Unit 3 Payment, Interest Rates, & Credit Cards Copyright 2007 Thomson South-Western

Key Terms Credit Annual fee Credit card Cash advance Credit limit Charge Interest rate Payment due date Outstanding balance Finance Charge Grace period Late fee Annual fee Cash advance Cash advance limit New purchases/ charges Previous payments Daily finance charge Annual percentage rate Minimum payment Average daily balance Slide 2

What is Credit? Credit The ability to make purchases or borrow money with the agreement to pay it back later. Repayment usually includes paying extra money, called interest You are granted credit so you can buy something now and pay for it in the future The actual process of borrowing money is called “financing” Slide 3

INSTALLMENT PAYMENT PLAN Sources of Credit Service credit Utilities, Medical, etc (service now, pay later) Bank credit cards [MOST COMMON] Revolving credit accounts (Read top of page 199) Store accounts Installment credit plans (Monthly Payment plan) INSTALLMENT PAYMENT PLAN Initial Balance $800.00 Monthly Payment (36 mo) $28.92 Total Payments Amount $1,041.19 Interest Paid $241.19 7-2 Sources and Benefits of Credit Slide 4

Sources of Credit Charge cards No Interest! (Yay!) No service fee (Huzzah!) Large Annual Fee (BOO!) Loans Installment loan Single-payment loan Collateral Cosigner Don’t abuse credit, or else you’ll be poor and have no furniture like me. *SIGH* Lines of credit 7-2 Sources and Benefits of Credit Slide 5

Benefits of Credit Fast, convenient way to make purchases and give rewards Increased spending power Records Proof of purchase Help with resolving disputes with merchants Protection against risks Fraudulent use of credit cards Settlement for damaged goods or disputes 7-2 Sources and Benefits of Credit Slide 6

Focus on... Credit in America Credit is easy to get for many people Credit can be used for online purchases Credit card payments can be taken over the phone. Credit offers and use may pose a security threat Credit use should be managed wisely 7-2 Sources and Benefits of Credit Slide 7

Shopping for a credit card Costs Annual Percentage Rate (APR) Grace period Annual fees Transaction fees Balancing computation for the finance charge Features Credit limit How widely the card is accepted What services and features are available Slide 8

Choosing a credit card Getting the Best Deal Name of credit card company/Type of card? Visa? Amex, etc.?   Link to offer Type of card (Bonus/ Reward, Cash Back, Low Interest, etc.) Intro APR/interest Regular APR Annual Fee (If yes, list amount) Type of Credit needed (Excellent, Good, Fair) Minimum age to sign up? Phone number Perks of the card. List at least 3 1 2 3 http://www.csgnetwork.com/creditcardmincalc.html and click on link or go to Char’s compare creditcard.com or cardratings.com Ed’s activity – Closure – review page 24 in book Slide 9

Debit cards vs. Credit cards Debit cards give you access to your own money A credit card is a separate supply of money. When you use a credit card, you are simply taking a loan from the company that issued the card. Your purchases are then totaled and sent to you in a monthly bill or statement. In most cases, if you pay your bill in full and on time, interest will not be changed. How does a credit card work? How do credit card companies make money? Do some cards allow you to take cash out? Credit Limit – What is it? Do not go over. What are some credit card features? APR/Interest, annual fee, bonus/rewards How to sign up and use the card. How to protect your credit card – keeping information private, lost card. Credit Score consideration. Slide 10

Advantages and Disadvantages of using credit Ability to buy needed items now Don’t have to carry cash Creates a record of purchases More convenient than writing checks Consolidates bills into one payment Disadvantages Interest (higher cost of items) May require additional fees Financial difficulties may arise if one loses track of how much has been spent each month Increased impulse buying Slide 11

Technology Corner Applying for Credit Online Consumers can apply for many types of loans online Applications require sensitive personal data Do not respond to credit offers sent to you online Apply only at sites that you know are for a reputable company 7-3 Costs of Credit Slide 12

Ethics Credit Card Fraud Take steps to help prevent credit card fraud Guard your cards and account numbers Carry only one or two cards at a time Do not lend your cards to others Cut cards and receipts into pieces before discarding them Check your Credit Card Statements carefully Report lost or stolen cards right away 7-3 Costs of Credit Slide 13

Credit card application Slide 14

Reading a Credit Card statement teens – lesson 8 - slide 8-F

Credit Card Statements pg. 18-19 Payment due date: the date by which the credit card company expects to receive your payment. Many credit card companies waive finance charges if the outstanding balance is fully paid by the payment due date. Outstanding balance: the amount of money you still need to repay Finance charge: the interest payment you owe on the credit card balance Slide 16

Credit Card Statements Slide 17

Checking Credit Statements Compare the charges on the statement with sales receipts and purchase records Verify that payments and credits have been recorded Note fees charged Verify the interest amount and the new balance owed Contact the company regarding errors 7-3 Costs of Credit Slide 18

May omit because Ed has a matching column handout that goes along with credit card stmts Slide 19

Credit Costs Fixed rates Variable rates Interest rate is set and does not change each month Can change with written notice Variable rates Can change often without prior notice Tend to rise fast when interest rates in general go up Possibly skip this slide 7-3 Costs of Credit Slide 20

How much can you afford? 20-10 rule Never borrow more than 20% of your yearly net income If you earn $400 a month after taxes, then your net income in one year is 12x400=4800 So you should never have more than 960 of debt outstanding Slide 21

How much can you afford? 20-10 rule continued Monthly payments shouldn’t exceed 10% of your monthly net income If your take-home pay is $400 a month 400x 10% =40 Your total monthly debt payments shouldn’t total more than $40 per month Slide 22

reading a credit report teens – lesson 7 - slide 7-F

Building a Credit History Establish a steady work record Pay all bills promptly Open a checking account and don’t bounce checks Open a savings account and make regular deposits Apply for a local store credit card and make monthly payments Apply for a small loan using your savings account as collateral. Get a co-signor on a loan and pay back the loan as agreed. Slide 24

3 C’s of Credit When a prospective creditor evaluates a credit application, they look for the three C’s Character Capital Capacity Slide 25

reading a credit report teens – lesson 7 - slide 7-F

4 Major Categories of Information That Appear On a Credit Report Identification and employment data Payment history Inquiries Public record information Slide 27

Ways to maintain a good credit rating Don’t borrow more than you can afford Don’t overdraw your checking account Pay your bills on time Limit the number of credit cards Review your credit once a year Correct any mistakes immediately Slide 28

Your responsibilities Conclusion Borrow only what you can repay Read and understand the credit contract Pay debts promptly Notify creditor if you cannot meet payments Report lost or stolen credit cards promptly Never give your card number over the phone unless you initiated the call or are certain of the caller’s identity Slide 29

Methods of Computing Interest Minimum payments How much you must pay each month on a credit account DON’T ONLY PAY THE MINIMUM. (Nummyheads!) Penalties and fees Late Penalty, over the limit fees, termination penalties Minimum payments can be high on an expensive purchase, such as a car. 7-3 Costs of Credit Slide 30

Special Rates Credit card interest rates are given as annual percentage rates Creditors must clearly state the rate of interest on all credit offers Low introductory interest rates often last only a few months 7-3 Costs of Credit Slide 31

Credit Cards Your beginning balance on 12/1 is $700 You make the following transactions: 12/5 – Purchase $500 12/13 – Purchase $40 12/28 – Purchase $100 12/31 – Payment $400 What is your new balance on 12/31? 700+500+40+100-400 = $940

Credit Cards When you receive your credit card bill, you want to calculate the following: Minimum monthly payment at a rate of 2% Interest payment for the month at an APR of 12% (APR –means it is for the year) What is the minimum monthly payment? $940 x 0.02 = $18.80 WILL ASK YOU TO PAY THIS OR $10 WHICHEVER IS GEATER What is the interest payment for the month? 12% / 12 = 1% (divide APR by 12 to get montlhy) $940 x .01 = $9.40

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Themint.org www.themint.org Teens Owing I paid how much Debt calculator Slide 39

Conclusion www.spendster.org www.themint.org Teens Owing Credit card iq quiz Slide 40