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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
Credit Cards:
Pros and Cons
Family Economics & Financial Education 1.4.1.G1
Objectives
Objective:
•What is a credit card?
•What are the costs and benefits of owning a credit card?
•Is a Credit Card for me?
© 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
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 Purchase ‘big ticket’ items earlier
• Can buy them immediately instead of saving up.
Easy form of debt consolidation Protection against rip-offs and fraud
• Usually liable for only $50 if reported immediately.
Gives you a record of your purchases 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?
• More Advantages Convenient
• You can travel without having large sums of cash, accepted everywhere.
Useful for emergencies Often required to hold a reservation Special Services
• Replacement of lost or stolen merchandise, extension of warranties, air travel insurance.
Protection Power• Company will intercede on your behalf if you are unhappy
with a purchase
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
There are three basic types of credit cards:• Travel and entertainment cards such as
American Express or Diners Club. They have no predetermined spending limits and must
be paid in full each month.
• Bank cards such as MasterCard, Visa, Discover, Optima, GM and Ford cards which are sponsored by individual banks. The bank defines spending limit and each offers
different terms and conditions. Banks offer a choice of payment methods, either pay the
balance in full with no interest or pay a minimum part or some part of the balance with a finance charge.
Family Economics & Financial Education 1.4.1.G1
• Company or Retail store cards such as Sears, J.C. Penney, Shell, or Mobil. These cards are only accepted by the specific
company and do not have an annual fee. However, the terms and conditions of these cards vary widely.
© 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
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 " The grace period is the number of days you have before a credit card company starts charging interest on new purchases. Not all credit cards have a grace period.
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
• "Finance Charge” The dollar amount you pay to use credit, includes interest costs and all charges associated with the transaction.
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
Annual Fees
• "Annual Fee" A flat, yearly charge similar to a membership fee, usually $25 to $50.
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
• "Transaction Fees” A fee for a cash advance, a late payment, or going over your credit limit. Sometimes there is a monthly fee if you did not use the 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
Computing Finance Charges
Beginning Balance $1,000 Payment $800 on the 15th on the month APR 18% or (l.5% monthly) "Average Daily Balance" Balance $600 ($1,000 for 15 days and $200 for 15 days) Finance Charge $9 ($600 times .015) "Adjusted Balance" Balance $200 ($1,000 minus $800) Finance Charge $3
($200 times .015)"Previous Balance” Balance $1,000 Finance Charge $15 ($1,000 times .015)
© 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
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
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
Family Economics & Financial Education 1.4.1.G1
Discussion Questions
© 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
1. Define credit and list advantages and disadvantages of using credit.
2. Describe the types of credit cards.
3. Give three inappropriate uses of credit cards.
4. Differentiate between a bank card, a travel and an entertainment card. What would be an appropriate use of each?
5. What factors would you consider when selecting a credit card?
6. Identify the steps to evaluate and select a Credit card.
7. Explain the three methods of calculating finance charges.
