MoneyCounts: A Financial Literacy Series

MoneyCounts: A Financial Literacy Series

Credit Cards

Dr. Daad RizkMoneyCounts: A Financial Literacy Series301 Outreach BuildingUniversity Park PA [email protected] 814-863-0214

mailto:[email protected]


Learning objectives

List types, pros & cons of Credit Cards Review a credit card billing statement Analyze relationships between credit card, credit report,

credit history and credit score (FICO) Recognize debt signs Apply the 20/10 rule for debt management

Learning Objectives


Reminder

Have a credit card billing statement handy, we will need it as we review each section on the bill – reading between the lines!


Types of credit card accounts

Bank Card – Visa, MasterCard, Discover (Issuer) Store Card – Macy’s, Chevron Travel and Entertainment Card – American Express

(Charge Card)

Types of Credit Card Accounts


advantages of using credit cards

Use of card builds credit history Quick source of funds in an “obsolete” emergency Ability to obtain “needed” items No extra charge if bill is paid on time and in full each

month Consumer protection ($50.00)

Advantages of Using Credit Cards


Disadvantages of using credit cards

Need to establish credit worthiness before getting card Can encourage impulse buying and unnecessary “wanted”

purchases High interest rates if not paid in full and by the due date Some cards charge annual fees – can become expense with the

passage of years Fees are charged for late payments or spending over the limit Improper use of the card, late payment, over the limit charges, etc.,

can negatively affect credit history and credit score

Disadvantages of Using Credit Cards


Cost and features

Annual Percentage Rate (APR) Fixed rate cards are slowly disappearing Variable APR tied to the Prime interest rate

Grace Period – minimum 21 days Annual Fees – making a come back Transaction Fees – low teaser rates Balancing computations method for the finance charge – date of transaction

not from the last cut off period Credit limit –decreasing for riskier cardholders How widely the card is accepted – strict approvals What services and features are available – ask all the questions Minimum age is now 21 (without a co-signer, without a proof of income)

Cost and Features




Billing Statement

1) Summary of account activity

A summary of the transactions on your account‐‐your payments, credits, purchases, balance transfer, cash advances, fees, interest charges, and amounts past due. It will also show your new balance, available credit (your credit limit minus the amount you owe), and the last day of the billing period (payments or charges after this day will show up on your next bill)

- Minimum 21 days in payment cycle

- Due date must be same each month


Billing Statement (2)

2) Payment information

Your total new balance, the minimum payment amount (the least amount you should pay), and the date your payment is due. A payment generally is considered on time if received by 5 p.m. on the day it is

due. If mailed payments are not accepted on a due date (for example, if the due date is on a weekend or holiday), the payment is considered on time if it arrives by 5 p.m. on the next business day.

Example: If your bill is due on July 4th and the credit card company does not receive mail that day, your payment will be on time if it arrives by mail by 5 p.m. on July 5th.


Billing Statement (3-4)

3) Late payment warning

This section states any additional fees and the higher interest rate that may be charged if your payment is late.

- Late fee $25-$35 unless the user is late multiple times in a 6 months consecutive period.

4) Minimum payment warning

An estimate of how long it can take to pay off your credit card balance if you make only the minimum payment each month, and an estimate of how much you likely will pay, including interest, in order to pay off your bill in three years (assuming you have no additional charges). For other estimates of payments and timeframes, see the Credit Card Repayment Calculator.



5) Notice of changes to your interest rates

If you trigger the penalty rate (for example, by going over your credit limit or paying your bill late), your credit card company may notify you that your rates will be increasing. The credit card company must tell

you at least 45 days before your rates change.

6) Other changes to your account terms

If your credit card company is going to raise interest rates or fees or make other significant changes to your account, it must notify you at least 45 days before the changes take effect.



7) Transactions

A list of all the transactions that have occurred since your last statement (purchases, payments, credits, cash advances, and balance transfers). Some credit card companies group them by type of transactions.

Others list them by date of transaction or by user, if there are different users on the account. Review the list carefully to make sure that you recognize all of the transactions. This is the section of your statement

where you can check for unauthorized transactions or other problems.



8) Fees and interest charges

Credit card companies must list the fees and interest charges separately on your monthly bill. Interest charges must be listed by type of transaction (for example, you may be charged a different interest rate

for purchases than for cash advances)



9) Year‐to‐date totals

The total that you have paid in fees and interest charges for the current year. You can avoid some fees, such as over‐the‐limit fees, by managing how much you charge, and by paying on time to avoid late

payment fees.

10) Interest charge calculation

A summary of the interest rates on the different types of transactions, account balances, the amount of each, and the interest charged for each type of transaction.


20/10 rule

How much debt can I afford to carry? Never carry more than 20% of your yearly net income If your yearly net income is $6,000, your total debt outstanding should never

exceed $1,200 (20% of $6,000) Never cause your monthly payment to be more than 10% of your monthly

income If your monthly net income is $500, your credit card debt payment should

not exceed $50 20/10 rule applies to total debt combined outside mortgages (credit cards, student

loans, car loans)

20/10 Rule


Very Important Tool

Federal Reserve Credit Card Repayment Calculator

How long will it take me to pay off my credit card balance if I make only the minimum payment?

How do I pay off my credit card balance sooner?

http://www.federalreserve.gov/creditcardcalculator


10 tips to control credit card debts

Have an emergency fund (10% of net income) Charge only what you can afford (20/10 rule) Avoid balance transfers (high interest rate) Don't miss credit card payments (not to pay late payment) Pay your balance in full each month (not to pay interest) Avoid cash advances (high interest rate) Understand your credit card terms (read between the lines) Limit the number of credit cards you sign for (control debt) Do not lend or lose your credit card (control liability) Recognize the signs of getting yourself in debt (control debt)

10 tips to control credit card debts


Credit Cards and FICO Score

How is FICO SCORE calculated (300-840)

Payment history is 35% measures your ability to pay on time Debt level is 30% (credit balance to credit limit ) Length of credit history is 15% (It’s good to leave open the

accounts that you’ve had for a long time) Inquiries are 10% (how many times you fill applications for credit) Mix of credits are 10% (having different kind of accounts, car loan,

student loan, credit card, mortgage) Annual Credit Report.com

https://www.annualcreditreport.com/


FICO (Fair Isaac Corporation)


FICO ScoresUnderstanding the Crossroads that Lead to Explaining the Score

What makes up the score?• 35% = Payment History• 30% = Capacity (Capacity is King)• 15% = Length of Credit• 10% = Search & Acquisition for New Credit• 10% = Type of Credit

What actions will hurt the score?• Missing payments (regardless of dollar

amounts…It will take 24mo. to restore credit with one late payment).

• Credit cards at capacity (i.e., maxing out credit cards).

• Opening up numerous trades in a short time period.

• Having more revolving loans in relation to installment loans.

• Loans at finance companies

What does not Affect the Score?• Income• Length of residence• Length of employment

Approximate Credit Weight for each Year• 40% = current to 12 months• 30% = 13-24 months• 20% = 25-36 months• 10% = 37+ months

How to Improve the Score• Pay down on credit cards• Do not close credit cards because capacity

will decrease.• Continue to make payments on time

(old late pays will become less significant with time).

• Slow down getting new loans.• Acquire a solid credit history with years of

experience.• Move revolving debt to installment debt.


what’s in a credit report?

• Contains Details about your identity and financial bahavior– Accounts

• Credit cards, retail cards, real estate loans, auto loans and collection accounts

– Inquiries• Hard inquiries and soft inquiries

– Public Records • Bankruptcy, tax lien, civil judgments

– Potentially negative items– Accounts in good standing

What’s in a credit report?


how often is it updated?

• Monthly by creditors– Different times of the month for each creditor

• Creditor A on the first of the month• Creditor B on the 11th of the month• Etc.,

– Using increments of 30,60,90,120 days late• If you miss a payment by 30 days – report is updated as 30 days late• Etc.,

– Failed to pay• Over 120 days (sometimes 180 days) report is updated to Failed to Pay

How often is it updated?


Credit Cards/Credit Report/Credit History

Every credit card you open, gets recorded on your credit report and establishes credit history includes department store credit cards, Bank cards, Travel cards, Gas cards, etc.,

All positive information remain indefinitely on your report - good credit history pay on time, pay in full, etc.,

All negative information "age-off" for 7 years, late payments, chapter 13 bankruptcy (reorganization of debt), liens, foreclosures, etc.,

Chapter 7 Bankruptcy remains for 10 years Child Support and defaults on student loans are reported until

satisfied


What not to do to protect your financial reputation

Do not open a credit card unless you are serious about having that particular card and intend to keep it for a very long time

Do not get seduced by rewards and token gifts to get you to open a credit card (umbrella, pen, or a saving of 10% on purchases)

Do not "MAX" your credit card to the limit ( do not charge anymore than 30% of your total credit limits)

Do not send your payment late, avoid paying "PILS" penalties, interest, late payment and surcharges

Live by the 20/10 rule to keep a healthy budget


Make a Plan!

• Invent a game– $ Spent on wants (not needs) $ Saved, $

Debt• Each time you spend money on wants, you put

same in saving account and same against debts

– Train for freedom• How fast can you pay down credit card debts

– Set goals and take charge


Thank You!

Comments and Questions

Dr. Daad RizkMoneyCounts: A Financial Literacy Series301 Outreach BuildingUniversity Park PA [email protected] 814-863-0214

mailto:[email protected]

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