April 16, 2013

Early Work: What do you want to be careful of when online shopping?

Schedule– Finish identity theft– Video Debt Slapped

Target: Understand the risks associated with credit cards.

April 17, 2013

Early Work: What are the name of the organizations that offer credit reports?

Schedule– Credit notes

Target: Understand the risks of using credit.

CREDIT CARDS

What to know and understand before you obtain one…

Personal FinanceEdmonds School District

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

Types of Credit

INSTALLMENT CREDIT

Loan is paid back in set monthly payments. Buyer signs a legally binding contract. Secured loan means the seller owns product

until paid in full.

Installment credit is typically used for large purchases such as vehicles, homes,

education, etc.

REVOLVING CREDIT

Monthly payment varies depending on the amount spent.

Minimum payment = highest cost of credit Pay in full within grace period to avoid finance

charges. APR can be adjusted by creditor. Interest rates are higher than for installment credit. There is a limit on the amount that can be charged.

Bank cards and store/retail cards are examples of revolving credit.

Credit Terms and Vocabulary

CREDIT TERMS & VOCABULARY – Finance Charge & Principle

Principle– The total dollar amount of purchases made on a credit card.– The balance remaining on the loan not including interest.

Finance Charge– The cost of using credit – the amount charged to borrow

money. This includes interest, fees, and other charges billed to you on your statement.

You can avoid finance charges by

paying on time and in full each month.

CREDIT TERMS & VOCABULARY - (cont.) APR

A.P.R. - Annual Percentage Rate

This is typically known as the interest rate and will be shown in a percentage.

– The yearly percentage rate is charged when a balance is held on a credit card.

– This rate is applied each month that an outstanding balance is present.

CREDIT TERMS & VOCABULARY - (cont.) APR

APR rates: (interest rates)– Varies with how your credit card is used

Purchases – may have one or several (also known as tiers); typically determined by your credit history and credit score

Balance Transfer – when the outstanding balance of one credit card (or several credit cards) is moved to another credit card account; different than purchase percentage rate; typically has a corresponding fee

Cash Advance – cash loan from a credit card from an ATM or bank withdrawal; typically different than purchase percentage rate; typically has a corresponding fee and high interest rates – possibly no grace period

Only use Cash Advance option in an emergency (if ever!)

Figuring the $$$

It’s important to know how much money you will pay when using credit

(when you’re not paying off your balance in full each month).

Here’s an easy way to understand compound daily % (interest)

$Balance on card$ ___ x APR% ___ = ______Divide by 365 (days/year) = $_______ (daily rate)

Daily rate x 30 (days in month) = $____ (monthly interest)Example:

$2000.00 x 24% (.24) = $480$480 / 365 = $1.32 (interest accumulating each day)

$1.32 x 30 = $39.42 in additional interest paid/due in the next month’s billing cycle

= $2039.42 (if no other charges are made the next month)

Method of Computing Balances of Purchases

Average Daily Balance – Banks measure and compute how much you owe on an average day of your billing cycle and use this to calculate interest for one month.

Typical to see on most cards, but read carefully! It could be…

Two Cycle Billing – Issuers calculate the balance by making use of the last two months of account activity.

Most expensive for card holders.

Adjusted Balance - Balance is determined by subtracting payments or credits received during the current billing period from the ending balance. Purchases made during the billing period aren’t included.

Best for card holders.

CREDIT TERMS & VOCABULARY - (cont.) 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; also known as a floating rate.

CREDIT TERMS & VOCABULARY - (cont.) Minimum Payment, Credit Limit

and Grace Period

Minimum payment– 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 - refers to an account that has surpassed its credit limit

with a transaction (i.e. outstanding balance is beyond his/her credit limit).

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 is usually 10-28 days

CREDIT TERMS & VOCABULARY - (cont.) 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

Over-limit fee– A fee charged when your balance goes over your credit limit– Also known as Over the Limit Fee.

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; many don’t

charge this fee.

CREDIT TERMS & VOCABULARY - (cont.) Fees

Cash advance fee– The fee is typically 3% of the amount withdrawn, with a

minimum dollar amount charged for smaller transactions.  – Finance charges typically accrue from the date of the

advance– Does not typically have a normal grace period as with

purchases.

Annual fee– The once-a-year (annual/yearly) cost of owning a credit

card. – This is a separate fee from interest rate on purchases. – Not all cards have an annual fee.

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

No more double-cycle billing Minimum 25 day grace period No over-limit fees (transactions rejected instead)

unless you opt-in.

Additional changes…– http://www.creditcards.com/credit-card-news/help/what-the-

new-credit-card-rules-mean-6000.php

Compare Rates

Worksheet “Shopping for Credit”

Good Debt vs. Bad Debt

GOOD 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.

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 Necessary for rental car and hotel reservations Use for catalog/Internet shopping Establish a good credit score

Disadvantages of Using Credit

“Too convenient” – can lead to overspending

Finance charges

Predetermines future income (debt accrued predicts what you need to bring home in net pay)

Can hurt your credit score

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?

Types of Credit Cards

Types of Credit Cards

Retail – also known as co-branded cards; these are store cards like Macy’s, GAP, etc.

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.

Types of Credit Cards – cashing in on benefits…

Reward cards – offer perks such as airline miles, a percentage back on merchandise.

Affinity cards – a percent of your spending is donated to a university, sports franchise, or non-profit organization. These often have special discounts or deals for using these credit cards issued in partnership with a major bank.

Choosing a Credit Card Which One Is Best for YOU?

What is the APR?

What are the fees – penalty for over the limit, late payments, etc.?

How long is the GRACE PERIOD?

READ THE FINE PRINT BEFORE YOU SIGN ANYTHING!!!!

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!

http://www.creditcardguide.com/

http://www.creditcards.com/best-credit-cards.php http://www.debtslapped.org

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.

Do not leave your card as a security deposit or as identification.

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.

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.

More Credit Laws…

Unauthorized charges

– If your card is used without your permission you can be held responsible for up to $50.

– If you report the loss BEFORE THE CARD IS USED, you can’t be held responsible for any unauthorized charges.

QUESTIONS???

Useful Websites and Phone Numbers

To get off marketing lists (phone, mail, email) www.dasonsumers.org

To stop credit card offerswww.optoutprescreen.com1-888-567-8688

Identity Theft - prevention, tips and what to do if you are a victimwww.consumer.gov.idtheft

1-877-438-4338

Resources Used:

“Debt Slapped” – DVD video made from grant from Consumer Protection & Education Fund – http://www.debtslapped.org

Molly McFadden – Lynnwood High School Jessi Walton – Mountlake Terrace High School Tony Leahy – Consumer Education & Training

Services