Using Credit Cards SS.8.FL.4.3 Examine the fact that borrowers who use credit cards for purchases and who do not pay the full balance when it is due pay much higher costs for their purchases because interest is charged monthly. Explain how a credit card user can avoid interest charges by paying the entire balance within the grace period specked by the financial intuition. Gr. 5 Financial Literacy

Image Source: Grade 5 Financial Literacy SS.8.FL.4.3 What are the benefits and pitfalls of using credit cards? What can you do to develop and maintain creditworthiness? Essential Questions

What information can be gained by analyzing the cartoon? (LAFS.5.RI.3.7) Image Source: Grade 5 Financial Literacy SS.8.FL.4.3

Grade 5 Financial Literacy SS.8.FL.4.1 What is credit? Credit is the ability to obtain goods or services before payment, based on the trust that payment will be made in the future. Thanks to credit, you can walk out of the store with the big screen TV you wanted now and pay for it later – usually in small monthly installments. Borrowing money is not free. Each month as you are enjoying your big screen TV, you will be billed for a portion of the total amount borrowed plus interest. Keep in mind that the interest fees accumulate each day, therefore the longer you take to repay the balance on your credit card, the more money you will end up giving the credit card company. Miss a payment and you will be charged penalties which could result in higher interest rates or the decline of any future transactions.

Grade 5 Financial Literacy SS.8.FL.4.1 Cash vs. Credit They help raise your credit score, such as the FICO credit score, when you pay balances down by the due date. This improved credit history paves the way for lower rates borrowing rates on other loans, including a mortgage. Read more: Credit Cards: Pros And Cons | Investopedia com/university/credit-cards/credit- cards6.asp#ixzz47MbchUq5 Follow us: Investopedia on FacebookFICO credit scoreCredit Cards: Pros And Cons | Investopediahttp:// com/university/credit-cards/credit- cards6.asp#ixzz47MbchUq5Investopedia on Facebook Buy now, pay now.Buy now, pay later. Unsafe to carry large amounts. CREDITCASH Safe and convenient to use. You can spend up to your credit limit at any given time. Responsible use of credit helps increase spending power – building your credit for larger purchases such as a home or car. Spending limited to the amount you are carrying. Enables you to make large purchases without having to wait until you have enough money to pay for it. Have to wait until you have saved enough money to make large purchases.

Grade 5 Financial Literacy SS.8.FL.4.1 Credit Limit Just because you have a credit card does not mean you can go on a shopping spree and spend as much as you want. Though credit cards provide you with revolving loans you can use on an ongoing basis, they have spending limits. Your credit limit is how much you are allowed to spend, the maximum amount of money the credit card company is willing to loan you at a time. For example if you have a $500 spending limit and you currently owe $400, you can only borrow another $100 until you have paid down your balance. You want to try to avoid spending up to your credit limit as it negatively impacts your credit score. A good rule of thumb is to owe no more than half your credit limit. Which of the two examples below is following this rule? Sample A Credit Limit: $1000 Currently owes $800 Sample B Credit Limit: $500 Currently owes $230

Grade 5 Financial Literacy SS.8.FL.4.1 Your Credit Report Your credit history tells banks a lot about your creditworthiness. Is this your first credit card? Do you make your payments on time? How much do you pay? What kinds of purchases are you making? Are you spending too much? When applying for credit, credit card companies will look at your credit report. A credit report is like a report card. You are assigned a number based on your credit history, the higher your credit score the more money you will be eligible to borrow at a lower interest rate. What do you think will happen to your credit worthiness if you decide to use your credit card and do not pay your debt?

Grade 5 Financial Literacy SS.8.FL.4.1 How do credit card companies know you are trustworthy of having credit? When it comes to credit cards big brother is watching your every move and keeping score on your credit report. Miss a payment, pay too little, owe too much, and having too many credit inquiries can negatively impact your credit score. The day you want to apply for a credit card or other loan, the merchant will pull up your credit report to decide whether to approve or deny your application. Your credit report will also be used to determine how much interest to charge you.

Grade 5 Financial Literacy SS.8.FL.4.1 Your Credit Score They allow you to purchase items and pay them off in monthly installments. The pie graph shows elements that contribute to your credit score. According to the graph, what two factors have the greatest impact on your credit score and overall creditworthiness? What message does this send credit card users? (LAFS.4.RI.3.7)

Grade 5 Financial Literacy SS.8.FL.4.1 Credit Card Offers Understanding credit card offers will help you decide which credit card is best for you. Remember, borrowing money comes at a price. with every swipe you are committing yourself to repay the amount borrowed plus interest. Interest is a fee credit card companies charge for lending money. Interest rates can range from 10-25%, your interest rate is dependent on they type of credit card and your creditworthiness. Here are what sets credit cards apart: 1. Interest Rates: Rewards: Lower rate cards typically offer fewer rewards than other cards. In fact, some of the best cash back or travel cards available do not come with the lowest interest rates. And this makes sense. The money card issuers give up by offering rich rewards, they get back by charging higher interest rates. But if you are not paying any interest, Interest RatesRewards Introductory Interest rates Annual Fees When it comes to borrowing money, the lower the interest rate the better. But in the case of credit cards, that’s not always true. In fact, most credit cards have a grace period that if you pay off your balance no interest is charged. Credit cards come with a variety of rewards, ranging from cash back to travel rewards to gas rebates. Credit cards with temporary zero or lowered interest rates. These credit cards are increasingly hard to find. Every credit card charges fees of some kind. Some of the cards, particularly American Express and many travel reward cards, charge an annual fee. Whether the fee is worth paying depends on why you want the card. Some of the best travel rewards cards charge a fee, but the rewards make the card worth the price of admission.

It’s also important to understand that although credit card companies advertise interest as APR – interest is not charged annually, it is actually charged daily. When applying for a credit card be sure to look at your daily periodic rate which is the APR divided by 365. (Note that some banks use 360.) Grade 5 Financial Literacy SS.8.FL.4.1 Understanding INTEREST is INTERESTING! You are not alone if you find understanding how credit card companies determine your interest each month. Most credit cards advertise an “annual percentage rate” or APR. However, credit cards charge interest daily. Some of your APR is fixed and some varies from month to month as it is based on national rates or other economic factors.

Grade 5 Financial Literacy SS.8.FL.4.1 What do you mean I’m charged interest on interest? Did you know that credit cards charge have compounding interest? The term “compound interest” means that any interest charges are added to the principal (which is the amount you originally borrowed) and you will continue to be charged interest on the interest you now owe. For example, if you have a $100 debt and it accrues 10% interest every month, then the first month you will be charged ten dollars (100 x 0.10). With compound interest, that ten dollars is added to your original debt, so now you have $110 of debt. The second month you are again charged 10% interest, which this time comes out to eleven dollars (110 x 0.10), so now you have $121 of debt. You can see how it begins to add up quickly! Month 1Month 2Month 3Month 4Month 5 Debt $100$110$121$133$146 Interest 100 x.10=110 x.10=121 x.10=133 x.10=146 x.10= $10$11$12$13$14.6 Total Debt $110$121$133$146$160.61

Grade 5 Financial Literacy SS.8.FL.4.1 You must pay more than the minimum required payment to pay off the balance, otherwise you’ll be paying ‘til INFINITY AND BEYOND! Understanding your Bill A.The number associated with your account. B. The address where the bill is sent. Most bills can now be received via and paid electronically. C. Your spending limit D. Penalties for late payments E. Summary of the month’s charges F-H. Amount you owe now and due date K. Your transactions – keep an eye for suspicious activity.

Grade 5 Financial Literacy SS.8.FL.4.1 Don’t despair! Understanding how credit cards work is the first step in learning how to use them wisely. 1. Pay off the entire balance within your billing cycle to avoid interest fees. Wise credit card holders… 2. Read the fine print. They understand how interest rates impact the total cost of their purchase. 3. Limit their credit purchases, avoid impulse buys, and are careful not to overspend. 4. Keep an eye on their spending so that they do not max out their credit cards. 5. Pay on time and always send more than the credit card minimum payment.

Grade 5 Financial Literacy SS.8.FL.4.1 Ready to play Credit Card Bingo? Write a word from the list below in each square of your BINGO card. Don’t forget to write FREE in the center square and write your words in random order. interestcredit reportrewardssuspicious APRgrace periodcompoundingdeclined DPRcredit limitcashdue date balanceinstallmentsannual feesminimum statementtransactionintroductory offerscreditworthiness credit scorecreditlate feesoverspending

What information can be gained by analyzing the cartoon? (LAFS.5.RI.3.7) Image Source: Grade 5 Financial Literacy SS.8.FL.4.3

Sources & Supplemental Resources Credit Card Facts How to Calculate Credit Card Interest Understanding Credit Card Offers Grade 5 Financial Literacy SS.8.FL.4.3