family economics & financial education 4.1.g1 © family economics & financial education –...
TRANSCRIPT
Family Economics & Financial Education 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 Department of Health and Human Development at Montana State University –
Bozeman
Credit Card
Basics
Family Economics & Financial Education 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 Department of Health and Human Development at Montana State University –
Bozeman
What is a Credit Card?
• Pre-approved credit
• Used for purchase of items now
• Payment of items later
Family Economics & Financial Education 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 Department of Health and Human Development at Montana State University –
Bozeman
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
• It is estimated that, on average, 20% of Americans have “maxed out” their credit cards.
• About 25% of adults in the United States have a history of credit problems.
• Americans’ average credit card debt is $8400 per household.
Family Economics & Financial Education 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 Department of Health and Human Development at Montana State University –
Bozeman
Statistics
• Roughly 24% of personal expenditures are made using bank credit cards, retail cards, and debit cards.
• In the first quarter of 2002, total credit debt was $660 billion.
• Approximately 185 million American consumers have at least one credit card and 1.3 million declared bankruptcy in 2002.
• Americans pay, on average, an 18.9% interest rate on credit cards.
• The average household pays $83.33 in credit card interest per month.
• On average, the typical credit card purchase is 112% higher than if using cash.
• More than 40% of American families spend more than they earn.
Family Economics & Financial Education 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 Department of Health and Human Development at Montana State University –
Bozeman
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 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 Department of Health and Human Development at Montana State University –
Bozeman
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 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 Department of Health and Human Development at Montana State University –
Bozeman
Types of Credit
Single Payment:• Items and services are paid for in a
single payment, within a given time period, after a the purchase. Interest is not usually charged. Ex utility bills
Installment:• Items and services are paid for in two or
more regularly scheduled payments of a set amount and time. Ex. car loan
Family Economics & Financial Education 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 Department of Health and Human Development at Montana State University –
Bozeman
Types of Credit
Revolving:• Many items can be bought using this
plan as long as the total amount doesn’t go over the credit user’s assigned dollar amount. Ex. credit cards, gas cards and store credit cards.
Family Economics & Financial Education 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 Department of Health and Human Development at Montana State University –
Bozeman
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 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 Department of Health and Human Development at Montana State University –
Bozeman
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 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 Department of Health and Human Development at Montana State University –
Bozeman
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 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 Department of Health and Human Development at Montana State University –
Bozeman
Building Credit• Establish a steady work record• Pays all bills on time• Open a checking account—no overdrafts• Open a savings account—make regular
deposits• Apply for a store credit card or gas card and
make regular purchases and pay off• Get a co-signer on a loan and make
payments• Apply for a small loan using your saving
account as collateral
Family Economics & Financial Education 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 Department of Health and Human Development at Montana State University –
Bozeman
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 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 Department of Health and Human Development at Montana State University –
Bozeman
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 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 Department of Health and Human Development at Montana State University –
Bozeman
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 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 Department of Health and Human Development at Montana State University –
Bozeman
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 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 Department of Health and Human Development at Montana State University –
Bozeman
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 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 Department of Health and Human Development at Montana State University –
Bozeman
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 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 Department of Health and Human Development at Montana State University –
Bozeman
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 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 Department of Health and Human Development at Montana State University –
Bozeman
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 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 Department of Health and Human Development at Montana State University –
Bozeman
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 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 Department of Health and Human Development at Montana State University –
Bozeman
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 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 Department of Health and Human Development at Montana State University –
Bozeman
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 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 Department of Health and Human Development at Montana State University –
Bozeman
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
• Read and understand the contract• Record all expenses and keep receipts • Check credit statement for errors • Always pay off balance completely
and timely