Credit In your opinion, do consumers spend more per month on average when they use a credit card or cash?

© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit Advanced 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 G1 Types of Credit Single-Payment Credit –Consumer agrees to pay the full balance owed each month –Interest is usually not charged –Most do not have credit limits –Examples: Utilities, American Express Card, Phone Bills.

© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit Advanced 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 G1 Types of Credit Closed - End Credit –A one time loan for a specific reason. –Specific number of payments, always the same amount each month. –The amount of the loan is agreed upon during the application process. –Also called Installment Credit –Examples: Mortgage, Car Loans.

© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit Advanced 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 G1 Types of Credit Open - End Credit –Credit is extended in advance, and can be used for a variety of things. –Amount of payment will be different each month depending upon the amount that is owed. –The amount of the loan can be increased or decreased depending upon the responsibility of the card holder. –Also called revolving credit. –Examples: Credit Cards

© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit Advanced 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 G1 Credit vs. Debit cards CharacteristicsCredit CardDebit Card What is it?Pre-approved creditA card (looks similar to a credit card) that is linked to an individual’s bank account Payment processCharged to an individual’s account and they may pay later Money is immediately deducted from the bank Is interest charged? Yes – because money is being borrowed from the credit card company No

© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit Advanced 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 G1 Why use a credit card? Advantages –Convenient –Useful for emergencies –Often required to hold a reservation –Purchase ‘big ticket’ items earlier –Easy form of debt consolidation –Protection against rip-offs and fraud –Establish a good credit rating What are advantages to using a credit card?

© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit Advanced 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 G1 Why use a credit card? Disadvantages –Interest is costly –Additional fees are common –Tempting to overspend –Privacy is an increasing concern –Personally responsible for lost/stolen cards –Identity theft easier –Can lose financial freedom from overspending What are disadvantages to using a credit card?

© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit Advanced 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 G1 Interest Interest is referred to as the annual percentage rate (APR) The price of borrowing money to make a purchase and paying it later is interest Credit is often compounding interest which is interest added upon interest each month based upon the amount charged The interest rate varies greatly between credit cards

© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit Advanced 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 G1 Federal Truth in Lending Act The Federal Truth in Lending Act requires card issuers to display the costs of a credit card in an easy to read box format on most applications and solicitations Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual FeesTransaction Fees for Cash Advances Late Payment Fees 19.9% Not less than 25 days $.50 when a finance charge at a periodic rate is charged Average daily balance method (including new purchases) $20 per year 2% with a minimum fee of $3 $29

© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit Advanced 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 G1 Annual percentage rate Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual FeesTransaction Fees for Cash Advances Late Payment Fees 19.9% Not less than 25 days $.50 when a finance charge at a periodic rate is charged Average daily balance method (including new purchases) $20 per year 2% with a minimum fee of $3 $29 Annual percentage rate (APR) – Interest rate charged for amount borrowed in terms of per dollar per year The lower the interest rate, the better

© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit Advanced 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 G1 Grace period Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual FeesTransaction Fees for Cash Advances Late Payment Fees 19.9% Not less than 25 days $.50 when a finance charge at a periodic rate is charged Average daily balance method (including new purchases) $20 per year 2% with a minimum fee of $3 $29 Grace Period – Amount of time allowed before finance charges are applied

© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit Advanced 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 G1 Minimum finance charge Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual FeesTransaction Fees for Cash Advances Late Payment Fees 19.9% Not less than 25 days $.50 when a finance charge at a periodic rate is charged Average daily balance method (including new purchases) $20 per year 2% with a minimum fee of $3 $29 Minimum finance charge – Minimum amount charged for card use

© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit Advanced 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 G1 Balance calculation method Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual FeesTransaction Fees for Cash Advances Late Payment Fees 19.9% Not less than 25 days $.50 when a finance charge at a periodic rate is charged Average daily balance method (including new purchases) $20 per year 2% with a minimum fee of $3 $29 Balance calculation method for purchases- Method used to determine balance for finance charges

© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit Advanced 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 G1 Annual fees Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual FeesTransaction Fees for Cash Advances Late Payment Fees 19.9% Not less than 25 days $.50 when a finance charge at a periodic rate is charged Average daily balance method (including new purchases) $20 per year 2% with a minimum fee of $3 $29 Annual fees- Yearly charge for credit card ownership

© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit Advanced 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 G1 Cash advances Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual FeesTransaction Fees for Cash Advances Late Payment Fees 19.9% Not less than 25 days $.50 when a finance charge at a periodic rate is charged Average daily balance method (including new purchases) $20 per year 2% with a minimum fee of $3 $29 Transaction fees for cash advances – cash withdrawal fees

© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit Advanced 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 G1 Late payment fees Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual FeesTransaction Fees for Cash Advances Late Payment Fees 19.9% Not less than 25 days $.50 when a finance charge at a periodic rate is charged Average daily balance method (including new purchases) $20 per year 2% with a minimum fee of $3 $29 Late payment fees – Penalty fee for payments not made by the due date

© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit Advanced 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 G1 Safety tips Sign card with a signature and “Please See ID” Do not leave cards lying around Close unused accounts in writing and by phone, then cut up the card Do not give out account numbers unless making purchases Keep a list of all cards, account numbers, and phone lists separate from cards Report lost or stolen cards promptly

© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit Advanced 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 G1 Fair Credit Billing Act Created in Helps to protect consumers while using a credit card to make purchases It allows the consumer to not pay for a product or service for which the consumer has a complaint Billing disputes are covered within the Fair Credit Billing Act for credit cards If products are not delivered or if it is not what they 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 –Making credit cards a safer form of payment for online purchases

© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit Advanced 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 G1 Other Legislation for Credit Truth in Lending Act (1968) –Makes sure consumers are fully informed about costs and conditions of borrowing. Fair Credit Reporting Act (1970) –Protects the privacy and accuracy in a credit check. Equal Opportunity Act (1974) –Credit cannot be denied based on discrimination Fair Debt Collection Practices Act (1977) - Prevents abuse by professional debt collectors. (does not apply to banks or other businesses collecting their own accounts)

© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit Advanced 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 G1 The 4 C’s of Credit Collateral –What do you have of value that a lender can take if you do not repay the loan as promised? Capacity –Do you have the financial ability to repay a loan with your current income? –Lenders look at income and employment history. Capital –Is the lender fully protected if you cannot repay the loan? Character –Are you responsible? Do you have good credit history of paying your bills on time?

© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit Advanced 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 G1 The Rule How Do You Know if You Have Too Much Debt? 70% of your income should be spent on living expenses (rent, food, gas, utilities, etc) 20% of your income should be for investing and saving for financial goals. 10% of your income should be spent on debt repayments for items such as credit cards, car and school loans.