Download - 1 Personal Finance 7.02: Understand ways to protect personal credit

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Personal Finance

7.02: Understand ways to protect personal credit.

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Activity

Show the video clip “Amateur Rock Star” by Scott Blair from this link: http://www.whatsmyscore.org/contest/videos.php.

Discussion: How can having a bad credit score negatively affect a

person? If bills are not paid, what items may be repossessed? What is the impact when seeking credit in the future? What is the overall message of this video clip?

Main Idea: Individuals should check their credit report, know their scores, and not spend beyond their financial limits.

http://www.whatsmyscore.org/contest/videos.php

http://www.whatsmyscore.org/contest/videos.php

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Activity

Display Appendix 7.03A, “Use of Credit---Agree or Disagree.” Have students record in their notes whether they agree or disagree with each data statement about use of credit by college/university undergraduates.

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Journal Entry

What do you think Credit is?

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Credit Overview

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What Is Credit? Obtaining goods and services with a promise to pay for

them from future income

A temporary money substitute since it allows a person to buy today and pay tomorrow

Can be a valuable resource when used wisely Credit involves two parties, a lender and a

borrower Lender (creditor, credit-provider, source of credit)

One who provides money for purchases based on a person’s promise to repay

Lender expects borrower to pay extra, known as interest, for the use of the money

Borrower (debtor)---One who received credit from a lender

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Types of Consumer Credit

Sales Credit Regular charge accountInstallment accountRevolving credit account

Cash Credit---Secured and Unsecured Company or retail store credit cardsTravel and entertainment credit cardsGeneral-purpose credit cards

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Solve Credit Problems

Actively deal with the problemStop using credit; focus on repaymentSee a credit counselorDevelop a spending plan with living expenses and a plan for repaymentAsk creditors to adjust credit terms

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Establish Credit

The importance of credit ratings

Credit ratings are based on the three CsCharacterCapacityCapital

Ways to establish creditOpen/manage checking/saving accountsPay utility bills in your nameObtain a credit card from a local storeGet help from a cosignerObtain a secured credit card

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Maintain Good Credit

Evaluate when you really need creditShop for the right type of credit for each purchaseShop for the best credit termsKnow how you will pay backUse only the amount of credit you can repayMeet terms of credit agreementsKeep accurate recordsConsult creditors immediately if you cannot pay on timeResolve billing errors promptly

Credit Card

Understanding Your Credit Card

Credit UnitTake Charge of Your

Finances

Credit Card

© Family Economics & Financial Education –Updated March 2010– Credit Unit – Understanding a Credit CardFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The

University of Arizona

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Credit

When goods, services or money is received in exchange for a promise to pay a definite sum

of money at a future date

The price of money- when referring to credit, interest is the charge for

borrowing money

CREDIT-

INTEREST-

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Lender and Borrower

LENDER-The person or

organization who has the resources

to provide the individual with a

loan

BORROWER-

The person or organization that is

receiving the money from the

lender

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Closed-end vs. Open-end Credit

Characteristics

Closed-end credit

Open-end (revolving)

credit

Definition A one-time loanCredit extended in

advance

Purpose of loan

Specified in application

May be used for a variety of purposes

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Closed-end vs. Open-end Credit

Characteristics

Closed-end credit

Open-end credit

PaymentsSpecified number

of equal payments

Varies- can be paid in one payment or a series of equal or unequal payments

Loan Amount

Agreed upon during the application

process

May be increased for responsible

consumers

ExamplesMortgage,

automobile, education loans

Credit cards

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Credit Card

What is a credit card?Pre-approved credit which can be used for the

purchase of goods and services now and payment of them later

A credit cards credit limit varies based upon an individual’s

perceived creditworthinessCredit limit is the maximum dollar amount

loaned

Creditworthiness is an individuals ability and

willingness to pay the money back

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Credit Card Interest

Interest is charged each month the balance is not

paid in full

The cost of credit expressed as

a yearly interest rate

Rate at which interest is charged is referred to as:

Annual Percentage Rate

(APR)

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Minimum Payments

• Required to make at least a minimum payment each month– Usually only a small percentage (2.5-5%) of

the total balance due

• Cardholders who only make the minimum payment:– Make slow progress paying off card balance– Pay substantially more than what was

initially charged to the card

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Minimum Payments

Amount charged to credit card in

one purchas

e

APRMinimu

m payment

Time to pay off

the credit card

Total amount paid in interest

Total amount

paid

$2,000 18% $50.00 62 months $1,077.25 $3,077.25

$500 12% $25.00 23 months $60.67 $560.67

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Advantages to using Credit Cards

AdvantagesConvenient payment

toolUseful for emergencies

Often required to hold a reservation

Able to purchase “big ticket” items and spread

out payments

Protection against fraud

Opportunity to establish a positive credit history

Online shopping is safer than using a debit card

because of the Fair Credit Billing Act protectionPossibility of receiving

bonuses, such as frequent flyer miles or cash rebates

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Disadvantages to using Credit Cards

DisadvantagesInterest can be costly

when a balance is revolvedAdditional

penalty fees may apply

Tempting to overspend

Risk of identity theft

Responsible for lost/stolen cards

Applying for multiple accounts can lower your

credit score

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Debit Cards

• What is a debit card?– A plastic card which looks like a credit

card, but is electronically connected to the cardholder’s bank account

– Money is immediately withdrawn from the cardholders checking account

What is the difference between a credit card and a debit card?

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Credit History

Credit ReportA record of a consumer’s credit history that

includes information about credit card use as well as the use of other types of credit, such as auto loans, student loans and mortgage loans

A number that summarizes an individual’s credit record and history. It is a numeric “grade” of a

consumer’s financial reliability

Credit Score

Credit cards can have a positive or negative impact on an individuals credit history

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Positive Credit Card use

Proper credit card

use

Helps develop positive credit history

and credit report

Earn a high credit

score

A high credit score gives the consumer the opportunity to have lower interest rates on loans, the privilege to use different forms of credit, and an easier approval process

for future credit

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Positive Credit Card Use

• Examples of positive credit card behaviors:– Paying credit card balances in full every

month– Paying credit card bills on time – Applying for only credit cards that are needed– Keeping track of all charges by keeping

receipts and using a check register– Checking the monthly credit card statement

for errors

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Negative Credit Card Use

Consumers with low credit scores have difficulty getting loans, difficulty renting apartments, pay higher interest rates, pay higher insurance rates, and have

difficulty obtaining a job

Improper credit card

use

Develops negative

credit history

and credit report

Lower credit score

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Negative CreditCard use

• Examples of negative credit card behaviors:– Making late credit card payments– Paying only the minimum payment– Exceeding the card’s credit limit (usually

triggers a penalty fee)– Charging items that can’t be paid off

immediately– Owning too many credit cards

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NO Credit

• If an individual has not used credit, they will not have any information in their credit report

• Not having a credit report can cause an individual to be denied credit

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Credit Card Offers

Credit card issuers are required to disclose the terms and fees of credit cards in an easy to read

box format

This is called the Schumer box

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Interest Rates and Interest ChargesAnnual Percentage Rate (APR) for Purchases

12.99%, 13.99% or 14.99%, introductory APR for one year, based on your creditworthiness.After that, your APR will be 14.99%. This is a variable-rate APR that will vary with the market based on the Prime Rate.

APR for Balance Transfers

15.99%This APR will vary with the market based on the Prime Rate

APR for Cash Advances


Penalty APR and When it Applies

28.99%This APR may be applied to your account if you:1.Make a late payment;2.Go over your credit limit;3.Make a payment that is returned; or4.Do any of the above on another account that you have with us.How long will the Penalty APR apply? If your APR’s are increased for any of these reasons, the Penalty APR will apply until you make six consecutive minimum payments when due.

How to Avoid Paying Interest on Purchases

Your due date is at least 25 days after the close of each billing cycle. We will not charge you any interest on purchases if you pay your entire balance by the due date each month.

Minimum Interest Charge

If you are charged interest, the charge will be no less than $1.50.

For Credit Card Tips from the Federal Reserve Board

To learn more about factors to consider when applying for or using a credit card, visit the website of the Federal Reserve Board at http://www.federalreserve.gov/creditcard

FeesSet-up and Maintenance Fees

NOTICE: Some of these set-up and maintenance fees will be assessed before you begin using your card and will reduce the amount of credit you initially have available. For example, if you are assigned the minimum credit limit of $250, initial available credit will be only about $209.Annual Fee: $20Account Set-up Fee: $20 (one-time fee)Participation Fee: $12 annually ($1 per month)Additional Card Fee: $5 annually (if applicable)

Transaction Fees

Balance Transfer: Either $5 or 3% of the amount of each transfer, whichever is greater (maximum fee: $100)

Cash Advance: Either $5 or 3% of the amount of each cash advance, whichever is greater

Foreign Transaction: 2% of each transaction in U.S. dollarsPenalty Fees Late Payment: $29 if balance is less than or equal to $1000

OR $35 if balance is more than $1000 Over-the-limit: $29 Returned Payment: $35

* How We Will Calculate Your Balance: We use a method called “average daily balance (including new purchases).”* Loss of Introductory APR- We may end your introductory APR and apply the Penalty APR if you become more than 60 days late in paying your bill

Annual Percentage Rate (APR) for

PurchasesThis section discloses the interest paid for

purchases on the card. Multiple interest rates

may be listed here, because the final interest rate may

depend on the creditworthiness of the

applicant

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Transaction Fees






Introductory RateIf the credit card has an introductory rate it will be shown in this section, which is the

APR charged during the credit card's

introductory period after a credit card account is opened. The card will have a different APR after the introductory

period endsWhat is the introductory rate for

this credit card offer?The introductory rate depends on the

creditworthiness of the applicant, but it

will be 12.99%, 13.99%, or 14.99%

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Transaction Fees






Variable-rate APRSome cards will have a variable-rate APR, which is an APR that

may change depending on other factors, such as the prime rate. The prime rate is an index

that represents the interest rate most banks charge their most credit-worthy

customers What is the APR for Purchases for this credit

card offer?14.99%

Is this a variable-rate APR or a fixed-rate APR?

Variable-rate APR

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Transaction Fees







This section discloses the interest paid for balance transfers, which is the act of

transferring debt from one credit card account

to another. Balance transfer fees may apply,

even if the balance transfer APR is 0% What is the APR for balance transfers for this

credit card offer?15.99%

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Transaction Fees







This section discloses the interest paid for

cash advances, such as withdrawing cash from an ATM using a credit

card. Cash advance fees may also apply

What is the APR for cash advances for this credit

card offer?21.99%

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Transaction Fees







This section discloses the penalty APR, as well

as the penalty terms that trigger the penalty

APR to take effect

•Penalty APR is the interest rate charged on new transactions if the penalty terms in the credit card contract are triggered

What is the Penalty APR for this credit card offer?

21.99%

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Transaction Fees






How To Avoid Paying

Interest on Purchases

This section explains how you can avoid

interest charges on a credit cardHow can a cardholder

avoid paying interest on a credit card?By paying credit card

bills in full by the due date

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Transaction Fees







Credit card companies often have a minimum interest

amount. These charges typically

range from $0.50 to $2 per month and are

disclosed in this section of the credit

card offerWhat is the minimum

interest charge for this credit card?$1.50

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Transaction Fees






For Credit Card Tips from the

Federal Reserve Board

This section directs consumers to the Federal Reserve website to obtain more information about credit cards

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Transaction Fees






Set-up and Maintenance FeesThis section discloses

any set-up and maintenance fees for the card, which can include annual fees, account set-up fees, participation fees,

and additional card fees

•Annual fee is a yearly fee that may be charged for having a credit card

What is the annual fee for this credit card?

$20

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Transaction Fees






Transcation FeesThis section discloses any transaction fees for the card, which can include balance transfer fees, cash advance fees, and foreign transaction

fees What is the fee for cash advances for this card?

$5 or 3% of the amount of each cash advance (whichever is

greater)

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Transaction Fees






Penalty FeesThis section discloses the penalty fees for the card, which can

include late-payment, over-the-limit, and returned payment

fees

•Late payment fee is charged when a cardholder does not make the minimum monthly payment by the due date•Over-the-limit fee is charged if the account balance goes over the set credit limit

Does this card have an over-the limit fee?

Yes, the over-the-limit fee is $29.

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Transaction Fees






How we calculate your balance

Credit card companies can use

one of several methods to calculate

the outstanding balance on a credit card. The method

used is disclosed in this section

What method is used to calculate the balance on

this card?Average daily balance (including new

purchases)

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Transaction Fees






Loss of Introductory APRIf the card has an

introductory rate, this area will list how the lower introductory rate can be lost

How can the introductory APR be lost on this card?

If the cardholder is more than 60 days

late in paying the billWhat APR will the

cardholder be charged if the introductory rate

is lost?The Penalty APR of 28.99%

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Credit Card Chaos

• The educator will identify terms associated with a credit card offer

• Identify which term is true on your provided credit card offer and move to that poster

• In a small group, define the term on the poster

• As a class, discuss which credit card characteristic is better for a consumer and why

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Credit Card Chaos

• Fixed-rate APR for Purchases vs. Variable-rate APR for Purchases

• Introductory Rate vs. No Introductory Rate• APR for Purchases Greater than or Equal to 15%

vs. APR for Purchases Less than 15%• No Minimum Interest Charge vs Minimum

Interest Charge• Annual Fee vs. No Annual Fee• Balance Transfer Fee vs. No Balance Transfer Fee• Late Payment Fees vs. No Late Payment Fees

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Credit Card Benefits

• Research benefits that may be received from the card– Cash rebates– Warranties for items purchased with the card– Travel accident insurance– Frequent flyer miles

• Make sure to know all terms and conditions of card benefits

• Cards that offer benefits may charge fees or higher interest rates

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Receiving a Credit Card

1. Compare credit card offers and determine which card to apply for

2. Complete a credit application– A form requesting information about a

person’s ability to repay and the applicant’s age

– Can be completed through the mail, the internet or over the phone

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Receiving a Credit Card

3. Lenders conduct a credit investigation

– A comparison of information on credit application to information on a credit report

4. Applicants may or may not be approved for the card they apply for

– Approval depends on the applicant's credit history

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Pre-Approved Credit Card Applications

• Credit card companies send pre-approved credit card applications in the mail– If an individual is pre-approved for that

particular card, they have passed the initial credit check

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Credit Card Statements

• Credit card statements outline important information about the card

• The 2009 CARD Act required credit card companies to include specific information about a card account in the statement

Andrew’s Credit Card StatementPlease help Andrew interpret his credit card

statement.

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TransactionsReference Number

Trans Date

Post Date

Description of Transaction or Credit

Amount

XXXX1 2/22 2/23 Store #1 $529.57

XXXX2 2/25 2/26 Payment $450.00 -

XXXX3 2/26 2/26 Cash Advance $318.00

XXXX4 3/15 3/17 Balance Transfer $785.00

FeesXXXX5 2/23 2/23 Late Fee $35.00

XXXX6 2/27 2/27 Balance Transfer Fee $23.55

XXXX7 2/28 2/28 Cash Advance Fee $10.90

Total Fees for this Period $69.45

Interest Charged Interest Charge on Purchases $6.31

Interest Charge on Cash Advances $4.58

Total Interest for this Period $10.89

Payment InformationNew Balance $1784.53Minimum Payment Due $53.00Payment Due Date 4/20/12Late Payment Warning: If we do not receive your minimum payment by the date listed above, you may have to pay a $35 fee and your APR’s may be increased up to the Penalty rate of 28.99%Minimum Payment Warning: If you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance. For example…

Interest Charge CalculationType of Balance

Annual Percentage Rate (APR)

Balance Subject to Interest Rate

Interest Charge

Purchases 14.99% $512.14 $6.31Cash Advances 21.99% $253.50 $4.58Balance Transfers 0.00% $637.50 $0.00

Summary of Account Activity

Previous Balance 535.07Payments -450.00Purchases +529.57Balance Transfers +785.00Cash Advances +318.00Past Due Amount +0.00Fees Charged +69.45Interest Charged +10.89New Balance $1,784.53 Credit Limit $2,000.00Available credit $215.47Statement closing date

3/22/2012

Days in billing cycle 30

If you make no additional charges using this card and

each month you pay…

You will pay off the balance shown on this statement in

about…

And you will end up paying an

estimated total of…

Only the minimum payment

10 years $3,284

$62 3 years $2,232

Notice of Changes to Your Interest RatesYou have triggered the Penalty APR of 28.99%. This change will impact your account as follows:Transactions made on or after 4/9/12: As of 5/10/12, the Penalty APR will apply to these transactions. We may keep the APR at this level indefinitely.Transactions made before 4/9/12: Current rates will continue to apply to these transactions. If you become more than 60 days late on your account, the Penalty APR will apply to hose transactions as well.

Important Changes to Your Account TermsThe following is a summary of changes that are being made to your account terms. For more detailed information, please refer to the booklet enclosed with this statement. These changes will impact your account as follows:Transactions made on or after 4/9/12: As of 5/10/12, APR for Purchases will increase to 16.99%.Transactions made before 4/9/12: Current APRs will continue to apply to these transactions.

2012 Totals Year-to-DateTotal fees charged in 2012 $90.14Total interest charged in 2012 $18.27

Andrew’s Credit Card Statement


This section includes payments, credits, purchases, balance

transfers, cash advances, fees,

interest charges, amounts past due, the new balance, available credit, and the last day

of the billing periodHow much did Andrew charge in new purchases

during this credit card billing cycle?$529.57

10

9

8

7

6

2

4

5

13

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Trans Date

Post Date


Amount

XXXX1 2/22 2/23 Store #1 $529.57

XXXX2 2/25 2/26 Payment $450.00 -














Interest Charge




3/22/2012





about…




10 years $3,284

$62 3 years $2,232





10

9

8

7

6

2

4

5

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InformationThis section includes

the total new balance, the minimum payment amount, and the date

payment is due

What is Andrew’s minimum payment due for

this billing cycle?$53.00

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Trans Date

Post Date


Amount

XXXX1 2/22 2/23 Store #1 $529.57

XXXX2 2/25 2/26 Payment $450.00 -














Interest Charge




3/22/2012





about…




10 years $3,284

$62 3 years $2,232





10

9

8

7

6

2

4

5

13Late Payment

WarningThis section states any additional fees and the

higher interest rate that may be charged if

a payment is late

How much is Andrew’s late payment fee?

$35

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Trans Date

Post Date


Amount

XXXX1 2/22 2/23 Store #1 $529.57

XXXX2 2/25 2/26 Payment $450.00 -














Interest Charge




3/22/2012





about…




10 years $3,284

$62 3 years $2,232





10

9

8

7

6

2

4

5

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Minimum Payment Warning

This section includes an estimate of how

long it can take to pay off a credit card

balance if only the minimum payment is

made each month, and an estimate of the total amount paid, including

interest, if the bill is paid in three years

(assuming no additional charges are

made)How long will it take

Andrew to pay off the balance of his credit card if he only pays the minimum

payment?10 years

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Trans Date

Post Date


Amount

XXXX1 2/22 2/23 Store #1 $529.57

XXXX2 2/25 2/26 Payment $450.00 -














Interest Charge




3/22/2012





about…




10 years $3,284

$62 3 years $2,232





10

9

8

7

6

2

4

5

13Notice of Changes to

Your Interest RatesIf a cardholder triggers the Penalty APR, the

credit card issuer must notify them on their statement that their

rates will be increasing

Has Andrew triggered the Penalty APR?

Yes, he will pay 28.99% on all transactions made after 4/9/12.

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Trans Date

Post Date


Amount

XXXX1 2/22 2/23 Store #1 $529.57

XXXX2 2/25 2/26 Payment $450.00 -














Interest Charge




3/22/2012





about…




10 years $3,284

$62 3 years $2,232





10

9

8

7

6

2

4

5

13

Important Changes to Your Account

TermsIn this section of the

statement, cardholders must be notified of any raise in rates or fees or

any other significant changes to the account

Other than implementation of the Penalty APR, will

there be any other changes to Andrew’s

account terms?Yes, his APR for

Purchases is increasing to 16.99%.

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Trans Date

Post Date


Amount

XXXX1 2/22 2/23 Store #1 $529.57

XXXX2 2/25 2/26 Payment $450.00 -














Interest Charge




3/22/2012





about…




10 years $3,284

$62 3 years $2,232





10

9

8

7

6

2

4

5

13

TransactionsThis section includes a

list of all the transactions that have occurred since the last statement (purchases,

payments, credits, cash advances, and

balance transfers). This section should be

carefully reviewed by the cardholder to

ensure there are no unauthorized charges

or errorsHow much did Andrew charge on his credit card

to Store #1?$529.57

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Trans Date

Post Date


Amount

XXXX1 2/22 2/23 Store #1 $529.57

XXXX2 2/25 2/26 Payment $450.00 -














Interest Charge




3/22/2012





about…




10 years $3,284

$62 3 years $2,232





10

9

8

7

6

2

4

5

13

Fees and Interest Charged

Credit card issuers must list the fees and

interest charges separately on the

monthly statement. Interest charges must

be listed by type of transaction

Did Andrew pay a late fee?

Yes, he paid $35.00 for a late fee.

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Trans Date

Post Date


Amount

XXXX1 2/22 2/23 Store #1 $529.57

XXXX2 2/25 2/26 Payment $450.00 -














Interest Charge




3/22/2012





about…




10 years $3,284

$62 3 years $2,232





10

9

8

7

6

2

4

5

13

Year-to-Date TotalsThe total amount paid

in fees and interest charges for the current year must be shown on

the statement

What is the total amount of interest Andrew has paid in the year 2012?$18.27

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Trans Date

Post Date


Amount

XXXX1 2/22 2/23 Store #1 $529.57

XXXX2 2/25 2/26 Payment $450.00 -














Interest Charge




3/22/2012





about…




10 years $3,284

$62 3 years $2,232





10

9

8

7

6

2

4

5

13

Interest Charge Calculation

This section includes 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 What interest rate is

Andrew paying on cash advances?21.99%

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Cardholder Protections & Rights

Limits liability for unauthorized credit card

charges to $50.00 per cardMust write a letter within 60 days of the first bill containing the errorIf a credit card number is used fraudulently

but the card itself was not used, the individual has no personal liability

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– To receive a credit card, consumers must be 21 years of age or older

• Consumers under 21 have to either have a co-signer or show documentation of sufficient income to make payments

• If someone agrees to be a co-signer on an account, they are equally responsible for the loan

– Interest rates on existing balances generally can’t be raised unless a cardholder is 60 days or more past due

2009 CARD Act

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– Must be notified of any significant changes in rates and fees at least 45 days before the changes take effect

• Any changes made to an account can only apply to future transactions (new charges)

• Have the option of closing the account before the changes go into effect

– Cardholders now have to “opt-in” to allowing transactions that take them over their credit limit

2009 CARD Act

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– Credit card issuers are required to send a monthly statement at least 21 days before a credit card payment is due

– Credit card payment due dates must be consistent month to month

2009 CARD Act

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– Credit card companies cannot increase rates for the first 12 months after an account is open unless:

• The card has a variable interest rate• The cardholder is more than 60 days late in paying

their bill• The card has an introductory rate (the introductory

rate must be in place for at least 6 months and then the rate can increase)

2009 CARD Act

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– Some set-up and maintenance fees are charged before the card is used

– This may reduce the amount of credit initially available

• These non-penalty fees cannot exceed 25% of the initial credit limit

• For example, if a card has a credit limit of $1,000 the total fees for the first year (not including penalty fees) cannot exceed $250

2009 CARD Act

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Credit Card Safety Tips

Sign card with a signature and “Please see ID”

Do not leave cards lying around, and report lost or stolen cards

promptly

Close unwanted accounts by writing and

phone, then cut up the card

Do not give out account

numbers unless making a purchase

Keep a list of all cards, account numbers, and

phone lists separate from

cards

Shred all pre-approved credit

card offers, applications, or

solicitations

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Online Shopping Safety Tips

1. Use a temporary credit card number– This is a one-time use only number– A set amount will be charged to your

credit card– Then a number will be given to you to do

your shopping

2. Use a credit card rather than a debit card– Fair Credit Billing Act

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Fair Credit Billing Act

• Helps to protect consumers while using a credit card to make purchases

• Allows the consumer to not pay for a product or service for which the consumer has a complaint

• If products are not delivered or if it is not what the consumer requested, any amount of money that was credited to the card above the $50.00 fee that consumers are responsible for will be issued back

• Debit cards do not have the same protection

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Summary

A credit card is pre-approved credit which can be used for the purchase

of goods and services now and payment of them later

To avoid paying interest on a credit card, pay the balance in full every

month

A credit card can have a positive or a negative impact on an individual’s credit history

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Summary

Credit card companies are required to disclose the terms and fees of a credit

card in the Schumer’s box

Credit card statements outline important information about a credit

card and should be checked carefully for errors

Consumers have many protections and rights in

regards to credit card use

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Credit Card Trivia

Credit Card

Understanding Your Credit Card

Credit Cards 101 Trivia

© Family Economics & Financial Education –Updated March 2010– Credit Unit – Credit Card TriviaFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The


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Trivia Instructions

• Divide the students into teams of 3-5• Provide each team with a white board and a

dry erase marker• Have each team create a team name and

write it on the board where points are being tallied

• Choose a team to select a category and point value

• Read the question and allow all of the teams 10 seconds to write their response on the paper



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Trivia Instructions

• Have the students hold their answers up at the same time

• Each time, award every team who answered the question correctly the money value indicated by the question

– If they answer incorrectly, the teacher may take away the point value

• Allow the next team to choose the category and point value

• Continue until all of the questions have been answered

• The team with the most money at the end wins



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Credit Cards 101 Trivia

TerminologySchumer

BoxCredit History

Credit Card Knowledge

$100 $100 $100 $100

$200 $200 $200 $200

$300 $300 $300 $300

$400 $400 $400 $400

Final Trivia



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Terminology- $100

Answer:A yearly fee that may be charged

for having a credit card.



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Terminology- $100

Question:What is an annual fee?



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Answer:When a consumer has passed

an initial credit check.

Terminology- $200



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Terminology- $200

Question:What is pre-approved?



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Terminology- $300

Answer: A loan which the borrower must repay the amount in a specified number of equal

payments.



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Terminology- $300

Question:What is closed-end credit?



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Terminology$400

Answer:

A plastic card that is electronically connected to the cardholder’s bank

account.



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Terminology- $400

Question:What is a debit card?



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Schumer Box- $100

Answer:The cost of credit expressed

as a yearly interest rate.



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Schumer Box- $100

Question:What is the annual percentage

rate (APR)?



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Schumer Box - $200

Answer:Transferring debt from one

credit card account to another.



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Schumer Box - $200

Question:What is a balance transfer?



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Schumer Box - $300

Answer:The interest rate charged right

after a credit card account is opened.



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Schumer Box - $300

Question:What is introductory rate?



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Schumer Box - $400

Answer:The interest rate charged on new transactions if the penalty

terms in the credit card contract are triggered.



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Schumer Box - $400

Question:What is penalty APR?



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Credit History- $100

Answer:An individual’s ability and willingness to pay money

back.



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Credit History-- $100

Question:What is creditworthiness?



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Credit History - $200

Answer:A record of a consumer’s credit

history.



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Question:What is credit report?



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Answer:A number that summarizes an

individual’s credit record and history.



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Question:What is a credit score?



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Answer:An example of positive credit

card use.



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Question:What is:• Paying card balances in full

every month• Paying card bills on time• Applying for only cards that are

needed• Keeping track of all charges• Checking monthly card statement

for errors

Credit History- $400



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Answer: Outlines important information about

a credit card, including transactions the cardholder has made during that billing cycle and the current balance

on the credit card.

Credit Card Knowledge - $100



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Question:What is a credit card statement?



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Answer:The cardholder’s liability for

unauthorized credit card charges under the Truth in

Lending Act.




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Question:What is $50.00?



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Answer:The maximum amount of

charges allowed to the account.



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Question:What is the credit limit?



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Answer:To increase credit card safety,

the back of the card should include the cardholder’s

signature and this.



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Question:What is “Please see ID?”



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FinalTrivia



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Final Trivia

Answer:An APR that may change

depending on other factors, such as the prime rate.



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Final Trivia

Question:What is variable-rate APR?

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Jump$tart Principle, “Compare Interest Rates.”

Ask students to write a brief answer to the following questions: Why do you need to compare interest rates? What other factors do you need to compare and

why? Discuss their answers as a class reviewing

points on interest, APR, minimum payment, length of loans, and how they impact total cost.

Journal Entry

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1. Limits current buying __________ as income is required to pay old debts

2. Makes recordkeeping __________

3. May lead to over-__________

4. If debts are not repaid, merchandise may be __________ by creditors

5. May lead to __________ purchases

Advantages and Disadvantages of Using Credit

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1. If debts are not repaid, __________ may be damaged

2. Allows consumers to purchase __________ items they would not otherwise be able to purchase

3. If credit rating becomes poor, could impact ability to get __________ in future

4. Provides a sense of __________ because of having the means to pay for emergencies

5. Allows use of goods and services before or while __________ for them


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1. Good credit shows that a person is financially __________

2. Bad credit shows that a person is financially __________

3. Initially __________ a borrower’s income

4. Must protect credit cards from __________ use


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1. Usually makes __________ items easier

2. Convenient to use3. Credit not always __________4. When used responsibly, helps

__________ good credit5. May lose track of how much has been

__________


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1. Enables consumers to make purchases __________ and by telephone

2. Can be used to buy a variety of __________ and services

3. Typically pay more because of __________ charges

4. Keeps consumers from having to carry __________5. Retailers increase prices to cover costs of credit

and bad __________


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Establish Credit

The importance of credit ratings

Credit ratings are based on the three CsCharacterCapacityCapital

Ways to establish creditOpen/manage checking/saving accountsPay utility bills in your nameObtain a credit card from a local storeGet help from a cosignerObtain a secured credit card

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Creditors only lend to people who can be expected to pay them back

Creditors look at credit-related information to determine if one is a good risk

A creditor’s evaluation of one’s ability and willingness to repay debts is a credit rating

Credit ratings are based on 3 Cs Character---a person’s reputation for being honest and their

financial history Capacity---a person’s employment history and ability to earn

money Capital---a person’s financial worth Ways to establish credit

Establishing Credit

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Loan Sources Preferred lenders Most reliable lenders Examples: banks, credit unions, savings and loan

associations, consumer finance companies, insurance policy loans, credit card companies, private loans

Non-preferred lenders May take advantage of people with poor credit;

typically charge high interest rates Examples: “payday” lenders, pawnbrokers, loan

sharks, auto title loan lenders, tax refund loan

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Considerations When Shopping for Credit

Conditions of loans Annual fees Annual percentage rate (APR)---the amount and

whether it changes Method used to calculate interest Minimum payment Grace period Minimum finance charge and other fees Credit limit Special features and services

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Considerations When Shopping for Credit

Cautions when seeking loans Always “read the fine print” and know the terms of loans

before signing Consider if this would be wise or unwise use of credit Remember that, once signed, borrowers are bound by the

terms of the agreement Consumers can apply for loans in person, online, over the

telephone or in writing Typically, provide information about income, employment

history, residence, credit history The lender will likely run a credit check. If approved, borrowers may have right to rescission

(cancel) within three days if they choose; a provision of the Truth in Lending Act

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Review these explanations and examples to aid in understanding types of sales credit.

Types of Sales Credit

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Sales credit-credit to purchase goods and services from retailers Regular charge account

Borrower promises to pay in full within 20-30 days

If not paid in time, there is a finance charge Example: Accounts with utility companies

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Installment account Borrowers agree to schedule of payments of

equal dollar amounts, including interest Creditors hold the title or “own” the merchandise

until payments are complete. Borrowers typically asked to sign a written

contract A small down payment may be required Examples: Accounts used to purchase

appliances and furniture

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Revolving credit account Borrowers may choose to pay in full each month

or spread payments over time A minimum payment (a percentage of unpaid

balance) must be made each month Unpaid balance may be carried over A finance charge is applied to the unpaid

balance. The lender sets a credit limit for the borrower Examples: Retail stores (Target, Sears); credit

card issuers (Visa, MasterCard)

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Types of Cash Credit

Review these explanations and examples to aid in understanding types of cash credit.

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Cash credit-money granted by a financial institution to use for a variety of purposes; may be secured or unsecured; may be installment, single-payment, or credit card/check credit loans Unsecured loans

Require borrower’s signature as evidence of agreement with terms of the loan

No collateral required Generally available for borrowers with a good credit

history

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Secured loans Require some form of collateral

(property) to secure the loan Collateral reduces lender’s risk; can take

property if the borrower does not repay A cosigner can sign the loan if a borrower

has neither collateral nor good credit Cosigner typically has good credit and

agrees to pay if borrower fails to repay

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Types of cash credit Installment loans---provide a specific amount of

money with promise of repayment with interest according to a schedule of monthly payments in a set amount

Single-payment loans---with collateral, provide a specific amount of money with the promise of repayment with interest in a single payment at a specified time.

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Credit card/check credit loans---allow borrowers to use their credit cards to obtain money or write a check connected to the card account knowing the bank will cover up to a given maximum amount; borrowers repay with interest

Company or retail store credit card loan Issued by service stations, local merchants, or chain

stores Charge purchases ONLY with the merchant issuing the

card A credit limit and minimum monthly payments are

common Examples: Gasoline accounts and chain stores (Belk,

Sears, Target)

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Travel and entertainment credit card loan Generally no credit limit, but account balance

must be paid in full each month For travel-related expenses only, such as

airfare, tours, hotel expenses, etc. May be paid off over time Interest rates of 18% or more are common Examples: American Express and AAA Travel

Card

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General-purpose credit card loan Issued by banks, credit unions, and other financial

institutions Can be used to make purchases around the world where

they are accepted Cash can often be withdrawn from teller machines using

these cards Cards have a credit limit and require a minimum monthly

payment Finance charges/fees vary depending on card, issuer, and

credit history Examples: Visa, MasterCard, and Discover

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Activity

Cs and Ps of Credit Loans Handout Available

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Activity

Cs and Ps of Credit Loans Handout Available

136

Activity

Discuss why creditors rely on the 3 Cs when evaluating credit.

Emphasize that the lender’s view of the applicant’s credit worthiness determines approval, and lenders may use different guidelines.

137

Journal Entry

Jump$tart principle: “Your credit past if your credit future.”

Ask student to write a paragraph explaining why this is true based on what they learned in the “Understanding Credit Cards PowerPoint.”

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Activity

Play one of two PSA videos on http://www.ftc.gov/freereports

Have students explore the Federal Trade Commission website http://www.ftc.gov/freereports to find information on how to obtain a credit report.

Discuss the three major credit reporting agencies--- Equifax, Experian, and TransUnion---and what they do.

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Maintaining Good Credit

Evaluate the need to borrow. Can the purchase be avoided, delayed or bought on lay-away?

Identify and use the right type of credit for the intended purchase and shop for the best terms

Know how you will pay it back before you borrow Only use the amount of credit that you can afford to repay Meet all the terms of credit contracts and agreements Keep accurate records of charges, statements, and payments Consult creditors immediately if you cannot pay on time Resolve billing errors promptly

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Credit Reports A credit report is like a report card reflecting how well a person

has used credit resources Credit reporting agencies maintain records on how people

manage their credit accounts Equifax, Experian, and TransUnion are three national credit-

reporting agencies Contains information about employment history, credit

accounts, balances, payment patterns Consumers should check each of the three credit reports

annually to verify accuracy The Fair Credit Reporting Act---can get a free copy of credit

reports every 12 months The FTC site http://www.ftc.gov/freereports explains how to

obtain the free reports

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Signs of a Debt Problem Consumers find themselves stressed and constantly worrying

over their finances Having no savings Having reached the credit limit on most of their credit cards Skipping payments on some bills in order to pay others Using cash advances on one credit card to pay another Relying on credit cards to purchase day-to-day items like

groceries and fast food Relying on credit cards to pay monthly bills Opening new credit card accounts in response to reaching the

credit limit on others Regularly receiving contacts from creditors/collection

agencies trying to collect unpaid debts

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Strategies For Getting Out of Debt

Actively deal with the problem; ignoring it will only make it worse

Stop using credit; focus on repaying the debt owed

Get help from trained people---a credit counselor or credit counseling service

Develop a spending plan that includes living expenses and debt repayment funds.

Contact creditors immediately, let them know your situation, ask to have credit terms adjusted

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Bankruptcy, a Last Resort Legal relief or forgiveness from repaying certain

debt Try to deal with debts using all means available

before filing for bankruptcy Bankruptcy carries serious, long-term

consequences---part of one’s credit report for ten years

Chapter 7---must sell certain personal belongings, use proceeds to repay debts

Chapter 13---can retain most personal property, but must propose a repayment plan, go to credit counseling, receive financial management education, and be employed

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Journal Entry

Jump$tart Principle: “Don’t borrow what you can’t repay.”

Divide students into teams of four and have each team create a tip sheet, pamphlet, or bulletin board on one of the following topics keeping the Jump$tart principle as a guide: Tips on credit card use Tips on establishing & maintaining a good credit rating Tips on getting out of debt Tips on knowing when and why to borrow

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Consumer Credit Laws at a Glance

Laws have been passed to help creditors and protect and inform consumers

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Laws to protect consumer access to credit

o The Equal Credit Opportunity Act prohibits creditors from discriminating on the basis of sex, marital status, race, national origin, religion, age, or the receipt of public assistance. If credit is denied, creditors are required to provide a written statement explaining why credit was denied.

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Laws requiring lenders to deal fairly with consumers

o Truth in Lending Act requires lenders to disclose the terms of credit and loan agreements. Specific information, such as APR, how variable rates are calculated, when payments are due, and all fees are required to be disclosed to the consumer.

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o The Fair Credit Reporting Act guarantees consumers the right to access their credit file and dispute incorrect information. Consumers are entitled to one free credit report from each of the three national credit bureaus each year. If errors are noted, consumers can dispute the information in their file. Inaccurate information must be corrected or removed. If the dispute cannot be resolved, consumers can request that their version of the situation be included in their file

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o The Fair Credit Billing Act outlines steps for settling credit card billing disputes. This legislation states that consumers should write a letter containing the account holder’s name, account number, and a detailed description of the problem to the creditor using the address on the billing statement for billing errors. The letter and supporting documents, such as receipts, should be mailed certified mail and received by the company within 60 days of the consumer first receiving the bill containing errors. The law states that the company has to respond within 30 days and resolve the claim within 90 days. If the credit company finds that there was a billing error, they are required to credit the borrowers account for the amount of the charge and any related interest incurred. If they find that the charge is legitimate, the consumer must pay the amount billed and any related interest incurred.

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o The Fair Debt Collection Practices Act protects consumers against unfair methods of collecting debts. Consumers are protected against such practices as publicizing their debt to others, the use of threats or abusive language, being contacted at inconvenient times, etc.

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o The Credit CARD Act of 2009 establishes new and extensive law requiting lenders to disclose information to aid consumers in managing their credit accounts. The law stipulates minimum days of payment

152

Laws establishing and limiting consumer liability

o The Electronic Funds Transfer Act protects consumers who use cards that use electronic impulses instead of cash, checks or paper records to activate financial transactions. This law makes the following provisions: consumers must request (EFT) cards, consumer’s rights and responsibilities for using EFT cards must be provided to the consumer, establishes limited liability ($50) to the consumer for unauthorized use, requires paper receipts for transactions, issuers are required to promptly address and correct EFT errors

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Consumer Protections

154

News

The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 offers consumers a new set of protections by prohibiting certain lender practices. The legislation also benefits consumers because all credit card accounts, also known as open-ended credit accounts, must abide by these rules. As a result, consumers are freed from the burden of understanding and keeping track of a wide range of lender-specific rules. The following are a summary of some of the key provisions of the CARD Act

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The following are prohibited practices as of February 22, 2010:

Changing the interest rate at any time for any reason: Card issuers must notify the consumer in writing the reasons for rate increases.

A limit on the period penalty rates can

be charged: Penalty interest rates can be charged for a maximum of six months provided the consumer makes on-time payments during the penalty period

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The same criteria must be used for increasing and lowering interest rates: After a six month penalty interest rate period, the account must be re-evaluated for a lower interest rate. If credit reports, general economy or other measures of credit worthiness were used to justify the rate increase these same measures must be used to determine a lower interest rate.

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Changing the interest rate on existing balances: Interest rate increases must be applied to new balances occurring on or after the effective date for the new rate.

Double-cycle billing: Interest cannot be charged on the previous month’s balance regardless of whether or not the balance was paid in full.

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Late fee traps: Payments cannot be considered late when the due date falls on a date the lender was closed such as weekends, holidays, or other dates the lender is closed.

Mid-day due dates: Payment cannot be required to be received by a specific time during the day, such as noon or 3:00pm. All payments received by 5:00pm on the due date must be counted as on-time.

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Changing due dates: Due dates can no longer change each month. The account due date must be the same each month. For example: April 5th, May 5th, and June 5th.

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Payment method fees: Lenders may not charge a fee for account payments made by telephone or over the internet. However, a fee may be charged for expedited payment service by a customer service representative.

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Journal Entry

What I know about Credit!

Download - 1 Personal Finance 7.02: Understand ways to protect personal credit

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