DEBTSMART: 10 financial questions you should ask yourself today!

People always ask kids, "What do you want to do/be when you grow up?" I'm sure you remember the question well. A fireman, policeman, scientist, doctor, social worker, teacher, superhero, etc. are some popular answers. The truth is that people have many interests and talents. Someone may be just as happy being a lawyer as a teacher. That's why I believe the better question to ask is "How do you want to live?" Do you want to live in a mansion or a shack? Do you want a chauffer or bicycle? Do you want to live in the city, country, on a farm, an apartment? I believe that you need to decide what you want to do based on how you want to live your life. Time after time, I've read about studies showing that ,in general, people do get what they strive for. In fact, I just ran into a friend of mine from high school. He was my lab partner in biology. He wanted to be a podiatrist, which was great since I really didn't want to dissect that pig. He did everything. Guess what he's doing today? Okay, he's not a podiatrist, but he is a neurologist. He still became a doctor. My other friend always wanted to be in construction and now he's the owner of a very successful construction company. If you think back, you will probably discover that most people who pursued what they wanted achieved their goals. That's why it's so important to have the right goals. Pursue dreams that will give you the future you want with your career. But, let's not forget something that's equally important, which is the quality of your off-time and family life. If you really love helping people, doing social work, or being a camp counselor, that's great! But if you, at the same time, want to live in a huge house by the shore, then you will be disappointed that the social worker salary isn't going to let you live in that manner. It's a combination of what you want to do and how you want to live. Pick one of the things that you love to do, that will pay for how you want to live. That's my two cents on this issue. It's never too late to start. You might be thinking, "I did get what I wanted, but now I want something else." Fine. Believe it in your heart. Work toward that goal. Stay focused and as before, you'll reach your goal. Just be sure you choose carefully because if you work hard you will get what you want! As Thoreau said, "In the long run, we only hit what we aim at.

5 Tips for Grabbing Last Minute Holiday Shopping Deals

Tuesday December 23, 10:45 am ET
By Kimberly Palmer

The stockings may be hung and the tree decorated, but not everyone is ready to sit back and enjoy the eggnog. Some of us still need to hit the malls and buy presents. But shopping procrastinators are in luck this year--retailers are offering mega-discounts and sales to those who still have money to spend.
To make sure you're getting the best deal possible, here are five tips to keep in mind, as well as a list of stores with some of the most tempting offers:

Retailers are desperate. With the retail sales forecast weak--TNS Retail Forward estimates sluggish growth of around 2 percent--stores are doing whatever they can to get consumers to open their wallets, and that usually means offering big discounts. Hefty markdowns for Black Friday spurred a short-term jump in spending, and many of those discounts have lingered throughout the entire month of December.

That means you have the upper-hand. With retailers willing to do almost anything to win your business, you have room to do a bit of negotiating. Before setting foot in a store, compare prices through websites such as PriceGrabber.com so you know where to go to get the best deal. If you're visiting a boutique or craft market, then you likely have some leeway to ask for a lower price. A simple request, such as, "Can you give me a discount on that?" can lead to $5 off or more. As for the big box stores, Brad Wilson, editor of BradsDeals.com, says more retailers are willing to match their competitors' prices this season. That means consumers who see better deals elsewhere can point out the discrepancy to a store manager and ask for a price match.

Don't forget about last minute online deals. For those who prefer to shop from the comfort of their own homes, a few online retailers are still offering deals for delivery by Christmas. According to DealNews.com, 1-800-FLOWERS.COM and Teleflora can deliver by Christmas Eve if you order by 2 p.m. local time on Christmas Eve--so basically, you can order your bouquet and have it delivered within hours.

Last minute travel gifts are another option; websites such as Travelocity, LastMinuteTravel.com and Expedia feature last minute deals with bigger than usual discounts, so procrastinators can benefit.

But be careful as you click. Fraudsters are prowling websites for credit card numbers and other personal information, so be sure to enter information only on trustworthy websites. Never click on a link embedded in an E-mail or send credit card information over E-mail. When your January credit card statement arrives, check it carefully for any discrepancies. Credit card companies offer protections against fraud as long as it's reported in a timely manner.

For the best deals, check out these retailers:

-- J. Crew is offering 20 percent off through December 24, but it applies to in-store purchases only. That means the stores will be crowded, but you can snag some great deals on J. Crew's colorful winter collection.

-- If you like Lacoste's pastel colors, then you can take advantage of the mark downs on select Polo shirts for men and women. While the classic colors like yellow and blue carry their original $79.50 price tag, Wisteria purple, Storm Cloud blue, and others are on sale for $58.99.

-- The Gap is offering up to 40 percent off, while its sister stores Old Navy and Banana Republic are holding their own sales of up to a whopping 60 percent off.

-- At Target, shoppers can get visit stores to get up to 30 percent discounts--just make sure you check Target's weekly ad in advance.

-- Wal-Mart has put together its list of last-minute gift suggestions with some incredible discounts, including a Garmin GPS device with an mp3 player for $246, marked down from $498.

If you end up running out of time before Christmas, then you can still take advantage of the post-holiday sales through January. And next year, try to plan your shopping list in advance to prevent a crunch as Christmas approaches.

According to Greg Hintz, general manager of Yahoo Shopping, consumers tend to spend more when they wait until the last minute. Plus, he adds, making a shopping list ahead of time reduces the chances of impulse purchases--so that's another goal to add to the 2009 New Year's resolutions list.

President Yudhoyono, Chinese deputy PM discuss financial crisis

Jakarta (ANTARA News) - President Susilo Bambang Yudhoyono and Chinese Deputy Prime Minister Li Keqiang held a one-hour meeting at the presidential office here on Monday to discuss the impact of the current global financial crisis on their countries` economy.

"President Yudhoyono and the visiting Chinese deputy prime minister discussed the impact of the global financial crisis because the Chinese economy is predicted to drop by about 10 percent," presidential spokesman Dino Patti Djalal said after accompanying President Yudhoyono in the meeting with Li Keqing.

Patti Djalal said President Yudhoyono and his guest in the meeting found it necessary to strengthen the two countries` economic and trade cooperation amidst the global crisis.

"Specifically, the Chinese government will give buyer credits of US$800 million to Indonesian companies, and therefore we are going to use the buyer credits selectively in various projects," Patti Djalal said.

But he added that President Yudhoyono would underscore the importance of mutual beneficial cooperation between Indonesian and Chinese companies which were engaged in the scheme of the cooperation.

He said that on the occasion President Yudhoyono appreciated the Chinese government in its concrete cooperation with Indonesia to construct Suromadu bridge, connecting Surabaya and Madura island, both in East java Province.

The Chinese deputy prime minister visited Indonesia to open the 3rd Indonesia China Energy Forum (ICEF III) and sign a number of agreements in the energy field.

Indonesia and China earlier signed eight agreements on the energy sector covering electricity, coal, oil and gas with a total investment value of around Rp35 trillion and would absorb at least 32,000 manpowers. (*)

Financial Crisis Tab Already In The Trillions and Counting

Given the speed at which the federal government is throwing money at the financial crisis, the average taxpayer, never mind member of Congress, might not be faulted for losing track.

CNBC, however, has been paying very close attention and keeping a running tally of actual spending as well as the commitments involved. And there's been quite a jump since we last tabulated things two weeks ago.

Try $7.36 trillion dollars. That's more than double what was spent on WW II, if adjusted for inflation, based on our computations from a variety of estimates and sources.Not only is it an astronomical amount of money, it's a complicated cocktail of budgeted dollars, actual spending, guarantees, loans, swaps and other market mechanisms by the Federal Reserve, the Treasury and other offices of government taken over roughly the last year, based on government data and news releases. Strictly speaking, not every cent is a direct result of what's called the financial crisis, but they're all arguably related to it.

The bulk of the sum falls under the Federal Reserve's umbrella, while another good chunk ($700 billion) is the under the Troubled Asset Relief Program (TARP) as defined under the Emergency Economic Stabilization Act, signed into law in early October. (The TARP alone is bigger than virtually any other US government endeavor dating back to the Louisiana Purchase. See slideshow.)

WALL STREET IN CRISIS - A CNBC SPECIAL REPORT

The total figure is a combination of what's been committed (where it is defined) and what has actually been spent or lent (where a given program has started. )

So, for example, we counted the full $800 billion committed Tuesday in the form of measures directed at supporting consumer loan and mortgage-backed securities, even though none has yet been allocated. We counted the full TARP, even though only $320 billion has been spoken for.

Sovereign bond

A sovereign bond is a bond issued by a national government. Bonds issued by national governments in the country's own currency are also referred to as government bonds.

Nations with very high or unpredictable inflation or with unstable exchange rates often find it uneconomic to issue bonds in their own currencies and so are forced to issue bonds denominated in more stable foreign currencies. This raises the issue of sovereign default if the nation cannot afford to repurchase the necessary foreign currency at bond repayment time. Due to the risk of default, investors require the bonds to be issued with a higher yield. This makes the debt more expensive to service, increasing risk of default. In the event of default, unlike a corporation or even a municipal subdivision, a nation cannot file for bankruptcy. But on the rare occasions that a default occurs, just as in defaults on corporate bonds, recent practice has been that the defaulting borrower presents an exchange offer to its bond holders in an effort to restructure the sovereign debt, as has been the case in US dollar denominated bonds issued by Peru (1996) and Argentina (2001). However, getting the bond holders to accept an exchange offer has become very difficult, something caused by the holdout problem.

During the early 1980s, the sovereign bonds of developing nations were a popular investment for Western banks. These created many problems when some nations found it difficult to repay those bonds.

Economic aspects and projections

Economic aspects and projections
[edit] Global aspects

A number of commentators have suggested that if the liquidity crisis continues, there could be an extended recession or worse.[24] The continuing development of the crisis prompted fears of a global economic collapse.[25] The financial crisis is likely to yield the biggest banking shakeout since the savings-and-loan meltdown.[26] Investment bank UBS stated on October 6 that 2008 would see a clear global recession, with recovery unlikely for at least two years.[27] Three days later UBS economists announced that the "beginning of the end" of the crisis had begun, with the world starting to make the necessary actions to fix the crisis: capital injection by governments; injection made systemically; interest rate cuts to help borrowers. The United Kingdom had started systemic injection, and the world's central banks were now cutting interest rates. UBS emphasized the United States needed to implement systemic injection. UBS further emphasized that this fixes only the financial crisis, but that in economic terms "the worst is still to come".[28] UBS quantified their expected recession durations on October 16: the Eurozone's would last two quarters, the United States' would last three quarters, and the United Kingdom's would last four quarters.[29]

At the end of October UBS revised its outlook downwards: the forthcoming recession would be the worst since the Reagan recession of 1981 and 1982 with negative 2009 growth for the US, Eurozone, UK and Canada; very limited recovery in 2010; but not as bad as the Great Depression.[30]

[edit] US aspects

Real gross domestic product—the output of goods and services produced by labor and property located in the United States—decreased at an annual rate of 0.3 percent in the third quarter of 2008, (that is, from the second quarter to the third quarter), according to advance estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.8 percent. Real disposable personal income decreased 8.7 percent.[31]

Nouriel Roubini, professor of economics at New York University and chairman of RGE Monitor, predicted a recession of up to 2 years, unemployment of up to 9 percent, and another 15 percent drop in home prices.[32] Moody's Investors Service continued in October, 2008 to project increased foreclosures for residential mortgages originating in 2006 and 2007. These increases may result in downgrades of the credit rating of bond insurers Ambac, MBIA, Financial Guaranty Insurance Company, and CIFG.[33] The bond insurers, meantime, together with their insurance regulators, are negotiating with the Treasury regarding possible capital infusions or other relief under the $700 billion bailout plan. In addition to mortgage backed bonds, the bond insurers back hundreds of billions of dollars of municipal and other bonds. Thus a ripple effect could spread beyond the mortgage sector should there be a major downgrade in credit ratings or failure of the companies. [34]

[edit] Official prospects

On November 3, 2008, the EU-commission at Brussels predicted for 2009 an extremely weak growth of the BIP, by 0.1% only, for the countries of the Euro zone (France, Germany, Italy, etc.) and even negative number for the UK (-1.0%), Ireland and Spain. On November 6, the IMF at Washington, D.C., launched numbers predicting a worldwide recession by -0.3% for 2009, averaged over the developed economies. On the same day, the Bank of England and the Central Bank for the Euro zone, respectively, reduced their interest rates from 4.5% down to 3%, and from 3.75% down to 3.25%. Economically, mainly the car industry seems to be involved. As a consequence, starting from November 2008, several countries launched large "help packages" for their economies.

Developing global financial crisis

Beginning with bankruptcy of Lehman Brothers on Sunday, September 14, 2008, the financial crisis entered an acute phase marked by failures of prominent American and European banks and efforts by the American and European governments to rescue distressed financial institutions, in the United States by passage of the Emergency Economic Stabilization Act of 2008 and in European countries by infusion of capital into major banks. Afterwards, Iceland almost claimed to go bankrupt. Many financial institutions in Europe also faced the liquidity problem that they needed to raise their capital adequacy ratio. As the crisis developed, stock markets fell worldwide, and global financial regulators attempted to coordinate efforts to contain the crisis. The US government composed a $700 billion plan to purchase unperforming collaterals and assets. However, the plan was vetoed by the US congress because some members rejected the idea that the taxpayers money be used to bail out the Wall Street investment bankers. The stock market plunged as a result, the US congress amended the $700 billion bail out plan and passed the legislation. The market sentiment continued to deteriorate and the global financial system almost collapsed. While the market turned extremely pessimistic, the British government launched a 500 billion pound bail out plan aimed at injecting capital into the financial system. The British government nationalized most of the financial institions in trouble. Many European governments followed suit, as well as the US government. Stock markets appeared to have stabilized as October ended. In addition, the falling prices due to reduced demand for oil, coupled with projections of a global recession, brought the 2000s energy crisis to temporary resolution.[20][21] In the Eastern European economies of Poland, Hungary, Romania, and Ukraine the economic crisis was characterized by difficulties with loans made in hard currencies such as the Swiss franc. As local currencies in those countries lost value, making payment on such loans became progressively difficult.[22]

As the financial panic developed during September and October, 2008 there was a "flight to quality" as investors sought safety in U.S. treasury bonds, gold, and strong currencies such as the dollar and the yen. This currency crisis threatened to disrupt international trade and produced strong pressure on all world currencies. The International Monetary Fund had limited resources relative to the needs of the many nations with currency under pressure or near collapse

Scope

After affecting banking and credit, mainly in the United States, the situation evolved into a global general financial crisis verging on a systemic crisis. Domino effect, as many institutions had financial links, and also psychological contagions (see behavioral finance), made it spread at the same time worldwide and to many financial and economic areas:

* Financial markets (stock exchanges and derivative markets notably) where it developed into a market crash,
* Various equity funds and hedge funds that went short of cash and had to get rid of assets,
* Insurance activities and pension funds, facing a receding asset portfolio value to cover their commitments,
* With also incidences on public finance due to the bailout actions.
* Forex, at least for some currencies (Icelandic crown, various Eastern Europe and Latin America currencies...), and with increased volatility for most of them

The first symptoms of what is called the Economic crisis of 2008 ensued also in various countries and various industries, as the financial crisis, albeit not the only cause, was a factor by making borrowing and equity raising harder.

[edit] Historical background

The initial liquidity crisis can in hindsight be seen to have resulted from the incipient subprime mortgage crisis, with the first alarm bells being rung by the 2006 HSBC results. The crisis was widely predicted by a number of economic experts and other observers, but it proved impossible to convince responsible parties such as the Board of Governors of the Federal Reserve of the need for action.[9][10]

One of the first victims was Northern Rock, a major British bank.[11] The highly leveraged nature of its business led the bank to request security from the Bank of England. News of this lead to investor panic and a bank run in mid-September 2007. Calls by Liberal Democrat Shadow Chancellor Vince Cable to nationalise the institution were initially ignored, however in February 2008, the British Government relented, and the bank was taken into public hands. Northern Rock's problems proved to be an early indication of the troubles that would soon befall other banks and financial institutions.

Excessive lending under loosened underwriting standards, which was a hallmark of the United States housing bubble, resulted in a very large number of subprime mortgages. These high-risk loans had been perceived to be mitigated by securitization. Rather than mitigating the risk, however, this strategy appears to have had the effect of broadcasting and amplifying it in a domino effect. The damage from these failing securitization schemes eventually cut across a large swath of the housing market and the housing business and led to the subprime mortgage crisis. The accelerating rate of foreclosures caused an ever greater number of homes to be dumped onto the market. This glut of homes decreased the value of other surrounding homes which themselves became subject to foreclosure or abandonment. The resulting spiral underlay a developing financial crisis.

Initially the companies affected were those directly involved in home construction and mortgage lending such as Northern Rock and Countrywide Financial. Financial institutions which had engaged in the securitization of mortgages such as Bear Stearns then fell prey. Later on, Bear Stearns was acquired by JP Morgan Chase through the deliberate assistance from the US government. Its stock price fell from the record high $154 to $3 in reaction to the buyout offer of $2 by JP Morgan Chase, subsequently the acquisition price was agreed on $10 between the US government as well as JP Morgan. On July 11, 2008, the largest mortgage lender in the US, IndyMac Bank, collapsed, and its assets were seized by federal regulators after the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures. That day the financial markets plunged as investors tried to gauge whether the government would attempt to save mortgage lenders Fannie Mae and Freddie Mac, which it did by placing the two companies into federal conservatorship on September 7, 2008 after the crisis further accelerated in late summer.

See also: Federal takeover of Fannie Mae and Freddie Mac

It then began to affect the general availability of credit to non-housing related businesses and to larger financial institutions not directly connected with mortgage lending. At the heart of many of these institution's portfolios were investments whose assets had been derived from bundled home mortgages. Exposure to these mortgage-backed securities, or to the credit derivatives used to insure them against failure, threatened an increasing number of firms such as Lehman Brothers, AIG, Merrill Lynch, and HBOS.[12][13][13][14] Other firms that came under pressure included Washington Mutual, the largest savings and loan association in the United States, and the remaining large investment firms, Morgan Stanley and Goldman Sachs.[15][16]

[edit] Risks and regulations

For some analysts the first half of the 2000 decade will be remembered as a time that financial innovations and the CRA requirement of mandated lending to non creditworthy individuals overwhelmed the capacity of both regulators and banks to assess risk in the financial markets. The case of Citigroup is emblematic: Citigroup had always been under Federal Reserve regulation, and its near collapse shows that the regulation was ineffective, and that government underestimated the crisis severity even after it began. Citigroup was not alone in not being capable to understand fully the risks it was taking. As financial assets became more and more complex, and harder and harder to value, investors were reassured by the fact that both the international bond rating agencies and bank regulators, who came to rely on them, accepted as valid some complex mathematical models which theoretically "showed" the risks were much smaller than they actually proved to be in practice [17]. In George Soros' opinion "The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility"

Financial crisis of 2007–2008

This article is about the series of financial market events, starting in July 2007, which suggested a weakening in the world economies. For details on the stock market crashes and bank bailouts of late 2008, see Global financial crisis of 2008. For economic issues beyond the financial markets, see Late 2000s recession.

The financial crisis of 2007–2008, initially referred to in the media as a "credit crunch" or "credit crisis", began in July 2007[1][2] when a loss of confidence by investors in the value of securitized mortgages in the United States resulted in a liquidity crisis that prompted a substantial injection of capital into financial markets by the United States Federal Reserve and the European Central Bank.[3][4] The TED spread, an indicator of perceived credit risk in the general economy, spiked up in July 2007, remained volatile for a year, then spiked even higher in September 2008,[5] reaching a record 4.65% on October 10, 2008. In September 2008, the crisis deepened, as stock markets world-wide crashed and entered a period of high volatility, and a considerable number of banking, mortgage and insurance company failures in the following weeks
Although America's housing collapse is often cited as having caused the crisis, the financial system was vulnerable because of intricate and over-leveraged financial contracts and operations, a U.S. monetary policy making the cost of credit negligible therefore encouraging such over-leverage, and generally an "hypertrophy of the financial sector"[7] (financialization).

One example was credit derivatives - Credit Default Swaps (CDS), which insure debt holders against default. They are fashioned privately, traded over the counter outside the purview of regulators.[8] The U.S. government's seizure of the mortgage companies prompted an auction of their debt so that traders who bought and sold default protection (CDS) could settle contracts. The auctions are used to set a price by which investors can settle the contracts with cash rather than having to physically deliver a bond to their counter-parties. Sellers of protection pay the face value of the contracts minus the recovery value set on the bonds.

Types of financial crises

[edit] Banking crisis

Main articles: Bank run and Credit crunch

When a commercial bank suffers a sudden rush of withdrawals by depositors, this is called a bank run. Since banks lend out most of the cash they receive in deposits (see fractional-reserve banking), it is difficult for them to quickly pay back all deposits if these are suddenly demanded, so a run may leave the bank in bankruptcy, causing many depositors to lose their savings unless they are covered by deposit insurance. A situation in which bank runs are widespread is called a systemic banking crisis or just a banking panic. A situation without widespread bank runs, but in which banks are reluctant to lend, because they worry that they have insufficient funds available, is often called a credit crunch.

Examples of bank runs include the run on the Bank of the United States in 1931 and the run on Northern Rock in 2007. The collapse of Bear Stearns in 2008 is also sometimes called a bank run, even though Bear Stearns was an investment bank rather than a commercial bank. The U.S. savings and loan crisis of the 1980s led to a credit crunch which is seen as a major factor in the U.S. recession of 1990-1991.

[edit] Speculative bubbles and crashes

Main articles: Stock market crash and Bubble (economics)

Economists say that a financial asset (stock, for example) exhibits a bubble when its price exceeds the value of the future income (such as interest or dividends) that would be received by owning it to maturity.[3] If most market participants buy the asset primarily in hopes of selling it later at a higher price, instead of buying it for the income it will generate, this could be evidence that a bubble is present. If there is a bubble, there is also a risk of a crash in asset prices: market participants will go on buying only as long as they expect others to buy, and when many decide to sell the price will fall. However, it is difficult to tell in practice whether an asset's price actually equals its fundamental value, so it is hard to detect bubbles reliably. Some economists insist that bubbles never or almost never occur.[4]

Well-known examples of bubbles (or purported bubbles) and crashes in stock prices and other asset prices include the Dutch tulip mania, the Wall Street Crash of 1929, the Japanese property bubble of the 1980s, the crash of the dot-com bubble in 2000-2001, and the now-deflating United States housing bubble.[5][6]

[edit] International financial crises

Main articles: Currency crisis, Capital flight, and Sovereign default

When a country that maintains a fixed exchange rate is suddenly forced to devalue its currency because of a speculative attack, this is called a currency crisis or balance of payments crisis. When a country fails to pay back its sovereign debt, this is called a sovereign default. While devaluation and default could both be voluntary decisions of the government, they are often perceived to be the involuntary results of a change in investor sentiment that leads to a sudden stop in capital inflows or a sudden increase in capital flight.

Several currencies that formed part of the European Exchange Rate Mechanism suffered crises in 1992-93 and were forced to devalue or withdraw from the mechanism. Another round of currency crises took place in Asia in 1997-98. Many Latin American countries defaulted on their debt in the early 1980s. The 1998 Russian financial crisis resulted in a devaluation of the ruble and default on Russian government debt.

Personal finance

Main article: Personal finance

Questions in personal finance revolve around

* How much money will be needed by an individual (or by a family), and when?
* Where will this money come from, and how?
* How can people protect themselves against unforeseen personal events, as well as those in the external economy?
* How can family assets best be transferred across generations (bequests and inheritance)?
* How does tax policy (tax subsidies or penalties) affect personal financial decisions?
* How does credit affect an individual's financial standing?
* How can one plan for a secure financial future in an environment of economic instability?

Personal financial decisions may involve paying for education, financing durable goods such as real estate and cars, buying insurance, e.g. health and property insurance, investing and saving for retirement.

Personal financial decisions may also involve paying for a loan.

interest charges

Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid.

For example, if a user had a $1,000 transaction and repaid it in full within this grace period, there would be no interest charged. If, however, even $1.00 of the total amount remained unpaid, interest would be charged on the $1,000 from the date of purchase until the payment is received. The precise manner in which interest is charged is usually detailed in a cardholder agreement which may be summarized on the back of the monthly statement. The general calculation formula most financial institutions use to determine the amount of interest to be charged is APR/100 x ADB/365 x number of days revolved. Take the Annual percentage rate (APR) and divide by 100 then multiply to the amount of the average daily balance (ADB) divided by 365 and then take this total and multiply by the total number of days the amount revolved before payment was made on the account. Financial institutions refer to interest charged back to the original time of the transaction and up to the time a payment was made, if not in full, as RRFC or residual retail finance charge. Thus after an amount has revolved and a payment has been made, the user of the card will still receive interest charges on their statement after paying the next statement in full (in fact the statement may only have a charge for interest that collected up until the date the full balance was paid...i.e. when the balance stopped revolving).[1]

The credit card may simply serve as a form of revolving credit, or it may become a complicated financial instrument with multiple balance segments each at a different interest rate, possibly with a single umbrella credit limit, or with separate credit limits applicable to the various balance segments. Usually this compartmentalization is the result of special incentive offers from the issuing bank, to encourage balance transfers from cards of other issuers. In the event that several interest rates apply to various balance segments, payment allocation is generally at the discretion of the issuing bank, and payments will therefore usually be allocated towards the lowest rate balances until paid in full before any money is paid towards higher rate balances. Interest rates can vary considerably from card to card, and the interest rate on a particular card may jump dramatically if the card user is late with a payment on that card or any other credit instrument, or even if the issuing bank decides to raise its revenue.

[edit] Benefits to customers

Because of intense competition in the credit card industry, credit card providers often offer incentives such as frequent flyer points, gift certificates, or cash back (typically up to 1 percent based on total purchases) to try to attract customers to their programs.

Low interest credit cards or even 0% interest credit cards are available. The only downside to consumers is that the period of low interest credit cards is limited to a fixed term, usually between 6 and 12 months after which a higher rate is charged. However, services are available which alert credit card holders when their low interest period is due to expire. Most such services charge a monthly or annual fee.

Benefits to merchants

For merchants, a credit card transaction is often more secure than other forms of payment, such as checks, because the issuing bank commits to pay the merchant the moment the transaction is authorized, regardless of whether the consumer defaults on the credit card payment (except for legitimate disputes, which are discussed below, and can result in charges back to the merchant). In most cases, cards are even more secure than cash, because they discourage theft by the merchant's employees and reduce the amount of cash on the premises. Prior to credit cards, each merchant had to evaluate each customer's credit history before extending credit. That task is now performed by the banks which assume the credit risk.

For each purchase, the bank charges the merchant a commission (discount fee) for this service and there may be a certain delay before the agreed payment is received by the merchant. The commission is often a percentage of the transaction amount, plus a fixed fee. In addition, a merchant may be penalized or have their ability to receive payment using that credit card restricted if there are too many cancellations or reversals of charges as a result of disputes. Some small merchants require credit purchases to have a minimum amount (usually between $5 and $10) to compensate for the transaction costs, though this is not always allowed by the credit card consortium.

In some countries, for example the Nordic countries, banks guarantee payment on stolen cards only if an ID card is checked and the ID card number/civic registration number is written down on the receipt together with the signature. In these countries merchants therefore usually ask for ID. Non-Nordic citizens, who are unlikely to possess a Nordic ID card or driving license, will instead have to show their passport, and the passport number will be written down on the receipt, sometimes together with other information. Some shops use the card's PIN for identification, and in that case showing an ID card is not necessary.

Grace period

A credit card's grace period is the time the customer has to pay the balance before interest is charged to the balance. Grace periods vary, but usually range from 20 to 40 days depending on the type of credit card and the issuing bank. Some policies allow for reinstatement after certain conditions are met.

Usually, if a customer is late paying the balance, finance charges will be calculated and the grace period does not apply. Finance charges incurred depend on the grace period and balance; with most credit cards there is no grace period if there is any outstanding balance from the previous billing cycle or statement (i.e. interest is applied on both the previous balance and new transactions). However, there are some credit cards that will only apply finance charge on the previous or old balance, excluding new transactions. Amit Gupta(India)

Parties involved

* Cardholder: The holder of the card used to make a purchase; the consumer.
* Card-issuing bank: The financial institution or other organization that issued the credit card to the cardholder. This bank bills the consumer for repayment and bears the risk that the card is used fraudulently. American Express and Discover were previously the only card-issuing banks for their respective brands, but as of 2007, this is no longer the case.
* Merchant: The individual or business accepting credit card payments for products or services sold to the cardholder
* Acquiring bank: The financial institution accepting payment for the products or services on behalf of the merchant.
* Independent sales organization: Resellers (to merchants) of the services of the acquiring bank.
* Merchant account: This could refer to the acquiring bank or the independent sales organization, but in general is the organization that the merchant deals with.
* Credit Card association: An association of card-issuing banks such as Visa, MasterCard, Discover, American Express, etc. that set transaction terms for merchants, card-issuing banks, and acquiring banks.
* Transaction network: The system that implements the mechanics of the electronic transactions. May be operated by an independent company, and one company may operate multiple networks. Transaction processing networks include: Cardnet, Nabanco, Omaha, Paymentech, NDC Atlanta, Nova, TSYS, Concord EFSnet, and VisaNet.[2]
* Affinity partner: Some institutions lend their names to an issuer to attract customers that have a strong relationship with that institution, and get paid a fee or a percentage of the balance for each card issued using their name. Examples of typical affinity partners are sports teams, universities, charities, professional organizations, and major retailers.

The flow of information and money between these parties — always through the card associations — is known as the interchange, and it consists of a few steps.

[edit] Transaction steps

* Authorization: The cardholder pays for the purchase and the merchant submits the transaction to the acquirer (acquiring bank). The acquirer verifies the credit card number, the transaction type and the amount with the issuer (Card-issuing bank) and reserves that amount of the cardholder's credit limit for the merchant. An authorization will generate an approval code, which the merchant stores with the transaction.

* Batching: Authorized transactions are stored in "batches", which are sent to the acquirer. Batches are typically submitted once per day at the end of the business day. If a transaction is not submitted in the batch, the authorization will stay valid for a period determined by the issuer, after which the held amount will be returned back to the cardholder's available credit (see authorization hold). Some transactions may be submitted in the batch without prior authorizations; these are either transactions falling under the merchant's floor limit or ones where the authorization was unsuccessful but the merchant still attempts to force the transaction through. (Such may be the case when the cardholder is not present but owes the merchant additional money, such as extending a hotel stay or car rental.)

* Clearing and Settlement: The acquirer sends the batch transactions through the credit card association, which debits the issuers for payment and credits the acquirer. Essentially, the issuer pays the acquirer for the transaction.

* Funding: Once the acquirer has been paid, the acquirer pays the merchant. The merchant receives the amount totaling the funds in the batch minus the "discount rate," which is the fee the merchant pays the acquirer for processing the transactions.

* Chargebacks: A chargeback is an event in which money in a merchant account is held due to a dispute relating to the transaction. Chargebacks are typically initiated by the cardholder. In the event of a chargeback, the issuer returns the transaction to the acquirer for resolution. The acquirer then forwards the chargeback to the merchant, who must either accept the chargeback or contest it

Secured credit cards

A secured credit card is a type of credit card secured by a deposit account owned by the cardholder. Typically, the cardholder must deposit between 100% and 200% of the total amount of credit desired. Thus if the cardholder puts down $1000, they will be given credit in the range of $500–$1000. In some cases, credit card issuers will offer incentives even on their secured card portfolios. In these cases, the deposit required may be significantly less than the required credit limit, and can be as low as 10% of the desired credit limit. This deposit is held in a special savings account. Credit card issuers offer this because they have noticed that delinquencies were notably reduced when the customer perceives something to lose if the balance is not repaid.

The cardholder of a secured credit card is still expected to make regular payments, as with a regular credit card, but should they default on a payment, the card issuer has the option of recovering the cost of the purchases paid to the merchants out of the deposit. The advantage of the secured card for an individual with negative or no credit history is that most companies report regularly to the major credit bureaus. This allows for building of positive credit history.

Although the deposit is in the hands of the credit card issuer as security in the event of default by the consumer, the deposit will not be debited simply for missing one or two payments. Usually the deposit is only used as an offset when the account is closed, either at the request of the customer or due to severe delinquency (150 to 180 days). This means that an account which is less than 150 days delinquent will continue to accrue interest and fees, and could result in a balance which is much higher than the actual credit limit on the card. In these cases the total debt may far exceed the original deposit and the cardholder not only forfeits their deposit but is left with an additional debt.

Most of these conditions are usually described in a cardholder agreement which the cardholder signs when their account is opened.

Secured credit cards are an option to allow a person with a poor credit history or no credit history to have a credit card which might not otherwise be available. They are often offered as a means of rebuilding one's credit. Secured credit cards are available with both Visa and MasterCard logos on them. Fees and service charges for secured credit cards often exceed those charged for ordinary non-secured credit cards, however, for people in certain situations, (for example, after charging off on other credit cards, or people with a long history of delinquency on various forms of debt), secured cards can often be less expensive in total cost than unsecured credit cards, even including the security deposit.

Sometimes a credit card will be secured by the equity in the borrower's home.[3][4] This is called a home equity line of credit (HELOC).

[edit] Prepaid "credit" cards

See also: Stored-value card

A prepaid credit card is not a credit card,[5] since no credit is offered by the card issuer: the card-holder spends money which has been "stored" via a prior deposit by the card-holder or someone else, such as a parent or employer. However, it carries a credit-card brand (Visa, MasterCard, American Express or Discover) and can be used in similar ways just as though it were a regular credit card.[5][6]

After purchasing the card, the cardholder loads the account with any amount of money, up to the predetermined card limit [7] and then uses the card to make purchases the same way as a typical credit card. Prepaid cards can be issued to minors (above 13) since there is no credit line involved. The main advantage over secured credit cards (see above section) is that you are not required to come up with $500 or more to open an account. [8] With prepaid credit cards you are not charged any interest but you are often charged a purchasing fee plus monthly fees after an arbitrary time period. Many other fees also usually apply to a prepaid card.[5]

Prepaid credit cards are sometimes marketed to teenagers[5] for shopping online without having their parents complete the transaction.[9][10][11][12]

Because of the many fees that apply to obtaining and using credit-card-branded prepaid cards, the Financial Consumer Agency of Canada describes them as "an expensive way to spend your own money".[13] The agency publishes a booklet, "Pre-paid cards",[14] which explains the advantages and disadvantages of this type of prepaid card.

[edit] Features

As well as convenient, accessible credit, credit cards offer consumers an easy way to track expenses, which is necessary for both monitoring personal expenditures and the tracking of work-related expenses for taxation and reimbursement purposes. Credit cards are accepted worldwide, and are available with a large variety of credit limits, repayment arrangement, and other perks (such as rewards schemes in which points earned by purchasing goods with the card can be redeemed for further goods and services or credit card cashback).

Some countries, such as the United States, the United Kingdom, and France, limit the amount for which a consumer can be held liable due to fraudulent transactions as a result of a consumer's credit card being lost or stolen.

[edit] Security

Credit card security relies on the physical security of the plastic card as well as the privacy of the credit card number. Therefore, whenever a person other than the card owner has access to the card or its number, security is potentially compromised. Merchants often accept credit card numbers without additional verification for mail order purchases. They however record the delivery address as a security measure to minimise fraudulent purchases. Some merchants will accept a credit card number for in-store purchases, whereupon access to the number allows easy fraud, but many require the card itself to be present, and require a signature. Thus, a stolen card can be cancelled, and if this is done quickly, no fraud can take place in this way. For internet purchases, there is sometimes the same level of security as for mail order (number only) hence requiring only that the fraudster take care about collecting the goods, but often there are additional measures. The main one is to require a security PIN with the card, which requires that the thief have access to the card, as well as the PIN.

An additional feature to secure the credit card transaction and prohibit the use of a lost credit card is the MobiClear solution. Each transaction is authenticated through a call to the user mobile phone. The transaction is released once the transaction has been confirmed by the cardholder pushing his/her pincode during the call.

The PCI DSS is the security standard issued by The PCI SSC (Payment Card Industry Security Standards Council). This data security standard is used by acquiring banks to impose cardholder data security measures upon their merchants.

[edit] Problems

Main article: Credit card fraud

A smart card, combining credit card and debit card properties. The 3 by 5 mm security chip embedded in the card is shown enlarged in the inset. The contact pads on the card enable electronic access to the chip.

The low security of the credit card system presents countless opportunities for fraud. This opportunity has created a huge black market in stolen credit card numbers, which are generally used quickly before the cards are reported stolen.

The goal of the credit card companies is not to eliminate fraud, but to "reduce it to manageable levels".[15] This implies that high-cost low-return fraud prevention measures will not be used if their cost exceeds the potential gains from fraud reduction.

Most internet fraud is done through the use of stolen credit card information which is obtained in many ways, the simplest being copying information from retailers, either online or offline. Despite efforts to improve security for remote purchases using credit cards, systems with security holes are usually the result of poor implementations of card acquisition by merchants. For example, a website that uses SSL to encrypt card numbers from a client may simply email the number from the webserver to someone who manually processes the card details at a card terminal. Naturally, anywhere card details become human-readable before being processed at the acquiring bank, a security risk is created. However, many banks offer systems where encrypted card details captured on a merchant's webserver can be sent directly to the payment processor.

Controlled Payment Numbers which are used by various banks such as Citibank (Virtual Account Numbers), Discover (Secure Online Account Numbers, Bank of America (ShopSafe), 5 banks using eCarte Bleue and CMB's Virtualis in France, and Swedbank of Sweden's eKort product are another option for protecting one's credit card number. These are generally one-time use numbers that front one's actual account (debit/credit) number, and are generated as one shops on-line. They can be valid for a relatively short time, for the actual amount of the purchase, or for a price limit set by the user. Their use can be limited to one merchant if one chooses. The effect of this is the users real account details are not exposed to the merchant and its employees. If the number the merchant has on their database is compromised, it would be useless to a thief after the first transaction and will be rejected if an attempt is made to use it again.

The same system of controls can be used on standard real plastic as well. For example if a consumer has a chip and pin (EMV) enabled card they can limit that card so that it be used only at point of sale locations (i.e restricted from being used on-line) and only in a given territory (i.e only for use in Canada). There are many other controls too and these can be turned on and off and varied by the credit card owner in real time as circumstances change (ie, they can change temporal, numerical, geographical and many other parameters on their primary and subsidiary cards). Apart from the obvious benefits of such controls: from a security perspective this means that a customer can have a chip and pin card secured for the real world, and limited for use in the home country assuming it is totally chip and pin. In this eventuality a thief stealing the details will be prevented from using these overseas in non chip and pin (EMV)countries). Similarly the real card can be restricted from use on-line so that stolen details will be declined if this tried. Then when the card user shops online they can use virtual account numbers. In both circumstances an alert system can be built in notifying a user that a fraudulant attempt has been made which breaches their parameters, and can provide data on this in real time. This is the optimal method of security for credit cards, as it provides very high levels of security, control and awareness in the real and virtual world. Furthermore it requires no changes for merchants at all and is attractive to users, merchants and banks, as it not only detects fraud but prevents it.