1. © Family Economics & Financial Education –Updated April 2009– 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 How are Credit Scores determined? Credit cards may influence each component of how an individual’s credit score is calculated

2. © Family Economics & Financial Education –Updated April 2009– 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 What is a good FICO credit score? FICO scores range from 300 – 850. The higher score is better. 750-850 (excellent) 660-749 (good) 620-659 (fair) 350-619 (poor)

3. © Family Economics & Financial Education –Updated April 2009– 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 The higher your credit score, the lower your payments for a car Purchasing a $20,000 car with a 3 yr. loan: Cr. ScoreAPRMo. Paym. 720-8506.790%$616 690-7197.672%$624 660-6899.171%$638 620-65910.771%$653 590-61914.120%$685 500-58915.127%$695 www.myfico.com (if you have a low credit score, you probably cannot get a loan)www.myfico.com

4. © Family Economics & Financial Education –Updated April 2009– 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 The higher your score, the less you pay on a home loan Consider a couple who is looking to buy their first house. Let's say they want a thirty-year mortgage loan and their FICO credit scores are 720. They could qualify for a mortgage with a low 5% interest rate. But if their scores are 580, they might pay 8% or more -- that's at least 3 full percentage points more in interest. On a $100,000 mortgage loan, that 3 point difference will cost them $2,400 dollars a year, adding up to $72,000 dollars more over the loan's 30-year lifetime.

5. © Family Economics & Financial Education –Updated April 2009– 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 The higher your score, the less you pay on a home loan For example, on a $216,000 30-year, fixed-rate mortgage: credit score interest rate monthly payment 760 – 8505.26%$1,194 700 – 7595.48%$1,223 680 – 6995.66%$1,248 660 – 6795.87%$1,277 640 – 6596.3%$1,337 620 – 6396.85%$1,415 As you can see in this example, a person with a credit score of 760 or better will pay $221 less per month for a $216,000 30-year, fixed-rate mortgage than a person with a FICO® score of 620 – that’s a savings of $2,652 per year.

6. © Family Economics & Financial Education –Updated April 2009– 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 Credit scores Low credit scores will cost individuals more money long-term. –This table is based upon a thirty-year fixed mortgage rate on a $300,000 loan. –What is the difference in real dollars? Low vs. High Score FICO ScoreInterest RateMonthly Payment 30 Year Amount 7605.9%$1,787$643,320 6507.2%$2,047$736,920 5909.3%$2,500$900,000

7. © Family Economics & Financial Education –Updated April 2009– 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 Example of how a credit score can move up and down: March 2009

8. © Family Economics & Financial Education –Updated April 2009– 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 February 2010

9. © Family Economics & Financial Education –Updated April 2009– 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. © Family Economics & Financial Education –Updated April 2009– 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 Types of Credit CharacteristicsClose-end Credit (Installment loans) Open-end credit (revolving credit) DefinitionA one-time loanCredit is extended in advance Purpose of the loanSpecified in application May be used for a variety of purposes PaymentsSpecified number of equal payments Vary depending upon amount charged Loan amountAgreed upon during the application process May be increased for responsible consumers ExamplesMortgage, Automobile Loan Credit Card (VISA)

11. Layaway Before the widespread use of credit cards, most stores had layaway plans. The store kept the merchandise until you paid it off. Some stores have started allowing layaway again, and it is becoming more popular.

12. New federal laws for students (2/10): Credit card companies cannot solicit on campus or near campus. Cannot offer students “tangible” items like t-shirts to apply for a card. You cannot have a credit card if you are under age 21 unless you can prove you have a steady income or you have a co-signer. Example: If you are 18 and in the Navy, you may be able to get a credit card after you get a paycheck for a year. Example of a co-signer: a parent signs the card application. If you do not pay, the parent is responsible.

13. © Family Economics & Financial Education –Updated April 2009– 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 Credit card Interest examples Amount charged to credit card APRMinimum Payment Time to pay off the credit card Total amount of interest paid Total paid for credit card balance $2,00018%$50.0062 months$1,077.25$3,077.25 $2,00010%$50.0049 months$443.00$2,443.00 $2,00018%$75.0035 months$573.00$2,573.00

14. © Family Economics & Financial Education –Updated April 2009– 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-H The Cost of Using Credit APR = 24% Minimum Payment of 4% or $12 $300 for an IPod/accessories Finance Charge $149.99 Your IPod REALLY cost $449.99 After you’ve made the last payment, will your iPod still be around??? And it will take 3 years and 8 months to pay off 1

15. © Family Economics & Financial Education –Updated April 2009– 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-G How Long Will It Take? APR = 18% Minimum Payment of 4% or $120 You charge $3,000 for furniture. Finance Charge $1,715.67 Total cost of original $3,000 loan = $4,715.67 After you’ve made the last payment, will you still be using that furniture in 11 years? And it will take nearly 11 YEARS to pay off 1

16. © Family Economics & Financial Education –Updated April 2009– 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 Prime Rate Credit card interest rates are based on the Prime Rate

17. © Family Economics & Financial Education –Updated April 2009– 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 What is a Prime Rate? The Prime Interest Rate is the interest rate charged by banks to their most creditworthy customers. The current Prime Rate is 3.25% Providers of consumer and commercial loan products often use the U.S. Prime Rate as their base lending rate, then add a margin (profit) based primarily on the amount of risk associated with a loan.

18. © Family Economics & Financial Education –Updated April 2009– 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 How is the prime rate calculated? The U.S. Prime Rate is determined by adding 3.00 percentage points to the “federal funds target rate.” For example, if the fed funds target rate is 0.25%, then the U.S. Prime Rate will be 3.25%.

19. © Family Economics & Financial Education –Updated April 2009– 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 What is the Fed Funds Target Rate? It is the interest rate banks charge each other for loans. The federal funds target rate is controlled by a group within the U.S. Federal Reserve system called the Federal Open Market Committee (FOMC). The FOMC holds a monetary policy meeting eight times every year to decide whether to raise, lower or make no changes to the fed funds target rate.

20. © Family Economics & Financial Education –Updated April 2009– 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 Federal Funds Target Rate recent history

21. © Family Economics & Financial Education –Updated April 2009– 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

22. © Family Economics & Financial Education –Updated April 2009– 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 understanding the information on a credit card application The Federal Truth in Lending Act of 1968 required card issuers to display the costs of a credit card in an easy to read format. (among other rules) The Credit Cardholder’s Bill of Rights Act of 2008 refined this law even further by requiring the wording to be more understandable, the print large, and certain information must be in bold and/or larger font.

23. © Family Economics & Financial Education –Updated April 2009– 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 Information you need to know Annual Percentage Rate for Purchases How to Avoid Paying Interest on Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual FeesTransaction Fees for Cash Advances Late Payment Fees _______% Due date will be a minimum of 21 days after the close of each billing cycle. Pay everything during that 21 days and you pay no interest. $______ if the balance is not paid each month. (Typically $.50- 1.50) Average daily balance method (including new transactions) $__ per year or none ____% with a minimum fee of $_____ (Typically 3-5% with a minimum fee of $5-10) $_____ depending on your balance Above is some of the types of information you need to know when applying for a credit card. These are explained further in the next slides.

24. © Family Economics & Financial Education –Updated April 2009– 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 Annual percentage rate Annual Percentage Rate for Purchases How to Avoid Paying Interest on Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual FeesTransaction Fees for Cash Advances Late Payment Fees _______% Annual percentage rate (APR) – Interest rate charged for amount borrowed in terms of per dollar per year. All APR’s for credit cards are based on the Prime Rate. The credit card application will tell you how much is added to the prime rate. Your APR is based on your credit rating (score). The lower the interest rate, the better

25. © Family Economics & Financial Education –Updated April 2009– 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 How to Avoid Paying Interest on Purchases Annual Percentage Rate for Purchases How to Avoid Paying Interest on Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual FeesTransaction Fees for Cash Advances Late Payment Fees Due date will be a minimum of 21 days after the close of each billing cycle. Pay everything during that 21 days and you pay no interest. As long as you pay your entire balance by 5:00 on the day it is due, you will not pay interest on the balance. If the due date is a weekend or holiday, it is due at 5:00 on the next business day.

26. © Family Economics & Financial Education –Updated April 2009– 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 Minimum finance charge Annual Percentage Rate for Purchases How to Avoid Paying Interest on Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual FeesTransaction Fees for Cash Advances Late Payment Fees $______ if the balance is not paid each month. (Typically $.50- 1.50) If you don’t pay off the balance, you pay a finance charge, which is based on the APR and the balance you owe. Minimum finance charge – Minimum amount charged for card use if you don’t pay the entire balance. Card companies make you pay a finance charge even if you have a very low balance.

27. © Family Economics & Financial Education –Updated April 2009– 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 Balance calculation method Annual Percentage Rate for Purchases How to Avoid Paying Interest on Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual FeesTransaction Fees for Cash Advances Late Payment Fees Average daily balance method (including new transactions) Balance calculation method for purchases- Method used to determine balance for finance charges. You will learn how banks calculate Average Daily Balance when we start the assignments.

28. © Family Economics & Financial Education –Updated April 2009– 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 Annual fees Annual Percentage Rate for Purchases How to Avoid Paying Interest on Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual FeesTransaction Fees for Cash Advances Late Payment Fees $__ per year or none Annual fees- Yearly charge for credit card ownership These used to be virtually unheard of, but with the law changes in 2010 many companies are starting to charge annual fees again.

29. © Family Economics & Financial Education –Updated April 2009– 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 Cash advances Annual Percentage Rate for Purchases How to Avoid Paying Interest on Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual FeesInterest Rates and Transaction Fees for Cash Advances Late Payment Fees ____% with a minimum fee of $_____ (Typically 3-5% with a minimum fee of $5-10) What is a Cash Advance? The APR for Cash Advances is higher than the card APR Transaction fees for cash advances – If you choose to withdraw cash using your credit card, there are always extra fees. Typically 3-5% of how much you withdraw.

30. © Family Economics & Financial Education –Updated April 2009– 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 Late payment fees Annual Percentage Rate for Purchases How to Avoid Paying Interest on Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual FeesTransaction Fees for Cash Advances Late Payment Fees $_____ depending on your balance Late payment fees – Penalty fee for payments not made by the due date (even one day late, or paid after 5:00 on the due date) Usually based on your balance, but can be a flat fee. $39 is typical Late payments can affect your credit score.

31. © Family Economics & Financial Education –Updated April 2009– 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 Penalty APR’s Your APR can jump to a “penalty rate” if you: Pay less than the minimum payments Don’t pay the minimum by the due date Make a payment that is returned (bounced check) Penalty rates are typically 27% and up.

32. © Family Economics & Financial Education –Updated April 2009– 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 Credit limits Every card has a credit limit, and it is based on your credit score. For example, someone with very little credit history or a poor credit score may have a credit limit of $250-$500. A person with a good credit score may have a limit of $10,000 or more.

33. © Family Economics & Financial Education –Updated April 2009– 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 Over the limit fees The new credit card law requires the bank to decline your charge if your purchase will put you over your credit limit. You can opt to change that if you choose, but if you go over the limit you pay a fee, usually of $39.

34. © Family Economics & Financial Education –Updated April 2009– 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 Balance Transfers Moving the amount you owe on a credit card to a different credit card is called a balance transfer. –Companies will advertise a lower interest rate for balance transfers. –These are usually introductory rates and will only last for a short time. –Why do credit card companies try to tempt you to transfer balances?

35. © Family Economics & Financial Education –Updated April 2009– 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 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 over the phone unless making purchases with a secure company. Keep a list of all cards, account numbers, and phone lists separate from cards (copy the f/b of cards) Report lost or stolen cards immediately.

36. © Family Economics & Financial Education –Updated April 2009– 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 Fair Credit Billing Act 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

37. © Family Economics & Financial Education –Updated April 2009– 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 Account Statements Formula used to calculate the new balance on your credit card : New Balance = Previous Balance + Finance Charge + New Purchases – Payments – Credits Turn to p. 286, #1 for practice (answers next slide)

38. © Family Economics & Financial Education –Updated April 2009– 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 p. 286, #1 You owed $600 on your last bill (previous bal.) You did not pay it all, so you had a finance charge (interest) of $7.50 (+) You bought $90 at the store and used your card. (+) You sent $100 as a payment (-) Your new balance is $597.50 Try #2 on p. 286

39. © Family Economics & Financial Education –Updated April 2009– 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 p. 286, #2 $270.78 Assignment: pp. 286-287 (3, 5, 9-14) #10, the $40 is not deducted yet

40. © Family Economics & Financial Education –Updated April 2009– 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 P. 286 3. $649 5. $337.65 9.$1,809.30 10.$299.97 11.$182.09

41. © Family Economics & Financial Education –Updated April 2009– 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 p. 286 12.$679.58 13.a. $109.90b. $188.73 c. $369.04 12.$2494.20

42. © Family Economics & Financial Education –Updated April 2009– 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 Complete the Credit card application assignment

43. Any Questions? Next section: 7.3

44. Lesson 7.3—how the bank calculates finance charges on a credit card Average Daily Balance Method (New Purchases Included) Average Daily Balance—The average daily balance is the average of the account balance at the end of each day of the billing period. The company adds purchases and subtracts any payments or credits posted during that day from the beginning balance. The ending balances for every day are then totaled and divided by the number of days in the billing period to get the average daily balance. This number is used to calculate finance charges. Average Daily Balance = Sum of Daily Balances Number of Days in Billing Period

45. Number of Days in the Billing Period: how many days does the bank use to calculate your A.D.B.? Usually it is the total number of days in that month, but it can be days from a previous month also. Use a calendar if necessary. Post Date—shows dates when the bank recorded your purchases or payments. Anything that would make the balance change. **the post date will not always be the same date you bought the merchandise—there is usually a difference.

46. Transactions—either a payment or credit (returned something) that is deducted from the Balance or a purchase or fee that is added to the Balance. End of Day Balance— Previous Balance - Payments + Purchases Number of Days—the number of days that the balance remained the same. Sum of Daily Balances— Balance at End of Day x Number of Days

47. Look at the chart below to visualize how the Average Daily Balance is calculated. The billing period is the entire month of October. Post DateTransactions (payment or purchase) End of Day Balance Number Of Days Sum of Daily Balances 10/1-10/30.00225.603 (3 days counting from 10/1 to 10/3) 676.80 (225.6 x 3) 10/4-28.99 (return)196.61 (225.60- 28.99) 1 (1 day)196.61 (196.61 x 1) 10/5-10/80.00 (during this period nothing was charged or returned) 196.61 (nothing has changed in these 4 days) 4786.44 (196.61 x 4)

48. 10/9 +21.89 (bought something) 218.50 (196.61 + 21.89) 1218.50 (218.50 x 1) 10/10-10/170.00 10/18-35.99 10/19+42.75

49. 10/20-10/230.00 10/24-75.00 10/25+129.32 10/26-10/310.00 *(does this equal the number of days in October?) _____________addadd _______________

50. YOU HAVE ENOUGH INFORMATION TO FIND the Average Daily Balance: Sum of Daily Balances ÷ Number of Days in Billing Period = _____________________ Complete Practice Problem #1 in your notes.

51. Lesson 7.3, Part II: CALCULATING THE NEW BALANCE Use Practice Problem I (December) at the TOP of the previous page in your notes to find the new balance below. The APR is 24%. Finding the New Balance Step 1: Find the Average Daily Balance (already found in Practice Problem I--$119.31)

52. Lesson 7.3, Part II: CALCULATING THE NEW BALANCE Periodic Rate (if not given) = APR ÷ 12 (24% ÷ 12) = 2% Step 2: Find the Finance Charge: Average Daily Balance x Periodic Rate $119.31 x.02 = $2.39

53. Step 3: Find the Unpaid Balance = Previous Balance – (Payments + Credits) $125.80-$70.00=$55.80 Step 4: Find the Total New Purchases $25.85 Step 5: Find the New Balance = Unpaid Balance + Finance Charge + New Purchases $55.80+$2.39+$25.85=$84.04

54. Step 3: Find the Unpaid Balance = Previous Balance – (Payments + Credits) $_______-$_______=$________ Step 4: Find the Total New Purchases $_________ Step 5: Find the New Balance = Unpaid Balance + Finance Charge + New Purchases $_______+$_______+$_____=$______

55. Assignment: Use Practice Problem #2 Calculate the finance charge, unpaid balance, and new balance. Show the equation for each. a.Finance charge b.Unpaid balance c.New balance Get initials, and then continue your assignment as written in your notes.