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Family Economics & Financial Education 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Selecting a Credit
Card
Family Economics & Financial Education 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
What is a Credit Card?
• Pre-approved credit• Used for purchase
of items now• Payment of items
later
Family Economics & Financial Education 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Statistics
• 92% of college students have a credit card by their sophomore year
• 1 out of every 5 college students owes between $3,000 and $7,000 in credit card debt
• Almost half (47%) of all college students carry four or more credit cards
(Source: http://www.fcs.iastate.edu/financial)
Family Economics & Financial Education 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences 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
Family Economics & Financial Education 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences 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
Family Economics & Financial Education 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Types of Credit Cards
• Bank Credit Cards• Flexible account• Accepted anywhere• Available from a financial institution
(commercial bank, credit union) with a service provider (Visa, MasterCard)
– Electronic network
• Retail Credit Cards• Purchases allowed at a particular retailer
– i.e. The Buckle or Old Navy
• Can work with bank to offer a bank credit card with the retailer’s logo
Family Economics & Financial Education 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Types of Credit Cards cont.
• Travel and Entertainment Cards• Similar to bank credit cards
– Can make purchases at a number of businesses
• Entire balance must be repaid in 30 days
• Prestige Cards• High status accounts• Higher credit qualifications• Special benefits
– i.e. Free travelers checks, higher credit limits
Family Economics & Financial Education 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Types of Credit Cards cont.
• Affinity Cards• Accounts through financial institutions• Logo of sponsoring organization
– Example: Mothers Against Drunk Driving
• Financial institution donates percentage of charges to organization
Family Economics & Financial Education 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Schumer Box
• Fair Truth in Lending Act• Information required by law to inform consumer
of all costs associated with use of a credit card
Annual
Percentage Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance
Calculation Method
for Purchases
Annual Fees
Transaction 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 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Annual Percentage Rate
• Annual Percentage Rate (APR) – Interest rate charged for amount borrowed in terms of per dollar per year
Annual
Percentage Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance
Calculation Method
for Purchases
Annual Fees
Transaction 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 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences 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 Fees
Transaction 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 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Minimum Finance Charges
• Minimum Finance Charge – Minimum amount charged for card use
Annual Percentage
Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance Calculation Method for Purchases
Annual Fees
Transaction 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 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Balance Calculation Method
• Balance Calculation Method – Method used to determine balance for finance charges
Annual Percentage
Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance Calculation Method for Purchases
Annual Fees
Transaction 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 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Balance Calculation Method cont.
• Balance Calculation Method Average daily balance excluding new
purchases – Interest is only paid on the previous balance, not on purchases made since the last payment
Average daily balance including new purchases with a grace period – If the balance is not zero, interest is applied to new purchases when they are made, if the balance is zero, a grace period is allowed before interest is charged
Family Economics & Financial Education 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Balance Calculation Method cont.
• Balance Calculation Method Average daily balance including new
purchases with no grace period – Regardless of the previous month’s balance, interest is applied to new purchases as they are made
Two-cycle average daily balance including new purchases – This method should be avoided by consumers, as it is the least-beneficial. The average daily balance is determined on 60 days, rather than 30 days, so finance charges are doubled. A zero balance must be held for two months in order to avoid charges
Family Economics & Financial Education 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Annual Fees
• Annual Fees – Yearly charge for credit card ownership
Annual Percentage
Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance Calculation Method for Purchases
Annual Fees
Transaction 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 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Cash Advances
• Cash Advance Transaction Fees – Cash withdrawal fees
Annual Percentage
Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance
Calculation Method
for Purchases
Annual Fees
Transaction 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 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Late Payment Fees
• Late Payment Fees – Penalty fee for payments not made by the due date
Annual Percentage
Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance
Calculation Method
for Purchases
Annual Fees
Transaction 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 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Opening a Credit Account
1. Applicant completes a credit application2. Lender conducts a credit investigation3. Applicant is given a credit rating4. Lender accepts or denies the credit
request5. If accepted, applicant evaluates the
credit card details6. Applicant accepts or refuses credit terms
Family Economics & Financial Education 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Understanding the Bill
• 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
• Past Due Amount – The required amount not paid before the due date
• Due Date – The day by which the company requires a payment to be made
• New Balance – The total amount owed on a credit card
Family Economics & Financial Education 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Understanding the Bill cont.
• Credit Line – The maximum amount of charges allowed to an account
• Closing Date – Last day for transactions to be reported on the statement
• Charges, Payments, and Credits – The transactions which occur with the use of a credit card
• Finance Charge – Charges assessed for credit card use
Family Economics & Financial Education 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Using a Credit Card Properly
• Only use a card when there is no doubt about ability to pay off the charges at the end of the billing cycle
• Record all expenses and keep receipts • Check credit statement for errors • Always pay off balance completely
and timely
Family Economics & Financial Education 1.4.1.G1
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Safety Tips
• Sign card with 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 number unless
making purchases• Keep a list of all cards, account
numbers, and phone numbers separate from cards
• Report lost or stolen cards promptly
