills On Time

Message from Bob: A recent survey found that a staggering 39 percent of credit card issuers said they apply the rule to customers, even if they had no late payments on their own card.  A good class activity would be for teenagers to bring their own (or their parents’) current credit card agreements to class to see if they have a universal default clause.

Message from Chris: As I am graduating from UK at the end of this semester, I want to select topics for the weekly updates that I believe will make a difference in teenagers’ lives. This week’s article In the New$... is based on a Frontline television program, “Secret history of the Credit Card,” which is well worth viewing in class; PBS also provides excellent supplementary resources to go with the show. I selected this program also as an added resource for Dr. Flashman’s FAM 759 class, which he teaches during the Second Summer Session, to expose teachers and county agents to financial educational resources.


Related Updates:

Update #136 - Teens and Credit Cards - 10 October 2005
Update #129 - Credit History, Personal Behavior, and Employment - 16 May 2005
Update #127 - More Teens Getting Credit Cards - 2 May 2005
Update #119 - Should Teens Have Credit Cards? -28 February 2005
Update #109 - Avoid High Interest on Credit Cards - 6 December 2004


Web Site Pick of the Week:
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. sells legal and business books, forms, and software. This site provides excellent information on dealing with credit and spending your money wisely so you don’t end up in credit card debt. Click on “Property and Money,” then “Credit Repair and Debt.” Under “Tools and Resources,” look for the article, “Checklist: Avoiding Financial Trouble: Ten Tips.”


Video from Frontline:


Activity for Educators:

Have students read this week’s article In the New$..., as well as the article, “Checklist: Avoiding Financial Trouble: Ten Tips” from the Web Site Pick of the Week. Discuss how both articles’ advice can help consumers avoid high credit card interest rates and credit card debt. You might find the following questions helpful.


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 universal default? 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?


Follow-Up Activity:

History class: Write a three-page paper on the history of credit cards, taking into account their beginnings, growth in their 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$... Not Paying Your Bills on Time Can Really Cost You

By Chris Hart, Senior in Telecommunications, University of Kentucky

In our October 10th article In the News..., we wrote that college students with credit cards have an average of $1,585 in credit card debt. We noted how important it is to pay your credit card balances in full and, if you have credit card debt, to pay if off as quickly as possible. In this week’s article, we explain how credit card companies are looking hard for reasons to raise your interest rate.

Let’s say that you just bought a new Sony stereo system for your car; the price was $350 including sales tax, and you paid for it with your credit card. A few weeks after buying the stereo, you receive a letter from your credit card company. They are raising your interest rate from 15.5 percent to 21 percent, simply because you forgot to mail your payment in on time. You also were late on two other occasions. Under what’s called “universal default,” credit-card companies are allowed to penalize you for not making payments on time, even payments to other creditors. So many consumers are surprised to find their interest rate rising even with creditors whom they had always paid on time and with whom they had been in good standing.

According to a recent study by San Francisco-based Consumer Action, the average penalty rate in 2005 was a hefty 24.43 percent, up from 21.91 percent in 2004. Their study also found:

“Universal default rate hikes are imposed by credit card companies based on the way customers handle other credit accounts. This year, 44.68% of banks said they have universal default policies—a slight increase from last year’s survey. According to customer service representatives, the following circumstances, in descending order of importance, can trigger a universal default rate hike:

“CA found default and penalty rates as high as 35%....”

“Eleven of the 21 banks with universal default policies are willing to reduce the higher rates if cardholders’ credit histories improve. Three more banks said it was “possible.” Twelve banks out of these 14 said that after six months of improved credit, the rate might be adjusted downward—although not always to the original rate.”

So be advised that it is a good idea to check your agreement with your credit card company and call them to see if they use universal default. If they do, it might be worth switching your account to a company that does not. I’ve checked with the University of Kentucky Credit Union, and they do not use universal default; they say most credit unions do not. But, before making any change, be aware that getting a new credit card also can lower your credit rating, so you don’t want to switch cards very soon before applying for a car loan, for instance.

With credit cards, you must be vigilant in keeping track of how much you spend on credit and be sure to pay all your bills on time. Create a good filing system for paying bills and pay your credit card bill as soon as you receive it. Take 10 or 15 minutes to check the statement with your receipts to make sure it is correct and write the check immediately after getting your bill in the mail.

Source: “2005 Credit Card Survey,” Consumer Action, 7/28/05.


Kentucky High School Financial Planning Program
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. 


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