1. Understanding a Credit Card Take Charge of Your Finances 1.4.1

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 Types of Credit CharacteristicsClose-end CreditOpen-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

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 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 individuals 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

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 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

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 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

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 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 is interest added upon interest each month based upon the amount charged The interest rate varies greatly between credit cards

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 Interest 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

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 Credit scores A FICO (Fair Isaac Company) score is an evaluation of a person’s ability to repay debt –It is a number between 300 and 850 A higher number is a better credit score –Indicator of a person’s ability to pay back a loan A lower score may increase the interest rates a consumer pays or they may not receive credit –The creditor has a greater risk that the individual may not pay back the money they loaned

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 Credit Scores Credit cards may influence each component of how an individual’s credit score is calculated

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 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. 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

11. © 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 Schumer box 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 –Called the Schumer Box 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

12. © 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 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

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 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

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 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

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 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

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 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

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 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

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 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

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 Additional benefits Additional benefits of a credit card may include the following: –Rebates (money back) –Products or services given to the consumer Frequent flyer miles –Additional warranties –Travel accident insurance –Credit card registration –A low introductory APR

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 Credit Card Chaos directions The educator will identify a term associated with a credit card offer Participants will identify which term is true in their application and move to that poster In a small group, define the term on the poster As a class, discuss which credit card characteristic is better for a consumer and why

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 Credit Card Chaos Fixed Interest Rate vs. Variable Interest Rate Introductory Interest Rate vs. No Introductory Interest Rate Regular Interest Rate Greater than or Equal to 15% vs. Regular Interest Rate Less than 15% Annual Fee vs. No Annual Fee Grace Period of 20 Days or Longer vs. Grace Period of Less than 20 Days Balance Transfer Offer vs. No Balance Transfer Offer Balance Transfer Fee vs. No Balance Transfer Fee Late Fees vs. No Late Fees Accept Card for Optional Benefits vs. Decline Card for Optional Benefits

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 Receiving a credit card Credit Application A form requesting information about a person’s ability to repay debt Completed by the consumer This step may be skipped if the consumer has been “pre-approved” by the credit card company Credit Investigation A comparison of information on a credit card application to their credit report Conducted by the credit card company Award or denial of credit Consumer receives the credit card and can activate and begin using it Consumer does not receive a credit card. They can request information about why they were denied credit.

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 Charges, payments, and credits Understanding the bill Charges, payments, and credits – The transactions which occur with the use of a credit card –Important to keep receipts to compare them to the bill for accuracy Closing date – Last day for transactions to be reported on the statement Closing date

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 Finance charges Understanding the bill Finance charge – Charges assessed for credit card use Minimum payment due – The minimum amount to be paid –If this amount is paid and a balance is left on the account, additional finance charges will be included in the following month’s balance Minimum payment due

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 Understanding the bill Due date – The day by which the company requires a payment to be made Past due amount – The required amount not paid before the due date Due date

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 Understanding the bill New balance – The total amount owed on a credit card Credit Line – The maximum amount of charges allowed to an account New balance Credit line

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 Understanding the bill Over the limit fee – credit card companies will charge consumers a fee if they charge over their limit within one month Over the limit fee

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 Understanding the bill Balance transfer – Transfer the balance from one card to another –Companies will advertise a lower interest rate for balance transfers –These are often introductory rates and will only last for a short time

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 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

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 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

31. Any Questions?