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Understanding your credit card 1.4.1.g1

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  • 1. Understanding Your Credit Card Credit Unit Take Charge of Your Finances
  • 2. 1.4.1.G1 Credit CREDIT-When goods, services or money is receivedin exchange for a promise to pay a definite sum of money at a future date INTEREST- The price of money- when referring to credit, interest is the charge for borrowing money © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 3. 1.4.1.G1 Lender and Borrower LENDER- BORROWER- The person or The person ororganization who has the organization that is resources to provide the receiving the money from individual with a loan the lender © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 4. 1.4.1.G1 Closed-end vs. Open-end Credit Open-endCharacteristics Closed-end credit (revolving) credit Credit extended inDefinition A one-time loan advance May be used for a varietyPurpose of loan Specified in application of purposes © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 5. 1.4.1.G1 Closed-end vs. Open-end CreditCharacteristics Closed-end credit Open-end credit Varies- can be paid in one Specified number of Payments payment or a series of equal payments equal or unequal payments Agreed upon during the May be increased for Loan Amount application process responsible consumers Mortgage, automobile, Examples Credit cards education loans © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 6. 1.4.1.G1 Credit CardWhat is a credit card? Pre-approved credit which can be used for the purchase of goods and services now and payment of them later A credit cards credit limit varies based upon an individual’s perceived creditworthiness Credit limit is the Creditworthiness is an maximum dollar individuals ability and willingness amount loaned to pay the money back © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 7. 1.4.1.G1 Credit Card Interest Interest is charged each month the balance is not paid in full Rate at which interest is charged is referred to as: Annual Percentage Rate (APR) The cost of credit expressed as a yearly interest rate © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 8. 1.4.1.G1 Minimum Payments• Required to make at least a minimum payment each month – Usually only a small percentage (2.5-5%) of the total balance due• Cardholders who only make the minimum payment: – Make slow progress paying off card balance – Pay substantially more than what was initially charged to the card © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 9. 1.4.1.G1 Minimum Payments Amount Time to pay Total amount charged to Minimum Total amount APR off the credit paid incredit card in payment paid card interestone purchase $2,000 18% $50.00 62 months $1,077.25 $3,077.25 $500 12% $25.00 23 months $60.67 $560.67 © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 10. 1.4.1.G1 Advantages to using Credit Cards Advantages Convenient payment tool Protection against fraud Opportunity to establish a Useful for emergencies positive credit history Online shopping is safer than using aOften required to hold a reservation debit card because of the Fair Credit Billing Act protectionAble to purchase “big ticket” items Possibility of receiving bonuses, such and spread out payments as frequent flyer miles or cash rebates © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 11. 1.4.1.G1 Disadvantages to using Credit Cards DisadvantagesInterest can be costly when Responsible for lost/stolen cards a balance is revolved Additional penalty Applying for multiple accounts can fees may apply lower your credit score Tempting to overspend Risk of identity theft © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 12. 1.4.1.G1 Debit Cards• What is a debit card? – A plastic card which looks like a credit card, but is electronically connected to the cardholder’s bank account – Money is immediately withdrawn from the cardholders checking account What is the difference between a credit card and a debit card? © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 13. 1.4.1.G1 Credit History Credit cards can have a positive or negative impact on an individuals credit history Credit Report A record of a consumer’s credit history that includes information about credit card use as well as the use of other types of credit, such as auto loans, student loans and mortgage loans Credit ScoreA number that summarizes an individual’s credit record and history. It is a numeric “grade” of a consumer’s financial reliability © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 14. 1.4.1.G1 Positive Credit Card use Helps develop Proper credit positive credit Earn a high card use history and credit score credit report A high credit score gives the consumer the opportunity to havelower interest rates on loans, the privilege to use different forms of credit, and an easier approval process for future credit © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 15. 1.4.1.G1 Positive Credit Card Use• Examples of positive credit card behaviors: – Paying credit card balances in full every month – Paying credit card bills on time – Applying for only credit cards that are needed – Keeping track of all charges by keeping receipts and using a check register – Checking the monthly credit card statement for errors © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 16. 1.4.1.G1 Negative Credit Card Use Develops Improper negative credit Lower creditcredit card use history and score credit report Consumers with low credit scores have difficulty getting loans, difficulty renting apartments, pay higher interestrates, pay higher insurance rates, and have difficulty obtaining a job © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 17. 1.4.1.G1 Negative Credit Card use• Examples of negative credit card behaviors: – Making late credit card payments – Paying only the minimum payment – Exceeding the card’s credit limit (usually triggers a penalty fee) – Charging items that can’t be paid off immediately – Owning too many credit cards © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 18. 1.4.1.G1 NO Credit• If an individual has not used credit, they will not have any information in their credit report• Not having a credit report can cause an individual to be denied credit © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 19. 1.4.1.G1 Credit Card Offers Credit card issuers are required to disclose the terms and fees of credit cards in an easy to read box format This is called the Schumer box © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 20. Annual Percentage Rate (APR) for Purchases This section discloses the interest paid for purchases on the card. Multiple interest rates may be listed here, because thefinal interest rate may depend on the creditworthiness of the applicant
  • 21. Introductory Rate If the credit card has anintroductory rate it will be shown in this section, which is the APR charged during the credit cardsintroductory period after a credit card account is opened. The card will have a different APR after the introductory period ends What is the introductory rate for this credit card offer? The introductory rate depends on the creditworthiness of the applicant, but it will be 12.99%, 13.99%, or 14.99%
  • 22. Variable-rate APRSome cards will have a variable-rate APR, which is an APR thatmay change depending on other factors, such as the prime rate. The prime rate is an index thatrepresents the interest rate most banks charge their most credit- worthy customersWhat is the APR for Purchases for this credit card offer? 14.99% Is this a variable-rate APR or a fixed-rate APR? Variable-rate APR
  • 23. APR for Balance TransfersThis section discloses the interest paid for balance transfers, which is the act of transferring debt from one credit card account toanother. Balance transfer fees mayapply, even if the balance transfer APR is 0% What is the APR for balance transfers for this credit card offer? 15.99%
  • 24. APR for Cash AdvancesThis section discloses the interest paid for cash advances, such aswithdrawing cash from an ATMusing a credit card. Cash advance fees may also apply What is the APR for cash advances for this credit card offer? 21.99%
  • 25. Penalty APR and When it AppliesThis section discloses the penaltyAPR, as well as the penalty terms that trigger the penalty APR to take effect•Penalty APR is the interest ratecharged on new transactions ifthe penalty terms in the creditcard contract are triggered What is the Penalty APR for this credit card offer? 21.99%
  • 26. How To Avoid Paying Interest on PurchasesThis section explains how youcan avoid interest charges on a credit cardHow can a cardholder avoid paying interest on a credit card? By paying credit card bills in full by the due date
  • 27. Minimum Interest Charge Credit card companies often have a minimum interest amount. These chargestypically range from $0.50 to $2 per month and aredisclosed in this section of the credit card offerWhat is the minimum interest charge for this credit card? $1.50
  • 28. For Credit Card Tips from the Federal Reserve Board This section directs consumers to the Federal Reserve website to obtainmore information about credit cards
  • 29. Set-up and Maintenance FeesThis section discloses any set- up and maintenance fees for the card, which can include annual fees, account set-up fees, participation fees, and additional card fees•Annual fee is a yearly fee thatmay be charged for having acredit card What is the annual fee for this credit card? $20
  • 30. Transcation Fees This section discloses any transaction fees for the card, which can include balancetransfer fees, cash advance fees, and foreign transaction fees What is the fee for cash advances for this card? $5 or 3% of the amount of each cash advance (whichever is greater)
  • 31. Penalty Fees This section discloses the penalty fees for the card, which can include late- payment, over-the-limit, and returned payment fees•Late payment fee is chargedwhen a cardholder does notmake the minimum monthlypayment by the due date•Over-the-limit fee is chargedif the account balance goesover the set credit limit Does this card have an over-the limit fee? Yes, the over-the-limit fee is $29.
  • 32. How we calculate your balanceCredit card companies can use one of several methods to calculate the outstandingbalance on a credit card. The method used is disclosed in this sectionWhat method is used to calculate the balance on this card? Average daily balance (including new purchases)
  • 33. Loss of Introductory APR If the card has an introductory rate, this area will list how the lowerintroductory rate can be lostHow can the introductory APR be lost on this card?If the cardholder is more than 60 days late in paying the bill What APR will the cardholder be charged if the introductory rate is lost? The Penalty APR of 28.99%
  • 34. 1.4.1.G1 Credit Card Chaos• The educator will identify terms associated with a credit card offer• Identify which term is true on your provided credit card offer and move to that poster• In a small group, define the term on the poster• As a class, discuss which credit card characteristic is better for a consumer and why © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 35. 1.4.1.G1 Credit Card Chaos• Fixed-rate APR for Purchases vs. Variable-rate APR for Purchases• Introductory Rate vs. No Introductory Rate• APR for Purchases Greater than or Equal to 15% vs. APR for Purchases Less than 15%• No Minimum Interest Charge vs Minimum Interest Charge• Annual Fee vs. No Annual Fee• Balance Transfer Fee vs. No Balance Transfer Fee• Late Payment Fees vs. No Late Payment Fees © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 36. 1.4.1.G1 Credit Card Benefits• Research benefits that may be received from the card – Cash rebates – Warranties for items purchased with the card – Travel accident insurance – Frequent flyer miles• Make sure to know all terms and conditions of card benefits• Cards that offer benefits may charge fees or higher interest rates © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 37. 1.4.1.G1 Receiving a Credit Card1. Compare credit card offers and determine which card to apply for2. Complete a credit application – A form requesting information about a person’s ability to repay and the applicant’s age – Can be completed through the mail, the internet or over the phone © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 38. 1.4.1.G1 Receiving a Credit Card3. Lenders conduct a credit investigation – A comparison of information on credit application to information on a credit report4. Applicants may or may not be approved for the card they apply for – Approval depends on the applicants credit history © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 39. 1.4.1.G1 Pre-Approved Credit Card Applications• Credit card companies send pre-approved credit card applications in the mail – If an individual is pre-approved for that particular card, they have passed the initial credit check © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 40. 1.4.1.G1 Credit Card Statements• Credit card statements outline important information about the card• The 2009 CARD Act required credit card companies to include specific information about a card account in the statement Andrew’s Credit Card Statement Please help Andrew interpret his credit card statement. © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 41. Summary of Account ActivityThis section includes payments, credits, purchases, balance transfers, cash advances, fees, interest charges, amounts pastdue, the new balance, available credit, and the last day of the billing period How much did Andrew charge in new purchases during this credit card billing cycle? $529.57
  • 42. Payment InformationThis section includes the total new balance, the minimumpayment amount, and the date payment is dueWhat is Andrew’s minimum payment due for this billing cycle? $53.00
  • 43. Late Payment Warning This section states any additional fees and the higherinterest rate that may be charged if a payment is late How much is Andrew’s late payment fee? $35
  • 44. Minimum Payment Warning This section includes anestimate of how long it can take to pay off a credit card balanceif only the minimum payment is made each month, and an estimate of the total amount paid, including interest, if the bill is paid in three years(assuming no additional charges are made) How long will it take Andrew to pay off the balance of his credit card if he only pays the minimum payment? 10 years
  • 45. Notice of Changes to Your Interest Rates If a cardholder triggers the Penalty APR, the credit cardissuer must notify them on theirstatement that their rates will be increasing Has Andrew triggered the Penalty APR? Yes, he will pay 28.99% on all transactions made after 4/9/12.
  • 46. Important Changes to Your Account TermsIn this section of the statement,cardholders must be notified of any raise in rates or fees or anyother significant changes to the account Other than implementation of the Penalty APR, will there be any other changes to Andrew’s account terms? Yes, his APR for Purchases is increasing to 16.99%.
  • 47. TransactionsThis section includes a list of all the transactions that haveoccurred since the last statement (purchases, payments, credits, cash advances, and balance transfers). This section should be carefully reviewed by thecardholder to ensure there are no unauthorized charges or errorsHow much did Andrew charge on his credit card to Store #1? $529.57
  • 48. Fees and Interest ChargedCredit card issuers must list the fees and interest charges separately on the monthlystatement. Interest charges mustbe listed by type of transaction Did Andrew pay a late fee? Yes, he paid $35.00 for a late fee.
  • 49. Year-to-Date TotalsThe total amount paid in fees and interest charges for thecurrent year must be shown on the statementWhat is the total amount of interestAndrew has paid in the year 2012? $18.27
  • 50. Interest Charge CalculationThis section includes a summary of the interest rates on the different types of transactions,account balances, the amount ofeach, and the interest charged for each type of transaction What interest rate is Andrew paying on cash advances? 21.99%
  • 51. 1.4.1.G1 Cardholder Protections & Rights Truth in Lending Act Limits liability for unauthorized credit card charges to $50.00 per card Must write a letter within 60 days of the first bill containing the error If a credit card number is used fraudulently but the carditself was not used, the individual has no personal liability © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 52. 1.4.1.G1 Cardholder Protections & Rights 2009 CARD Act– To receive a credit card, consumers must be 21 years of age or older • Consumers under 21 have to either have a co-signer or show documentation of sufficient income to make payments • If someone agrees to be a co-signer on an account, they are equally responsible for the loan– Interest rates on existing balances generally can’t be raised unless a cardholder is 60 days or more past due © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 53. 1.4.1.G1 Cardholder Protections & Rights 2009 CARD Act– Must be notified of any significant changes in rates and fees at least 45 days before the changes take effect • Any changes made to an account can only apply to future transactions (new charges) • Have the option of closing the account before the changes go into effect– Cardholders now have to “opt-in” to allowing transactions that take them over their credit limit © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 54. 1.4.1.G1 Cardholder Protections & Rights 2009 CARD Act– Credit card issuers are required to send a monthly statement at least 21 days before a credit card payment is due– Credit card payment due dates must be consistent month to month © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 55. 1.4.1.G1 Cardholder Protections & Rights 2009 CARD Act– Credit card companies cannot increase rates for the first 12 months after an account is open unless: • The card has a variable interest rate • The cardholder is more than 60 days late in paying their bill • The card has an introductory rate (the introductory rate must be in place for at least 6 months and then the rate can increase) © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 56. 1.4.1.G1 Cardholder Protections & Rights 2009 CARD Act– Some set-up and maintenance fees are charged before the card is used– This may reduce the amount of credit initially available • These non-penalty fees cannot exceed 25% of the initial credit limit • For example, if a card has a credit limit of $1,000 the total fees for the first year (not including penalty fees) cannot exceed $250 © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 57. 1.4.1.G1 Credit Card Safety Tips Do not leave cards Close unwanted Sign card with a lying around, and accounts by writingsignature and “Please report lost or stolen and phone, then cut see ID” cards promptly up the card Do not give out Keep a list of all cards, Shred all pre-approved account numbers account numbers, and credit card offers, unless making a phone lists separate applications, or purchase from cards solicitations © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 58. 1.4.1.G1 Online Shopping Safety Tips1. Use a temporary credit card number – This is a one-time use only number – A set amount will be charged to your credit card – Then a number will be given to you to do your shopping2. Use a credit card rather than a debit card – Fair Credit Billing Act © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 59. 1.4.1.G1 Fair Credit Billing Act• Helps to protect consumers while using a credit card to make purchases• Allows the consumer to not pay for a product or service for which the consumer has a complaint• If products are not delivered or if it is not what the consumer requested, any amount of money that was credited to the card above the $50.00 fee that consumers are responsible for will be issued back• Debit cards do not have the same protection © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 60. 1.4.1.G1 Summary A credit card is pre-approved credit which can be used for the purchase of goods and services now and payment of them later To avoid paying interest on a credit card, pay the balance in full every month A credit card can have a positive or a negative impact on an individual’s credit history © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
  • 61. 1.4.1.G1 Summary Credit card companies are required to disclose the terms and fees of a credit card in the Schumer’s box Credit card statements outline important information about a credit card and should be checked carefully for errors Consumers have many protections and rights in regards to credit card use © Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona