Credit cards allow users to borrow money from banks at interest. If the full balance isn't paid each month, interest is charged on the remaining amount, increasing the total owed over time. For example, if someone owes $1,000 but only pays $100, at 10% interest they would owe $990 for the next month. Paying only the minimum monthly payment results in paying interest for years and ultimately paying much more than originally borrowed. Debit cards differ in that the money comes directly from the user's bank account, so there is no interest charged and it does not affect the user's credit score.

1. Credit Cards

2. Credit Cards and Debt
✤ Consider: If offered an investment
option that would give you a 15 to 20%
return on your money would you take it?
✤ Well if your credit card is charging you
20% interest on borrowed money then
paying off the balance of your card
guarantees substantial savings. It is just
as good as making a 20% return.
✤ Likewise, not paying off your balance is
taking a 20% loss

3. What is a credit card?
• A credit account is a pre-approved loan for
a certain amount of money each month.
• You are borrowing money from the bank,
and the bank charges you interest for
using their money.

4. Interest:
Every time you don’t pay the
full amount that you owe
(each month), the bank
charges you extra money.
This charge is usually
anything from 1% to 40% of
what you owe the bank.
This money is called
interest, and it gets added
to next month’s bill.

5. Let’s say you owe $1,000 on your credit card bill,
but you only want to pay $100 of that bill right
now (you’ll pay the rest later). You now owe
$900.
But wait, the credit card company will charge you
10% interest on what you still owe. 10% of $900
= $90. So after interest, you now owe $990 for
this month.
That means even though you paid $100 already,
you still owe almost the entire $1,000 because of
interest!

6. This is a credit card bill for one month:

7. If you pay your entire balance each month,
you won’t pay ANY interest!

8. If you pay your entire balance each month,
you won’t pay ANY interest!
Most people don’t!

9. How much you spent on your
credit card in one month.
The amount of interest the bank
is charging you for using their
money.
The minimum monthly payment
The minimum percent of your bill
you must pay per month.
How long it will take you to pay
off ONE MONTH of credit card
spending if you pay the minimum
amount.
What you will pay in interest over
that period of time.
How much you end up paying
total by the end!

10. Let’s look at this one more time…

11. Example of Credit Debt: Read Only
John and Jane both have $2,000 debt on their credit cards, which require a minimum payment
of 3%, or $10, whichever is higher. Both are strapped for cash, but Jane manages to pay an extra
$10 on top of her minimum monthly payments. John pays only the minimum.
Each month John and Jane are charged a 20% annual interest on their cards' outstanding
balances. So, when John and Jane make payments, part of those payments go to paying
interest and part go to the principal.
Here is the breakdown of the numbers for the first month of John's credit card debt:
Principal: $2,000
Interest: $33.33 ($2,000 x (1+20%/12))
Payment: $60 (3% of remaining balance)
Principal Repayment: $26.67
Remaining Balance: $1,973.33 ($2,000 - $26.67)
These calculations are done every month until the credit card debt is paid off.
In the end, John pays $4,240 in total over 15 years to absolve the $2,000 in credit
card debt. The interest that John pays over the 15 years totals $2,240, higher than
the original credit card debt.

12. ✤ Because Jane paid an
extra $10 a month, she
pays a total $3,276 over
seven years to absolve the
$2,000 in credit card
debt. Jane pays a total
$1,276 in interest.
✤ The extra $10 a month
saves Jane almost $1,000
and cuts her repayment
period by more than seven
years
Example of Credit Debt: Read Only

13. Students and Credit Cards
✤ A 2009 Sallie Mae study found that 92% of college students
who owned credit cards put textbooks, supplies and other
school expenses on their cards.
✤ A full 1/3 placed tuition on a card
✤ For many students making minimum payments seems easy
enough but new card users are by far the most frequent to
fall behind on payments.
✤ Low or bad credit can follow you for years, hurting your
chances to rent an apartment, buy a car, and receive loans
for school and housing.

14. Your credit score is affected by
how frequently you use your
card, whether you pay the full
balance, whether you pay on
time, etc.
Credit scores are used later on to
determine your reliability as a
borrower.
It’s a permanent record.

15. You will need a
strong credit score
to:
-Buy a house
-Rent a house
-Buy a car
-Get a loan
-Get another
credit card
-Get a job

16. If you can’t pay your
debts, you declare
bankruptcy. Your credit
score is ruined for ten
years.
But the bank may also
have to close if many of
their borrowers declare
bankruptcy!
This “credit disaster”
helped lead to recession in
2008.

17. Debit Cards are different.
• With debit, the money you spend comes
directly out of your checking account
immediately.
– If you don’t have the money, your card is denied.
You must pay now, not later!
– The bank is not lending you any money, so there is
no interest! You only spend what you have.
– The bank is not hurt if you run out of money,
because this isn’t a loan.
– However, debit cards do not affect your credit
score.