1. CREDIT CARDS What to know and understand before you obtain one…
Personal Finance
Edmonds School District

2. CREDIT IS…
A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some later date.
A privilege – it can be damaged or taken away… but if used wisely, can be of great benefit to the borrower
Important to understand – it can have great impact on your financial future

3. Types of Credit

4. INSTALLMENT CREDIT Usually referred to as a loan
Used for large purchases (i.e. cars, homes, education, etc.)
Is paid back in set monthly payments for a specific amount of time.
If it is a “secured loan”, you do not own the item until paid in full (can be repossessed).
Interest is generally lower (than revolving credit)

5. REVOLVING CREDIT Example: Credit Cards
Monthly payment varies depending on the amount spent.
There is a limit on the amount that can be owed at any one time
No set time period to pay the debt off (could last forever)
Interest rates are higher (than installment credit)
Can avoid paying interest if you pay off the debt in full each month.

6. Credit Terms and Vocabulary

7. CREDIT TERMS & VOCABULARY – Finance Charge & Principal
Principle
The amount that is actually charged (ex: if you charge $70 for a pair of jeans, your principle will be $70) or balance remaining on a loan (not counting the interest)
Finance Charge
The cost of credit (interest & fees added to your credit card bill each month).
You can avoid finance charges by
paying on time and in full each month.

8. CREDIT TERMS & VOCABULARY - APR
A.P.R. - Annual Percentage Rate
This is typically known as the interest rate and will be shown as a percentage.
This rate is applied each month that an outstanding balance is present.

9. CREDIT TERMS & VOCABULARY - APR – Intro, Fixed, or Variable
Introductory APR - an annual percentage rate that changes after a specific period of time.
Fixed Rate (or Fixed APR) - an annual percentage rate that does not change throughout the year
Variable Interest Rate (or Variable APR) – an annual percentage rate that changes when interest rates or other economic indicators change
Food for thought: In what situation might someone want (or not want) each of these types of APR rates?
After this slide play Credit Card details - 17:53 – 21:24

10. CREDIT TERMS & VOCABULARY - Minimum Payment, Credit Limit and Grace Period
The least amount that can be paid on a revolving credit account.
ALWAYS pay more than the minimum
Credit Limit
Also known as a credit line
How much total money can be charged to a credit card account
Overlimit Fee – additional fee is applied to an account that has surpassed its credit limit with a transaction. *This fee has been barred by the 2009 Credit Card Act
Grace period
A period of time during which you are allowed to pay your credit card bill without being charged a finance and/or late fee.
*This period must be at least 25 days (2009 Credit Card Act)

11. CREDIT TERMS & VOCABULARY - Fees
Late Payment Fee
A fee charged when your payment is not received by the due date
Check fine print – some of them have a due time of when it has to be received
Balance Transfer Fee
A fee charged by a credit card company to transfer a balance from one account to another.
This fee can be anywhere from 1%-5% of the balance amount.
Contact the credit card issuer for their specific fees; some don’t charge this fee.

12. CREDIT TERMS & VOCABULARY - Cash Advance & Annual Fee
The once-a-year fee charged for owning a credit card.
Note: Not all cards have an annual fee. Read the fine print!
Cash Advance
Cash loan from a credit card obtained at an ATM or bank
Immediate fee (typically 3% purchase amount)
Higher APR than normal purchases
No grace period (interest accrues immediately)
NEVER, EVER, NEVER, EVER USE THIS FEATURE!
Play Exposing the Costs – 11:50 – 13:50

13. Credit CARD Act 2009 – What has changed?
Must be 21 to get a credit card
Unless they can show proof they earn enough income to repay the debt
Or have adult co-signers on their account
Minimum 25 day grace period
No over-limit fees (transactions rejected instead)
Additional changes…

14. Good Debt vs. Bad Debt GOOD DEBT BAD DEBT
The purchase outlasts the debt.
The ratio of debt to income does not exceed 20%.
BAD DEBT
Financial obligations last longer than the purchase.
The ratio of debt to income exceeds 20% or jeopardizes financial security if payments cannot be made.

15. Benefits of Using Credit
Use of product or service before you “own” it
Free loan if you pay bill in full
Convenient, no-hassle shopping
More secure than cash – report to the bank that issued the card within two business days and you are not liable for more than $50
Useful in emergencies
Universal acceptance – global
Often necessary for rental car and hotel reservations
Used for Internet shopping
Establish a good credit score

16. Disadvantages of Using Credit
“Too convenient” – can lead to overspending
Finance charges
Predetermines future income
Can hurt your credit score

17. The 3 C’s of Getting Credit
CHARACTER
Can you be counted on to pay your bills?
CAPACITY
Do you have a steady source of income?
CAPITOL
How many assets do you have? How much debt do you have?

18. Types of Credit Cards

19. Types of Credit Cards
Retail – these are store cards like Macy’s, GAP, etc. They can ONLY be used in their store.
These have the highest interest rates.
Bank Cards – issued by a bank; examples include
Mastercard, Visa, Discover, American Express
Secured Card – The amount that can be charged is prepaid; deposit is held in a special savings account and only used at the request of the customer or when account is closed. For example, if a person deposits $1000 – a credit line will be given between $500 - $1000.
These are for students or those who have not established credit.

20. Choosing a Credit Card Which One Is Best for YOU?
What is the APR? What kind of APR is it? (variable, fixed introductory)
What are the fees? (late payments, etc.)
How long is the GRACE PERIOD?
Do they offer any rewards? (airline miles, discounts)
READ THE FINE PRINT BEFORE YOU SIGN ANYTHING!!!!

21. Just starting out? Do your homework!
RECOMMENDATIONS
Just starting out? Do your homework!
Get 1 credit card with a limit of $500-$1000
Pay it off (in full) every month
If you must carry a balance, keep it under 35% of your credit limit.
Use resources on the Internet to help!

22. Tips to PROTECT Your Credit Card Account
Never lend your card to anyone.
Never give your card number over the phone or Internet unless you initiated the call and you are certain of the company or organization.
Sign the back of your cards as soon as you receive them.
Keep a record of your card number, expiration date, and phone number of card company separate from your wallet.
Contact the credit card issuer if any questionable charges appear on your statement.

23. Federal Law Protects Your Use of Credit
Truth in Lending Law
The lender MUST disclose ALL lending costs and terms of the loan at the time the offer is made.
Fair Credit Billing Act
You may dispute billing errors and unauthorized use of your account.
You may dispute charges for goods and services charged but not delivered satisfactorily. You may withhold payment on that amount while the charge is being investigated.
Equal Credit Opportunity Act – DENIED????
You cannot be denied credit based on race, creed or gender.
You must be given a reason if you are denied credit.

24. QUESTIONS???