CREDIT AND DEBT

Grade 12 Family Studies

WHY IS IT IMPORTANT FOR YOU TO KNOW ABOUT FINANCES???

CREDIT CARDS Do you have a credit card? What is it used for? How is it like a loan?

HOW DO CREDIT CARDS WORK? When you use a credit card, the credit

card company lends you the money to make a purchase. You have to pay that money back, on terms described in the credit card agreement.Buy now pay later.Money you now owe is called “debt”

HOW DO THEY WORK?Before agreeing to give you a credit card,

the credit card company will check to see if you are a good credit risk.

Do you have a regular income and a good track record of paying your bills on time?

HOW DO THEY WORK? At the end of each month, the credit card company

sends you a bill that includes all the credit card purchases you made that month.

If you pay off the entire bill promptly on its due date, you will usually not be charged any interest.

You will be charged interest, sometimes at very high rates, on any credit card balances that are not paid off right away.

****If you use a credit card to take out a cash advance, you will be charged interest from the day you take out the money!***

HOW DO CREDIT COMPANIES MAKE MONEY? Usually they charge sellers a percentage

(1.5% to 4%) of every transaction that is paid for with a credit card. They also charge you interest on cash advances and any amounts that are not paid off promptly at the end of the month. Some credit card companies also charge users an annual fee for having the card.

WHAT ARE THE ADVANTAGES OF USING CREDIT CARDS? Allows payment without carrying cash

Allows online and telephone purchases

Allows out-of-country expenses

Allows emergency cash advance

More convenient than cheques

Bills presented in one convenient statement.

Sometimes gain “points” that can be redeemed for

consumer goods

Able to build up credit

WHAT ARE SOME OTHER FORMS OF CREDIT THAT ARE COMMONLY USED IN CANADA? A loan from a bank or other financial

institution that you have to repay on a specified schedule, with interest and sometimes with additional fees

A mortgage is a loan (usually for buying a home) in which the lender can take possession of the property if the loan is not repaid on time.

A line of credit is a type of pre-approved loan that allows you to borrow money when you need it, up to a maximum amount

HOW DO PEOPLE USE CREDIT CARDS IRRESPONSIBLY? As long you pay off your balance each month,

using debt may be responsible; if you accumulate debt for unnecessary purchases and aren’t able to pay it off, it’s irresponsible. i.e. Borrowing a large sum without finding out the

interest rate, and ended up with very high charges. There are different types of credit cards, such

as bank cards (Visa, MasterCard, etc.), store cards (The Bay, Canadian Tire, etc.), and travel or entertainment cards (American Express, Diner’s Club, etc.). They all have different features, repayment rules and interest rates.

MINIMUM PAYMENT Credit cards require at least a minimum

payment each month (usually 10% or more of the outstanding balance), and they charge interest on the full balance, often between 10% and 28% per year. Some offer a grace period when no interest is charged. All these details are described in the card agreement. Paying only the minimum amount required will

increase the cost and time to pay off the debt. Online banking will usually estimate how long it

will take to pay off a credit card if only the minimum payment is made.

10 TIPS TO HELP YOU USE YOUR CREDIT CARD WISELY1)Know what you’re getting into. When you sign up for

a credit card, you are entering a legally binding contract. Read the terms and conditions carefully to understand how they apply and what your responsibilities are.

2)Remember that having a credit card doesn’t increase the amount of money you have available to spend. Continue to live within your means and your budget.

3) Your goal should be to pay off your balance in full by the due date every month. Carrying a balance means that everything you charge to your credit card actually costs you more than the purchase price, because you are paying interest, And the longer you carry a balance, the higher the cost.

10 TIPS…4) If you can’t pay your monthly balance in full and

the outstanding balance is growing, you are spending more than you can afford and going further into debt. If you find yourself in this situation, stop using your credit card until you get your finances under control.

5)Avoid impulse buys, especially if you do not have the money available in your bank account to pay for the item. Ask yourself if you really need to make that purchase right away (or at all), or if it can wait until you actually have the money to pay for it.

6) If your credit card has a rewards program, don’t increase your spending or buy things you don’t need just to get points.

10 TIPS…7)Avoid taking a cash advance on your credit card.

You are charged interest from the day you take the advance until the day you repay the entire advance amount.

8) Talk to your financial institution about you options if you need money for unexpected expenses. There may be alternatives to using your credit card that will cost less in interest, such as a line of credit.

9) Make regular payments to help build a good credit history. Paying the balance in full every month will show other lenders that you are a responsible borrower.

10) Make sure that you are aware of all the fees associated with your credit card.