selecting a credit card presentation

© 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

Family Economics & Financial Education 1.4.1.G1

Selecting a Credit

Card


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What is a Credit Card?

• Pre-approved credit• Used for purchase

of items now• Payment of items

later


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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)

http://www.fcs.iastate.edu/financial




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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


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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


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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


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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


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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


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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


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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



Balance

Calculation Method

for Purchases

Annual Fees


Cash Advances

Late

Payment Fees

19.9%

Not less

than 25 days

$.50 when a finance


charged

Average daily

balance method

(including new

purchases)

$20 per year


$29


Bozeman


Grace PeriodAnnual Percentage

Rate for Purchases

Grace



Balance Calculation Method for Purchases

Annual Fees


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


$29

• Grace Period – Amount of time allowed before finance charges are applied


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• Minimum Finance Charge – Minimum amount charged for card use

Annual Percentage

Rate for Purchases

Grace




Annual Fees


Cash Advances

Late

Payment Fees

19.9%

Not less

than 25 days

$.50 when a finance


charged

Average daily

balance method

(including new

purchases)

$20 per year


$29


Bozeman


Balance Calculation Method

• Balance Calculation Method – Method used to determine balance for finance charges

Annual Percentage

Rate for Purchases

Grace




Annual Fees


Cash Advances

Late

Payment Fees

19.9%

Not less

than 25 days

$.50 when a finance


Average daily

balance method

(including new

purchases)

$20 per year


$29


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


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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


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Annual Fees

• Annual Fees – Yearly charge for credit card ownership

Annual Percentage

Rate for Purchases

Grace




Annual Fees


Cash Advances

Late

Payment Fees

19.9%

Not less

than 25 days

$.50 when a finance


Average daily

balance method

(including new

purchases)

$20 per year


$29


Bozeman


Cash Advances

• Cash Advance Transaction Fees – Cash withdrawal fees

Annual Percentage

Rate for Purchases

Grace



Balance

Calculation Method

for Purchases

Annual Fees


Cash Advances

Late

Payment Fees

19.9%

Not less

than 25 days

$.50 when a finance


Average daily

balance method

(including new

purchases)

$20 per year


$29


Bozeman


Late Payment Fees

• Late Payment Fees – Penalty fee for payments not made by the due date

Annual Percentage

Rate for Purchases

Grace



Balance

Calculation Method

for Purchases

Annual Fees


Cash Advances

Late

Payment Fees

19.9%

Not less

than 25 days

$.50 when a finance


Average daily

balance method

(including new

purchases)

$20 per year


$29


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


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Understanding the Bill• Minimum Payment Due – The minimum

amount to be paid If this amount is paid and a balance is left on

the account, additional finance charges will be included in the following month’s balance

• Past Due Amount – The required amount not paid before the due date

• Due Date – The day by which the company requires a payment to be made

• New Balance – The total amount owed on a credit card


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Understanding the Bill cont.

• Credit Line – The maximum amount of charges allowed to an account

• Closing Date – Last day for transactions to be reported on the statement

• Charges, Payments, and Credits – The transactions which occur with the use of a credit card

• Finance Charge – Charges assessed for credit card use


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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


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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