1.

Credit Card Basics

Credit cards give you an alternative to cash to help pay for goods, but they can
become a severe burden if you fail to pay them off. Here are some credit card basics
you need to know.

Credit cards are far more than pieces of plastic connected to an account that
provides an easy way out when you’re short on cash. Lewis Smith, the vice president
of finance at Bayport Credit Union, insists that credit cards are a teaching
experience. Like guardrails on the street, using and monitoring your card will keep
you on the road to financial triumph if you’re responsible enough to handle it.

A credit card contains a magnetic strip on the back, with your account number,
name, and expiration date on the front. Beyond that, it allows you to use the bank’s
money instead of your own to pay for items when you’re in a bind.

Though it bails you out at the register, you still have to pay back the bank over time,
or you could be charged late fees and interest. It’s not your money, and you have to
return it at some point.

✔️How do you use a credit card?

Using a credit card in literal terms is pretty easy, just insert into a card machine,
swipe or tap, and you’re good to go. But it’s a bit more intricate than that.

Credit cards have limits, whether it’s Php 20,000.00, Php 30,000.00 or more. When
using a credit card, you have to spend within those limits.

Pay off your credit card bills before they are due if you can. This creates a good
reputation with your bank and the companies you purchase goods from. An
excellent reputation and line of credit can help you get discounts, make you eligible
for better interest rates, and improves your chances of making dream purchases.

Your first car, getting an apartment or house, being able to travel across the world—
all these things become more realistic once you maintain good credit.

✔️ Credit card statements

Every month, you get a credit card statement that shows all your spending for that
specific period. From there, you have a grace period to pay the due amount in full or
make a minimum payment. If you pay the bill in full, you won’t incur any interest
charges or late fees. However, if you only make a minimum payment (usually one
percent of the total balance or the total interest), you will carry the balance over to
the next month and also be charged interest.

It’s vital that you keep receipts of all your purchases so that you can ensure nothing
on your credit card looks unfamiliar. If something looks off, call your bank as soon as
possible.

✔️ The benefits of a credit card

Credit cards are a great way to help you organize your expenses and keep them at a
premium as well. If you’re not a math major and don’t have the time to enter your
expenses in a book, your credit card keeps a record of all your purchases. It provides
a mirror of sorts to your spending habits, and if you don’t like how those habits reflect
on you, it’s time to change your approach to money.

But what benefits are there to having a credit card? After all, it’s not your money, and
borrowing money can be an uncomfortable feeling. But these cards and the banks
they’re attached to are there to lend a helping hand. They offer top-of-the-line
security which prevents you from being a victim of fraud or identity theft.

Many purchases also require a credit card. For example, credit cards are best suited
for online shopping, booking flights, and they are ideal for travelers because they can
be used in most countries.

Plus, you can gets rewards. You like freebies, don’t you?

By building a good credit score, you can get low introductory rates, air miles,
and cash back for various things. Who said hard work doesn’t pay off? Some student
credit cards also offer perks for students who maintain good grades.

Furthermore, you can get warranties or purchase protection in case something

happens to an item through your credit card.

✔️ The dangers of having a credit card

Credit cards can make paying for things easy, almost too easy. It’s a convenient
cash replacement, but it can make you think that you can pay for anything without
consequence. That sort of thinking can lead you down a dangerous road, one that
involves debt and maybe having to ask your parents to try and cover for you. Not a
good feeling, is it?

At least with cash, you can’t spend more than you have. You know your limits as soon
as you look in your wallet. With a credit card, you can be under the illusion that
there’s no limit to your spending.

While your bank will give you pointers on how to use your card, they won’t necessarily
stop you from passing your limit. In some cases, banks will approve your transaction
just so that they can charge you late fees.

This can lead to bad credit. Bad credit means you won’t get approved for major
purchases and could cause you to pay more for a product that you otherwise would.

⚡ Summary

Credit cards require diligence and trust, helping you become more responsible with
your money. Despite the ease of access and independence it provides, these cards
are part of a partnership between you and the banks who loan you the money. If you
can pay off your credit card and use it only when necessary, that partnership can be
a fruitful one.

1.1. Should I get a credit card?

Obtaining a credit card is something of a rite of passage. There’s nothing that makes
you feel more adult than digging into your wallet and pulling out a piece of plastic
with your own name on it.

But beyond a fleeting moment of accomplishment, is opening an account actually a

good idea? That depends on how you use it and whether the card you get suits your
particular needs. As many consumers have learned the hard way, it’s a decision that
can have long-term consequences. On the other hand, handle it right and it is an
important step in starting to build the good credit history that will eventually qualify
you for the best rates on car loans, mortgages, and many other financial tools you
will need going forward.

Before signing up, make sure you understand what you’re getting into. Here are some
of the implications you should consider.

✔️ The Pros of Opening a Credit Card

Opening a credit card means getting access to a revolving line of credit from the
issuing bank. The account comes with a predetermined credit limit based on the
issuer’s assessment of your creditworthiness. As long as your outstanding balance
stays within that limit, you can continue racking up charges.

Having that additional payment option in your back pocket has its advantages. For
one, you’ll have a safety net in case you face a short-term budget crunch. If you’re
strapped for cash and your car needs a new set of brakes, you can simply open your
wallet and charge it to your card.

Because most credit card accounts are “unsecured,” they tend to carry higher
interest rates than other loans.

Even if you have plenty of funds in your savings account, using a card can be a great
way to get rewards. Some products, offer cash-back benefits—typically as a
percentage of the amount you charge. And, of course, cards that provide airline
miles based on how you spend have long been a popular option among long-
distance travelers. In recent years the number of reward programs has
mushroomed, with banks offering discounts on everything from hotel stays to
merchandise.

Yet another reason to open your first card is to start building a credit history. Without
a track record to go on, you’ll be seen as a higher risk when it comes time to take out
a car or home loan. The length of your credit history has a direct relationship to your
credit score. The longer you hold onto an account, the better it’ll be for your score.

✔️ What You Risk When You Open a Credit Card

As convenient as it is to have an extra source of funds at your disposal, credit cards

also carry significant potential risks. Most cards are an unsecured form of credit,
meaning your debt isn’t backed up by any form of collateral. Because card issuers
can’t recoup their expenses if you fail to pay down your balance, they tend to charge
higher interest rates than other loans.

That doesn’t matter much if you regularly pay your full balance from your due date.
In that case you won’t pay a dime in interest. However, starting on your due date the
bank will begin assessing finance charges based on the balance that you’ve carried
over.

💡 KEY TAKEAWAYS
 • Credit cards can help you improve your credit score, but only if you use them
responsibly.
• Your payment history and borrowing amount are the two biggest factors in
your credit score.
• Secured credit cards are an option for borrowers with a poor credit history.

The upshot is that you could be paying a lot of money to your issuing bank in finance
charges alone. Some cards also charge a flat annual fee that makes them more
expensive still.

✔️ Avoiding Credit-Card Traps

These days many card companies offer a 0% APR introductory rate in order to entice
borrowers. That may sound like a great deal, but in the long run your credit line is
anything but free. Once the promotional period ends—generally between nine and 15
months—the real finance charges will kick in. You could suddenly find yourself paying
through the nose.

Remember, those interest fees are a primary source of income for banks. Therefore,
they have an incentive to keep your balances high (though not too high). How do
they do that, exactly? In part by requiring ridiculously low minimum payments each
month.

That’s only one of the traps that card users can easily fall into. Another is using their
cards for cash advances, which are essentially personal loans taken against your
available credit. All you have to do is head to your nearest ATM and pop in your card.
Suddenly you have a nice stack of cash in your hand.

While a cash advance is certainly an easy loan to get—there’s no additional

approval process—it’s also an expensive one. Banks charge a processing fee every
time you pull out money, typically 3% to 5% of the advance. They also slap on interest
rates that are likely higher than your APR for purchases. Furthermore, that interest
normally begins to accrue from the moment you take out money, not from your due
date.

If you’re falling short on funds, think about tightening your budget or getting a side
job to bring in a little extra money. Credit cards might seem like a nice fix for your
cash crunch, but they’ll cost you in the long run through hefty fees and lower credit
scores.
The cruel irony of credit cards is that the people who actually need them tend to be
most vulnerable to their risks. If, on the other hand, you have the money to pay off
your balance every month, the ability to earn rewards and build a good credit history
may justify opening an account.

✔️ A Safe Way to Build Credit

Customers with poor credit may have trouble qualifying for a traditional credit card.

One solution you might consider is getting a secured credit card, for which
underwriting is a lot looser. Unlike with other accounts, the borrower has to make an
upfront deposit, which protects the bank in case you default on your debt. In many
cases your credit limit equals the amount of your deposit.

As with traditional cards, banks report your payments to the credit bureaus, giving
you the ability to raise your credit score over time. And because your credit line is
pegged to your deposit, there’s less risk of going off the deep end with your spending.

✔️ Shopping Around

As appealing as those offers may sound, be prepared to push back. If you choose to
get a card, make sure it’s because you’ve given the matter some serious thought
first. Don’t sign up because you’re offered a number of frequent flyer miles or
because you’re getting a T-shirt out of the deal. It could end up being a very
expensive piece of clothing.

Nevertheless, the fact is that young consumers are still a prime target for card
issuers. After all, the first card you get is often the one you’ll use the most. If you’re in
that demographic, you’ve likely been hit up with offers through social media or at
off-campus events.

Do some shopping around. Look past the fleeting introductory rate to what the
regular APR will be and whether there’s an annual fee. You also want to make sure
that the places you shop accept your card network.

And if you’re opening a card primarily for rewards, make sure to read the fine print.
Airline-affiliated cards may sound convenient, but it’s worth checking their policy on
blackout dates and making sure they fly to your preferred destinations.

⚡ The Bottom Line

While there are many good reasons to acquire a credit card, it’s not a decision to
take lightly. Opening an account has long-term consequences—and not always for
the better. When asking yourself what credit cards should I get? - don't take the first
offer you get and do some online research on the options before you choose to sign
up. And once you do get a card, manage it like your future depends on how you
behave. Because it does.

2. Debit Card Basics

A debit card is like an ATM card with the functionality of a credit card. The notable
difference is that when you buy something with a debit card, the money comes
directly from your checking account.

One of the benefits of a debit card is being able to use it for transactions that
typically require credit cards. Examples include online purchases, car rentals, and
hotel and airline reservations, among other things.

How a Debit Card Works

You can use a debit card to withdraw cash at ATMs or make purchases at the brick-
and-mortar and online stores where credit cards are accepted, all without having to
write a check or carry cash. The biggest advantage over credit cards is that you're
not borrowing money as you are when you use a credit card, which can help keep
you out of debt.

Choosing a Debit Card

Selecting a debit card can be simpler than choosing a credit card—for example, you
won't need to think about interest rates—but there are a few key factors to consider.

• Look for banks or credit unions with branches near you.

• Investigate fees the bank will charge if you withdraw money from another
institution’s ATM.
• Consider transfer fees if you think you'll want to move money between your
checking and savings accounts frequently.
• Select a debit card that will let you manage purchases, checks and bill paying
from your smartphone.

Tips for Using Your Card

 • Keep sales and ATM receipts or copies.
• Always know your current bank account balance and available funds.
• Keep track of all transactions, including withdrawals that are still pending.
• Review monthly statements carefully. If you suspect a mistake or fraudulent
use, contact your financial institution immediately.

Key Takeaways

• Debit cards function similarly to credit cards.

• Funds are debited directly from a bank account.
• Overdraft protection allows transactions to process even if you don't have the
funds to cover them, but you'll be charged an overdraft fee.

2. Debit Card Basics

2.1. Should I get a Debit Card?

📌 Advantages of Debit Card

✔️ It keeps you within budget

Having a debit card is the best choice if you want to stay on budget. It prevents you
from overspending because you can only spend the amount that is in your account.
Also, there are no unexpected fees or interest rates.

✔️ Double Convenience

Debit cards, like credit cards, offer cashless transactions. You don’t need to carry that
much cash because stores accept debit card transactions. If you do need cash, you
can also use your debit card to withdraw from an ATM.

✔️ Security
Unlike credit cards, debit cards are protected by PIN, which means no one can
access, withdraw, or make purchases using your card without knowing your number.

✔️ Bonus Points
Because of market competition, banks offer bonus points you can avail alongside
any purchase made using debit cards. This means, you can spend your money and
get gifts or rewards afterwards.
⚠️ The Biggest Debit Card Dangers

Credit cards, when used wisely, can be safer overall than debit cards. In fact, debit
cards have a few serious drawbacks.

1. Fraud protection

If your wallet falls into the wrong hands, your debit card’s fraud protection isn’t as
strong as a credit card’s. Some banks will hold you 100 percent liable if your debit
card is used fraudulently for pin-based transactions.

Finally, if a thief uses your credit card, you can withhold payment for the charges until
your credit card investigates the suspected fraud. If a thief uses your debit card,
however, they can drain your bank account in a matter of minutes, and you won’t get
that money back until your bank investigates. So, keep track of your debit card and if
you lose it—report it at once!

2. Building credit

If you don’t have a credit history yet or you are trying to rebuild your credit score, a
debit card won’t help.

On the flip side, if you frequently forget to make credit card payments, sticking with a
debit card may prevent you from doing further damage to an already weak credit
report.

3. Merchant disputes

Let’s say you go to a fast-food restaurant and buy lunch with your debit card for
₱659. Problem is, the cashier is stoned and rings your card through for ₱6,590! You
decline a receipt, so you never notice the mistake until you use your debit card again
and it’s declined. You get home to check with your bank and see the problem.
Obviously, the merchant will probably return your money, but returning your money
to your account will take several days.

If this same thing happened with a credit card, you wouldn’t owe the card company
a penny until the problem was solved.
If there’s a dispute regarding a purchase you make, you’re in a weaker position when
you use a debit card. The merchant already has your money when you pay with a
debit card. So while the dispute is taking place, your money will remain with the
merchant and you’ll only see that money again if you win the dispute.

4. Rewards and services

Many credit cards offer cash back or other rewards programs, as well as services like
warranties on big purchases and rental car insurance. Most debit cards don’t have
the same perks (although some debit cards with these perks are starting to appear).

LOAN
The term loan refers to a type of credit vehicle in which a sum of money is lent to
another party in exchange for future repayment of the value or principal amount. In
many cases, the lender also adds interest and/or finance charges to the principal
value which the borrower must repay in addition to the principal balance. Loans may
be for a specific, one-time amount, or they may be available as an open-ended line
of credit up to a specified limit. Loans come in many different forms including
secured, unsecured, commercial, and personal loans.

INTEREST RATES
Interest rates have a significant effect on loans and the ultimate cost to the
borrower. Loans with higher interest rates have higher monthly payments—or take
longer to pay off—than loans with lower interest rates.

📌 Simple vs. Compound Interest

The interest rate on loans can be set at simple or compound interest.

✔️ Simple interest is interest on the principal loan. Banks almost never charge
borrowers simple interest. For example, let's say an individual takes out a ₱3,000,000
mortgage from the bank, and the loan agreement stipulates that the interest rate on
the loan is 15% annually. As a result, the borrower will have to pay the bank a total of
₱3,450,000 or ₱300,000 x 1.15.

✔️ Compound interest is the interest on a loan calculated based on both the initial
principal and the accumulated interest from previous periods.
 10-YEAR LENDING INTEREST RATES IN THE PHILIPPINES

https://data.worldbank.org/indicator/FR.INR.LEND?end=2019&locations=PH&start=2009

TYPES OF LOANS
✔️ Secured vs. Unsecured Loan

Loans can be secured or unsecured. Mortgages and car loans are secured loans, as
they are both backed or secured by collateral. In these cases, the collateral is the
asset for which the loan is taken out, so the collateral for a mortgage is the home,
while the vehicle secures a car loan. Borrowers may be required to put up other
forms of collateral for other types of secured loans if required.

Credit cards and signature loans are unsecured loans. This means they are not
backed by any collateral. Unsecured loans usually have higher interest rates than
secured loans because the risk of default is higher than secured loans. That's
because the lender of a secured loan can repossess the collateral if the borrower
defaults. Rates tend to vary wildly on unsecured loans depending on multiple factors
including the borrower's credit history.

✔️ Revolving vs. Term Loan

Loans can also be described as revolving or term. A revolving loan can be spent,
repaid, and spent again, while a term loan refers to a loan paid off in equal monthly
installments over a set period. A credit card is an unsecured, revolving loan. In
contrast, a car loan is a secured, term loan, and a signature loan is an unsecured,
term loan.

Republic Act No. 3765 (“Truth in Lending Act”)

It is the policy of the State to protect its citizens from a lack of awareness of the true
cost of credit to the user by assuring a full disclosure of such cost with a view of
preventing the uninformed use of credit to the detriment of the national economy.

Each person to whom credit is extended, prior to the consummation of the

transaction, shall be furnished a clear statement in writing setting forth, to the extent
applicable and in accordance with rules and regulations prescribed by the Monetary
Board, the following information:

• the cash price or delivered price of the property or service to be acquired;

• the amounts, if any, to be credited as down payment and/or trade-in;
• the difference between the amounts set forth under clauses (1) and (2);
• the charges, individually itemized, which are paid or to be paid by such person
in connection with the transaction but which are not incident to the extension
of credit;
• the total amount to be financed;
• the finance charge expressed in terms of pesos and centavos; and
• the percentage that the finance charge bears to the total amount to be
financed expressed as a simple annual rate on the outstanding unpaid
balance of the obligation.

The disclosure statement in writing is a required attachment to the credit transaction

contract. The borrower has a right to demand a copy of the disclosure statement.

💡 KEY TAKEAWAYS

o A loan is when money is given to another party in exchange for

repayment of the loan principal amount plus interest.
o Loan terms are agreed to by each party before any money is advanced.
o A loan may be secured by collateral such as a mortgage or it may be
unsecured such as a credit card.
o Revolving loans or lines can be spent, repaid, and spent again, while
term loans are fixed-rate, fixed-payment loans.

Loan vs. Line of Credit: What's the Difference?

Both loans and lines of credit let consumers and businesses to borrow money to pay
for purchases or expenses. Common examples of loans and lines of credit are
mortgages, credit cards, home equity lines of credit and auto loans. The main
difference between a loan and a line of credit is how you get the money and how
and what you repay. A loan is a lump sum of money that is repaid over a fixed term,
whereas a line of credit is a revolving account that let borrowers draw, repay and
redraw from available funds.
In general, loans are better for large, one-time investments or purchases. This could
be the purchase of a new home or car or paying for a college education. Lines of
credit, on the other hand, are better for ongoing, small or unanticipated expenses or
to even out income and cash flow. For instance, a small business owner might use a
credit card to pay for office supplies and materials every month. A homeowner might
take out a home equity line of credit to pay for ongoing remodeling costs when she
isn’t sure how much the project will cost.

Loans usually have fixed interest rates. This means that if you take out a loan with a
5% interest rate, that rate will not change during the life of the loan. On the other
hand, many lines of credit have variable rates.

💡 KEY TAKEAWAYS

o Loans and lines of credit are types of bank-issued debt that depend on
a borrower's needs, credit score, and relationship with the lender.
o Loans are non-revolving lump-sum credit facilities that are normally
used for a specific purpose by the borrower.
o Lines of credit are revolving credit lines that can be used repeatedly for
everyday purchases or emergencies in either the full limit amount or in
smaller amounts.

EXAMPLES OF LOANS
✔️ Mortgage

A mortgage is a specialized loan used to purchase a home or other kind of real

property and is secured by the piece of real estate in question.

✔️ Automobile Loan

Like mortgages, automobile loans are secured. The collateral, though, is the vehicle in
question. The lender advances the amount of the purchase price to the seller—less
any down payments made by the borrower.

✔️ Debt Consolidation Loan

Consumers can consolidate all their debts into one by approaching a lender for a
debt consolidation loan.
✔️ Home Improvement Loan

These loans may or may not be secured by any collateral. If a homeowner needs to
make some repairs to their home, they can approach a bank or other financial
institution for a home improvement loan.

✔️ Business Loan

These loans may or may not be secured by any collateral. If a homeowner needs to
make some repairs to their home, they can approach a bank or other financial
institution for a home improvement loan.

EXAMPLES OF CREDIT LINE

✔️ Personal Line of Credit

This is an unsecured line of credit. Just like an unsecured loan, there is no collateral
that secures this credit vehicle. As such, they require the borrower to have a higher
credit score.

✔️ Business Line of Credit

These credit lines are used by businesses on an as-needed basis. The bank or
financial institution considers the company's market value and profitability as well as
the risk. A business line can be secured or unsecured based on how much credit is
requested, and interest rates tend to be variable.

Credit Score: How does it affect me?

What Is a Credit Score?

A credit score is a number between 300–850 that depicts a consumer's

creditworthiness. The higher the score, the better a borrower looks to potential
lenders. A credit score is based on credit history: number of open accounts, total
levels of debt, and repayment history, and other factors. Lenders use credit scores to
evaluate the probability that an individual will repay loans in a timely manner.

• A credit score plays a key role in a lender's decision to offer credit.

• Factors considered in credit scoring include repayment history, types of loans,
length of credit history, and an individual's total debt.
• One metric used in calculating a credit score is credit utilization or the
percentage of available credit currently being used.
 • It is not always advisable to close a credit account that is not being used since
doing so can lower a person's credit score.

How Credit Scores Work?

A credit score can significantly affect your financial life. It plays a key role in a
lender's decision to offer you credit. People with credit scores below 640, for example,
are generally considered to be subprime borrowers. Lending institutions often charge
interest on subprime mortgages at a rate higher than a conventional mortgage in
order to compensate themselves for carrying more risk. They may also require a
shorter repayment term or a co-signer for borrowers with a low credit score.

Conversely, a credit score of 700 or above is generally considered good and may
result in a borrower receiving a lower interest rate, which results in their paying less
money in interest over the life of the loan. Scores greater than 800 are considered
excellent.

• Excellent: 800 to 850

• Very Good: 740 to 799
• Good: 670 to 739
• Fair: 580 to 669
• Poor: 300 to 579

💡 Your credit score, a statistical analysis of your creditworthiness, directly affects

how much or how little you might pay for any lines of credit you take out.

Credit Score Factors: How Your Score Is Calculated

There are five main factors evaluated when calculating a credit score:3

• Payment history
• Total amount owed
• Length of credit history
• Types of credit
• New credit

⚡ The Bottom Line

Your credit score is one number that can cost or save you a lot of money in your
lifetime. An excellent score can land you lower interest rates, meaning you will pay
less for any line of credit you take out. But it's up to you, the borrower, to make sure
your credit remains strong so you can have access to more opportunities to borrow
if you need to.