CREDIT CARDS

What to know and understand before you obtain one…

Personal FinanceEdmonds School District

CREDIT IS…

A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some later date.

A privilege – it can be damaged or taken away… but if used wisely, can be of great benefit to the borrower

Important to understand – it can have great impact on your financial future

Types of Credit

INSTALLMENT CREDIT

Usually referred to as a loan Used for large purchases (i.e. cars, homes,

education, etc.)– Is paid back in set monthly payments for a specific

amount of time.

– If it is a “secured loan”, you do not own the item until paid in full (can be repossessed).

– Interest is generally lower (than revolving credit)

REVOLVING CREDIT

Example: Credit Cards– Monthly payment varies depending on the amount spent.

– There is a limit on the amount that can be owed at any one time

– No set time period to pay the debt off (could last forever)

– Interest rates are higher (than installment credit)

– Can avoid paying interest if you pay off the debt in full each month.

Credit Terms and Vocabulary

CREDIT TERMS & VOCABULARY – Finance Charge & Principal

Principle– The amount that is actually charged (ex: if you charge $70

for a pair of jeans, your principle will be $70) or balance remaining on a loan (not counting the interest)

Finance Charge– The cost of credit (interest & fees added to your credit card

bill each month).

You can avoid finance charges by

paying on time and in full each month.

CREDIT TERMS & VOCABULARY - APR

A.P.R. - Annual Percentage Rate– This is typically known as the interest rate and

will be shown as a percentage.– This rate is applied each month that an

outstanding balance is present.

CREDIT TERMS & VOCABULARY - APR – Intro, Fixed, or Variable

Introductory APR - an annual percentage rate that changes after a specific period of time.

Fixed Rate (or Fixed APR) - an annual percentage rate that does not change throughout the year

Variable Interest Rate (or Variable APR) – an annual percentage rate that changes when interest rates or other economic indicators change

Food for thought: In what situation might someone want (or not want) each of these types of APR rates?

CREDIT TERMS & VOCABULARY - Minimum Payment, Credit Limit and

Grace Period

Minimum payment– The least amount that can be paid on a revolving credit account.

ALWAYS pay more than the minimum

Credit Limit – Also known as a credit line– How much total money can be charged to a credit card account– Overlimit Fee – additional fee is applied to an account that has

surpassed its credit limit with a transaction. *This fee has been barred by the 2009 Credit Card Act

Grace period – A period of time during which you are allowed to pay your credit

card bill without being charged a finance and/or late fee. *This period must be at least 25 days (2009 Credit Card Act)

CREDIT TERMS & VOCABULARY - Fees

Late Payment Fee– A fee charged when your payment is not received by the due date– Check fine print – some of them have a due time of when it has to

be received

Balance Transfer Fee– A fee charged by a credit card company to transfer a balance from

one account to another. – This fee can be anywhere from 1%-5% of the balance amount. – Contact the credit card issuer for their specific fees; some don’t

charge this fee.

CREDIT TERMS & VOCABULARY - Cash Advance & Annual Fee

Cash Advance Cash loan from a credit card obtained at an ATM or bank Immediate fee (typically 3% purchase amount) Higher APR than normal purchases No grace period (interest accrues immediately)

NEVER, EVER, NEVER, EVER USE THIS FEATURE!

Annual Fee– The once-a-year fee charged for owning a credit card. – Note: Not all cards have an annual fee. Read the fine print!

Credit CARD Act 2009 – What has changed?

Must be 21 to get a credit card– Unless they can show proof they earn enough income to

repay the debt– Or have adult co-signers on their account

Minimum 25 day grace period

No over-limit fees (transactions rejected instead)

Additional changes…– http://www.creditcards.com/credit-card-news/help/what-the-ne

w-credit-card-rules-mean-6000.php

Good Debt vs. Bad Debt

GOOD DEBT

– The purchase outlasts the debt.

– The ratio of debt to income does not exceed 20%.

BAD DEBT

– Financial obligations last longer than the purchase.

– The ratio of debt to income exceeds 20% or jeopardizes financial security if payments cannot be made.

Benefits of Using Credit

Use of product or service before you “own” it Free loan if you pay bill in full Convenient, no-hassle shopping More secure than cash – report to the bank that issued the

card within two business days and you are not liable for more than $50

Useful in emergencies Universal acceptance – global Often necessary for rental car and hotel reservations Used for Internet shopping Establish a good credit score

Disadvantages of Using Credit

“Too convenient” – can lead to overspending

Finance charges

Predetermines future income

Can hurt your credit score

The 3 C’s of Getting Credit

CHARACTER– Can you be counted on to pay your bills?

CAPACITY – Do you have a steady source of income?

CAPITOL– How many assets do you have? How much debt do

you have?

Types of Credit Cards

Types of Credit Cards

Retail – these are store cards like Macy’s, GAP, etc. They can ONLY be used in their store.

These have the highest interest rates.

Bank Cards – issued by a bank; examples include Mastercard, Visa, Discover, American Express

Secured Card – The amount that can be charged is prepaid; deposit is held in a special savings account and only used at the request of the customer or when account is closed. For example, if a person deposits $1000 – a credit line will be given between $500 - $1000.These are for students or those who have not

established credit.

Choosing a Credit Card Which One Is Best for YOU?

What is the APR? What kind of APR is it? (variable, fixed introductory)

What are the fees? (late payments, etc.)

How long is the GRACE PERIOD?

Do they offer any rewards? (airline miles, discounts)

READ THE FINE PRINT BEFORE YOU SIGN ANYTHING!!!!

RECOMMENDATIONS

Just starting out? Do your homework!

Get 1 credit card with a limit of $500-$1000 Pay it off (in full) every month If you must carry a balance, keep it under 35% of

your credit limit. Use resources on the Internet to help!

http://www.creditcardguide.com/

http://www.creditcards.com/best-credit-cards.php http://www.debtslapped.org

Tips to PROTECT Your Credit Card Account

Never lend your card to anyone.

Never give your card number over the phone or Internet unless you initiated the call and you are certain of the company or organization.

Sign the back of your cards as soon as you receive them.

Keep a record of your card number, expiration date, and phone number of card company separate from your wallet.

Contact the credit card issuer if any questionable charges appear on your statement.

Federal Law Protects Your Use of Credit

Truth in Lending Law – The lender MUST disclose ALL lending costs and terms of the loan at

the time the offer is made.

Fair Credit Billing Act – You may dispute billing errors and unauthorized use of your account. – You may dispute charges for goods and services charged but not

delivered satisfactorily. You may withhold payment on that amount while the charge is being investigated.

Equal Credit Opportunity Act – DENIED????– You cannot be denied credit based on race, creed or gender.– You must be given a reason if you are denied credit.

QUESTIONS???