Go over each item in the list, expounding on each one per notes below: Credit can help you when you don’t have cash to pay for an emergency expense, such as an auto repair or medical bill. Credit enables you to buy a big-ticket item you need now and stretch out the payments over time. A credit card typically offers a grace period of 20 to 25 days during which finance charges don’t accrue if you have paid your previous month’s balance in full. Explain that you’ll talk more about the grace period later in the seminar. Credit allows you to do things that are difficult or impossible to do without a credit card, like rent a car, reserve a hotel room, and buy airline tickets. Use of a credit card provides protection against fraud and undelivered, damaged or misrepresented goods. This can be particularly important when shopping online. Cards often also provide protection against loss and theft of purchases, and an extended warranty on items purchased with the card. Some also offer a form of rental car collision insurance. Some cards offer cash rebates, merchandise rewards, or airline miles. A credit card allows you to avoid carrying large amounts of cash, which could get lost or stolen. If your card gets lost or stolen, you won’t be liable for more than $50 as long as you report your card missing right away. A good credit history can make it possible for you to rent a home, start cell phone or utility service, buy insurance or get a job. A good credit record improves your chances of achieving future financial goals, such as getting a loan for a car, a home, or a business. And it allows you to qualify for more favorable interest rates and terms.
Installment credit: Requires you to make a fixed number of monthly payments until the original loan amount is repaid in full, along with all finance charges. Examples of installment credit include car loans and home loans (mortgages). Revolving credit: Also known as short-term or open-ended credit. Allows you to borrow money, up to an assigned credit limit, over and over again. The amount of your available credit shrinks as you use it and grows again as you repay the borrowed money. (See lesson plan for an example of revolving credit to share with the class.) Gives you the option to pay the entire outstanding balance or to pay a part of the balance and carry over the remainder to the following month. You will pay interest on the debt you “revolve.” Interest is the lender’s fee for allowing you to use its money. Examples of revolving credit include credit cards and lines of credit, such as overdraft protection for your checking account and a home equity line of credit (HELOC). Banks, credit unions, credit card companies, retailers, mortgage companies and others offer revolving credit accounts.
Go over each item in the list: Visa, MasterCard and Discover are the most widely accepted credit cards. The cards all function in essentially the same way. The Discover card is issued by Discover Financial Services. MasterCard and Visa cards are issued by hundreds of different financial institutions. Regardless of who the issuing institution is, the cards all display the Visa or MasterCard logo. An affinity card is a credit card offered by two organizations jointly. One is a credit card issuer and the other is a beneficiary nonprofit organization, professional association, special interest group, educational institution, or other non-bank entity. Each time you use your affinity card, the benefiting organization receives a contribution. A rewards card is a credit card that awards points, airline miles, cash back or other rewards based on cardholder purchases. Secured cards look and function just like unsecured cards, but they require a security deposit. The credit limit is typically the amount of the security deposit. If the cardholder defaults on the debt, the card issuer keeps the security deposit. A secured card can help someone to establish or re-establish credit. Retail card s and gas cards can be used only at the specific store/station or chain of stores/stations that issues the card.Customers choose retail and gas cards because they typically offer special discounts, gifts, services and other benefits to cardholders. Also called prepaid cards, stored value cards look and function like credit cards, though they don’t actually allow the user to make purchases on credit. Instead, the purchaser pays for the card upfront and the vendor “loads” the card with the prepaid amount. Stored value cards offer the convenience of credit without the risk of getting into debt. Some cards do charge activation and other fees, and may lose value over time if they go unused. Charge cards (American Express is the most well-known example) require cardholders to pay off their balance every month. Because you pay your bill in full each month, you do not have a pre-set spending limit and you do not pay interest. Charge cards typically charge an annual fee. A debit card with a Visa or MasterCard logo allows you to make purchases at merchants that accept those cards. But the money you spend is deducted directly from your checking account. A debit card offers many--but not all--the same conveniences and protections a credit card offers, without the finance charges or risk of getting into debt.
Present each item in the list: Credit limit: The maximum amount you can borrow/charge. This limit is sometimes increased over time, with a good payment record. Balance computation: Cards have choices for how to calculate the balance on which they will impose finance charges.You’ll usually have a lower finance charge with one-cycle average daily balance billing than with two-cycle billing, which essentially charges you interest on a previous balance you’ve already paid down if you revolve a portion of your debt from one month to the next. Minimum payment: This is the smallest amount that you are allowed to pay the credit card company without triggering a late fee. Of course, you can pay more than the minimum anytime you are able--doing so will save you money on finance charges. Each credit card has a formula for calculating the minimum payment, but any minimum payment must include all finance charges, fees and around 4% of the balance. Your payment is always applied first to interest and fees, then to principal. Due date: The date by which your payment must be received by the credit card company. Some card companies must receive your payment by a certain time on the due date for it not to be considered late. Some card issuers allow you to select your own due date. Grace period: The period--typically 20 to 25 days between the close of the billing cycle and the date your payment is due--during which finance charges do not accrue IF you are not carrying a balance from the previous month AND your payment is received by the due date.You do not get a grace period if you carry over a balance from the previous month. And there is no grace period on cash advances. Interest rate: There is, typically, more than one interest rate (APR) to consider on a credit card. We’ll talk more about credit card interest rates in just a minute. Fees: There are many fees associated with credit cards. We’ll talk more about specific fees right after we discuss interest rates.
Present each item in the list: Interest rates can vary widely from card to card. For example, 10% annual interest on $100 is $10; 20% annual interest on $100 is $20. A variable rate moves up and down based on changes in an underlying interest rate index.Typically, a variable interest rate on a credit card will be quoted as a certain number of percentage points above the index. This is known as the margin. For example, if your quoted rate is prime (the most commonly used index for credit cards) + a margin of 7.99%, and prime is currently 6%, then your rate would be 13.99% (6% + 7.99% = 13.99%). If prime increases to 8%, then your rate would increase to 15.99% (8% + 7.99% =15.99% APR). Your credit card company does not have to notify you when a variable rate will change. A fixed interest rate does not fluctuate according to changes in an underlying index. However, a fixed interest rate on a credit card (as opposed to the fixed rate on a mortgage or car loan, for example) can change at any time with a 15-day change-in-terms notice from the creditor. F ixed interest rates can also change if you pay late or do anything else to expose yourself to a penalty rate increase. (We’ll talk more about penalty rates in a moment.) The APR makes it possible to compare the true annual cost of different credit offers, taking into account both the interest rate being charged and any fees, such as an annual fee. For example, if two credit cards charge 12% interest, but one also charges an annual fee, that credit card will have a higher APR. The APR that is promoted for new cardholders is typically the one for purchases. There may be a higher APR for cash advances . The periodic interest rate is simply the annual interest rate expressed as a monthly or daily amount. (To get the periodic rate, the lender divides the annual rate by the number of months in a year or the number of days in the month.) For example, an 18% annual interest rate is a 1.5% monthly interest rate (18 /12 = 1.5). There are typically different rates for a single card. Teaser rate: A low--or 0%--promotional rate offered by some cards. Purchase rate: The regular (not teaser) rate for purchases. Balance transfer rate: The rate charged on balances transferred from other credit cards. Could be as low as 0% during promotional period. The promotional balance transfer rate sometimes lasts just a few months, sometimes a year or longer, and sometimes until the transferred balance is paid off. Cash advance rate: Typically higher than the purchase rate. Applied to convenience checks, too. Penalty rate (or default rate) : A higher rate charged by some cards if you pay your credit card bill late, go over the limit, pay another creditor late, bounce a check, or otherwise do not abide by the cardholder agreement. The penalty rate typically lasts a certain number of months, or until you meet some criteria…for example, making six consecutive on-time payments. The effective APR represents your total finance charges, including all fees, expressed as a percentage. By law, card issuers must disclose the effective APR on your credit card statement.
App fee: Many sub-prime cards (offered to those with lower credit scores) and some secured cards charge a fee when an account is opened. Annual fee: This is most common among charge cards, rewards credit cards, and secured and sub-prime cards. Sometimes the fee is applied only if you do not make at least a few charges during a year. Balance transfer fee: Charged for transferring a balance from one card to another. Typically assessed as a percentage of the balance transferred (for example, 2% or 3%). Frequently waived on balances transferred by new cardholders. Cash advance fee: Charged as a percentage of the cash advance, with a minimum charge regardless of how small the cash advance might be. (In addition to the fee, interest on cash advances begins to accrue immediately--there is no grace period--and is typically at a higher rate than the purchase APR.) Currency conversion fee: Most credit cards charge fees of 1% to 3% when you make purchases while traveling overseas. May also be called a currency exchange fee or foreign transaction fee. Late fee: Charged if your payment is late. Fees as high as $39 are not uncommon. Overlimit fee: Charged if you exceed your credit limit. Fees as high as $39 are not uncommon. Bounced check fee: Charged if your check bounces. Credit card companies sometimes charge fees for things like making your payment by phone or online.
See lesson plan for activity instructions, answers and questions, and talking points.
Go over each item in the list: Opening/closing date: The first and last dates for which transactions will appear. Past due amount: Any amount that should have been paid previously and is now considered late. New balance: The amount that you would have to pay by the due date to achieve a $0 balance. Minimum payment due: You must pay at least this amount by the due date to avoid a late charge. Due date: The date by which the creditor must have RECEIVED your payment. Account summary: This section provides key information at a glance, including previous balance amount; amount of recent payments and credits; amount of recent charges, fees and finance charges; total credit line; remaining credit; and the number of days in the billing cycle (this can vary based on the number of days in the month). Transactions: Purchases, cash advances and balance transfers increase your balance. Finance charges and fees also increase your balance. Payments and credits (returned merchandise, for example) decrease your balance. Rewards information: If you have a rewards card, you will see information about how many points/miles/rebate dollars, etc. you earned and/or redeemed during this billing cycle. Explanation of finance charges: This is where you will see the dollar amount of any finance charges and how they were calculated (APR, average daily balance, and so on). You will also see the breakdown of finance charges for different transactions (such as purchases and cash advances) if different APRs apply (as is typical). Effective APR: This is the APR that represents your total finance charges, including transaction fees, expressed as a percentage. Credit cards must provide this information by law. This shows the real cost of borrowing.
Announce a 20-minute break. Leave this slide onscreen during the break.
Go over each item in the list: You typically will not know the amount of your credit line when you apply for a card. The creditor will determine your credit limit upon reviewing your application and credit history. If the credit line is not sufficient, you can request a higher limit. If the limit does not meet your needs, you can decline the offer and look for another credit card that may offer a higher limit. The purchase APR will be more important if you usually or sometimes revolve your debt. If that is the case, look for the lowest purchase rate you can find. If you plan to transfer a balance from another card, look for the lowest balance transfer rate that lasts the longest. Also, find out if there are any balance transfer fees, which are usually expressed as a percentage of the amount transferred. The cash advance APR will be higher than the purchase APR. This is important if you regularly or sometimes use your credit card to get cash. Promotional, or teaser, rates matter if you plan to carry a balance (revolve your debt) or do a balance transfer. If you will do so, look for the lowest teaser rate that lasts the longest. If you believe there is any chance that you might be subject to the penalty APR--because you pay your bill late, charge over the limit, or default with another creditor, for example--consider the penalty APR. Also, be aware of the reasons why your interest rate would increase, and what it would take to get your rate back down to the regular APR (six months of on-time payments, for example). (“Universal default” means that your interest rate could go up even if you’re late or overlimit on another card, if your credit score decreases, or for a variety of other reasons.) Variable-rate information includes the index used (prime, LIBOR, etc.) and the percentage added to the index (margin). For example, prime + 5.99% for purchases and balance transfers, and prime + 9.99 for cash advances. There are typically 20 to 25 days in the grace period. If you can’t find a fee-free card that meets your needs, look for the card that best meets your needs AND has the lowest fee. If you are thinking about getting a rewards or airlines miles card, make sure that the card’s benefits and services are worth the cost of the fee. Consider the overall value of a card when comparing fee and no-fee cards. Often expressed as a percentage of the transaction, as with cash advances, balance transfers and currency conversion. Think about which transactions you perform most and look for the lowest fees on those transactions. If you do not make late payments, bounce checks or exceed your credit limit, these penalty fees are not as important as certain other terms. If you might, look for a card that has fees on the lower end of the scale. This is particularly important if you regularly or sometimes carry a balance from one month to the next. Two-cycle average daily balance will be more expensive for you, as will “including” new purchases rather than “excluding” new purchases. The minimum finance charge is typically 50 cents or $1, if you carry a balance. If you are considering a rewards card, compare the rewards and any fees or higher interest rates you might have to pay to get them. Evaluate whether the rewards are worth the additional costs. Look for a rewards cards that does not charge higher rates or additional fees.
See lesson plan for activity instructions and talking points.
Go over each item in the list: Offers: According to federal law, pre-approved offers are firm offers of credit. The only acceptable reason for the creditor to rescind its offer is if you experience a serious decline in creditworthiness after the offer was made. Remember, offers often entice applicants with promises of credit “up to” a high limit. You will most likely be approved for a much lower limit. Invitations: Invitations to apply simply invite you to apply for a card. Unlike a pre-approved offer, an invitation to apply is not a firm offer of credit. The company will use the information in your application and any information about you on file at the major credit reporting bureaus (your credit report and credit score) to make a decision about whether to grant you credit, how much, and under what terms. Instant credit: Merchants sometimes offer on-the-spot credit during a transaction. In some cases, a discount is offered to entice customers to apply for instant credit. After an applicant provides information, including Social Security number, the merchant accesses the applicant’s credit score to make a determination of creditworthiness. Consumer-initiated applications: If you do not receive offers of credit or invitations to apply, or if you want a particular card that has not solicited your application, you can contact a credit card issuer directly to apply. It is sometimes easier to get credit from a bank or credit union you already have a relationship with, or from a retailer or other merchant. A number of organizations and websites compile credit card information to help consumers compare terms and make wise choices. Consumer Action publishes an annual credit card survey, which includes terms and information for many credit cards. (If you have included a survey in participants’ packets, have them remove it and look at it now. If not, let participants know that they can download or order their own copy: Consumer Action’s contact info is on the brochure.) If you don’t find all the information you need, you can call the card issuer directly to ask any questions you might have.
Go over each item in the list: If you think you may need to use more than your available credit, call your card issuer in advance to request an increase. Make sure you have sufficient funds in your bank account to cover your credit card payment and avoid a bounced check fee. If payments become difficult, stop using credit and work on paying down your debt. Pay more than the minimum whenever possible. Pay off your balance completely whenever possible. (See lesson plan for example to share with class.) Some creditors require your payment to arrive not only by a certain date, but by a certain time that day. Make sure you understand exactly when your payment is due, and submit it in plenty of time to arrive and be posted. If you send your payment by mail, allow at least seven days for the payment to reach your issuer . Choose another method of payment--online bill-pay, pay-by-phone or automatic payments, for example--if it will prevent your payment from being late. Credit card cash advances are a very expensive way to get cash--much more expensive than an ATM withdrawal using your debit card. Keep debt to 50% or less of available credit. ( According to one source, those utilizing at least 50% of their credit lines have an average credit score of 645, compared to the national average of 674.) Be sure you understand--and fulfill--all the terms and conditions in the cardholder agreement so you can avoid penalty fees and rates. You do not have to purchase optional fee-based services and products, such as credit protection insurance or identity theft monitoring services, to qualify for a credit card. In some cases, as with the identity theft prevention service, you can achieve the same protection yourself--free! (Point out the section in the Staying on Track with Credit brochure that explains how to get your credit report from each credit bureau once per year, at no charge. You can also “freeze” your credit file with a password to prevent unauthorized use. Depending on your state and whether or not you are an identity theft victim, you may be able to place the freeze free or for a nominal fee. If you have trouble paying your bills, contact a credit counselor immediately to discuss your situation and determine how to get back on track. Write down the two NFCC numbers on your whiteboard or easel: 800-388-2227 (English) or 800-682-9832 (Spanish).
Thank participants for attending. Tell them you hope to see them at a future MoneyWi$e seminar. Wish them success in achieving their goal of successful homeownership. Ask them to take a few minutes to fill out the evaluation form in their folder and leave it in a large envelope you provide or face down on a table at the front or back of the room.
Staying on Track with Credit - PowerPoint Slides
<ul><li>Consumer Action created this project in partnership with </li></ul>USE CREDIT WISELY
Advantages of Credit <ul><li>What can credit do for you? </li></ul><ul><li>Help you through a financial emergency </li></ul><ul><li>Enable you to pay for a purchase over time </li></ul><ul><li>Provide a short, interest-free loan </li></ul><ul><li>Enable you to rent a car, hotel room, etc. </li></ul><ul><li>Offer convenience, security when shopping </li></ul><ul><li>Rebates or rewards </li></ul><ul><li>Allow you to avoid carrying cash </li></ul><ul><li>Allow you establish credit/build good credit </li></ul>
Types of Credit <ul><li>Installment Credit </li></ul><ul><li>Fixed number of monthly payments </li></ul><ul><li>Car loans, mortgages </li></ul><ul><li>Revolving Credit </li></ul><ul><li>Short-term, open-ended </li></ul><ul><li>Assigned credit limit </li></ul><ul><li>Available credit fluctuates as you make purchases & payments </li></ul><ul><li>Option to make full or partial payment </li></ul><ul><li>HELOCs, credit cards </li></ul>
Card Types <ul><li>Credit, charge & debit cards </li></ul><ul><li>Visa, MasterCard, Discover </li></ul><ul><ul><li>Affinity cards </li></ul></ul><ul><ul><li>Rewards cards </li></ul></ul><ul><ul><li>Secured cards </li></ul></ul><ul><li>Retail and gas cards </li></ul><ul><li>Stored value (prepaid) cards </li></ul><ul><li>Charge cards </li></ul><ul><li>Debit cards </li></ul>
Credit Card Terms <ul><li>Credit limit </li></ul><ul><li>Method of computing the balance </li></ul><ul><li>Minimum payment </li></ul><ul><li>Payment due date </li></ul><ul><li>Grace period </li></ul><ul><li>Interest rate </li></ul><ul><li>Fees </li></ul>
Credit Card Terms: Interest <ul><li>The lender’s fee for allowing you to use its money </li></ul><ul><li>Expressed as a percentage of the credit </li></ul><ul><li>Fixed vs variable interest rate </li></ul><ul><li>Annual percentage rate (APR) </li></ul><ul><li>Periodic interest rate </li></ul><ul><li>Different rates for a single card: </li></ul><ul><ul><li>Teaser </li></ul></ul><ul><ul><li>Cash advance </li></ul></ul><ul><ul><li>Purchase </li></ul></ul><ul><ul><li>Penalty/Default </li></ul></ul><ul><ul><li>Balance transfer </li></ul></ul><ul><ul><li>Effective interest </li></ul></ul>
Activity: Credit Card Jeopardy <ul><li>Break into three groups </li></ul><ul><li>Choose one person on your team to “buzz” in when you think you have the correct “question” to the answer </li></ul><ul><li>A correct answer earns the point. An incorrect answer loses a point and allows another team to “steal” the point. </li></ul><ul><li>Remember to phrase your answer in the form of a question. </li></ul>
Credit Card Billing Statements <ul><li>Opening/closing date </li></ul><ul><li>Past due amount </li></ul><ul><li>New balance </li></ul><ul><li>Minimum payment due </li></ul><ul><li>Due date </li></ul><ul><li>Account summary </li></ul><ul><li>Transactions </li></ul><ul><li>Rewards information </li></ul><ul><li>Explanation of finance charges </li></ul><ul><li>Effective APR </li></ul>
Food for Thought <ul><li>In 2007, credit card customers who revolved their debt (didn’t pay the balance in full each month) paid $18.1 billion in penalty fees to credit card companies. </li></ul><ul><li>Source: “Don’t Get Clobbered By Credit Cards,” by Gary Weiss </li></ul>
Activity: Credit Card Match-Up <ul><li>Break into groups </li></ul><ul><li>Answer the questions for each scenario based on what you have learned so far </li></ul><ul><li>There may be more than one “right” answer to each question </li></ul><ul><li>Choose a spokesperson to explain your choices </li></ul>
Obtaining Credit <ul><li>Pre-approved offers </li></ul><ul><li>Invitations to apply </li></ul><ul><li>Instant credit </li></ul><ul><li>Consumer-initiated application </li></ul><ul><ul><li>Banks, credit unions, retailers, card companies, and other institutions </li></ul></ul><ul><li>Compare offerings, terms </li></ul><ul><ul><li>www.consumer-action.org </li></ul></ul><ul><ul><li>www.bankrate.com </li></ul></ul><ul><ul><li>www.cardtrak.com </li></ul></ul><ul><ul><li>www.cardratings.com </li></ul></ul>
Using Credit Wisely <ul><li>Know your credit limit and don’t exceed it </li></ul><ul><li>Charge only as much as you can repay </li></ul><ul><li>Pay more than the minimum, if possible </li></ul><ul><li>Pay by your due date (and time!) </li></ul><ul><li>Use a debit card, not a credit card, to get cash </li></ul><ul><li>Don’t accumulate too much debt </li></ul><ul><li>Avoid penalty fees and rates </li></ul><ul><li>Consider optional fee-based services carefully </li></ul><ul><li>Contact a credit counselor (www.nfcc.org or www.aiccca.org) </li></ul>
Congratulations! <ul><li>You’ve completed the ‘Use Credit Wisely’ training! </li></ul>
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