understanding a credit card take charge of your finances
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Understanding a Credit Card
Take Charge of Your Finances
Types of CreditCharacteristics Close-end
CreditOpen-end credit (revolving credit)
Definition A one-time loan Credit is extended in advance
Purpose of the loan
Specified in application
May be used for a variety of purposes
Payments Specified number of equal payments
Vary depending upon amount charged
Loan amount Agreed upon during the application process
May be increased for responsible consumers
Examples Mortgage, Automobile Loan
Credit Card
Credit vs. Debit cardsCharacteristics
Credit Card Debit Card
What is it? Pre-approved credit A card (looks similar to a credit card) that is linked to an individual’s bank account
Payment process
Charged to an individual’s account and they may pay later
Money is immediately deducted from the bank
Is interest charged?
Yes – because money is being borrowed from the credit card company
No
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
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
Interest
• Interest is referred to as the annual percentage rate (APR)
• The price of borrowing money to make a purchase and paying it later is interest
• Credit is often compounding interest which is interest added upon interest each month based upon the amount charged
• The interest rate varies greatly between credit cards
InterestAmount charged to credit card
APR Minimum Payment
Time to pay off the credit card
Total amount of interest paid
Total paid for credit card balance
$2,000 18% $50.00 62 months
$1,077.25
$3,077.25
$2,000 10% $50.00 49 months
$443.00 $2,443.00
$2,000 18% $75.00 35 months
$573.00 $2,573.00
Credit scores
• A FICO (Fair Isaac Company) score is an evaluation of a person’s ability to repay debt– It is a number between 300 and 850
• A higher number is a better credit score
– Indicator of a person’s ability to pay back a loan
• A lower score may increase the interest rates a consumer pays or they may not receive credit– The creditor has a greater risk that the individual
may not pay back the money they loaned
Credit Scores• Credit cards may influence each
component of how an individual’s credit score is calculated
10%10%
15%
30%
35%Credit Mix
Pursuit of New Credit
Credit History & Length
Outstanding Debt
Payment History
Credit scores
• Low credit scores will cost individuals more money long-term. – This table is based upon a thirty-year fixed
mortgage rate on a $300,000 loan.
FICO Score Interest Rate
Monthly Payment
30 Year Amount
760 5.9% $1,787 $643,320
650 7.2% $2,047 $736,920
590 9.3% $2,500 $900,000
Schumer box• The Federal Truth in Lending Act requires
card issuers to display the costs of a credit card in an easy to read box format on most applications and solicitations – Called the Schumer Box
Annual
Percentage Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance
Calculation Method
for Purchases
Annual
FeesTransaction 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
Annual percentage rateAnnual
Percentage
Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance
Calculation Method
for Purchases
Annual
FeesTransaction 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
• Annual percentage rate (APR) – Interest rate charged for amount borrowed in terms of per dollar per year
• The lower the interest rate, the better
Grace periodAnnual
Percentage
Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance
Calculation Method
for Purchases
Annual
FeesTransaction 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
Minimum finance chargeAnnual
Percentage
Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance
Calculation Method
for Purchases
Annual
FeesTransaction 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
• Minimum finance charge – Minimum amount charged for card use
Balance calculation methodAnnual
Percentage
Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance
Calculation Method
for Purchases
Annual
FeesTransaction 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
• Balance calculation method for purchases- Method used to determine balance for finance charges
Annual feesAnnual
Percentage
Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance
Calculation Method
for Purchases
Annual
FeesTransaction 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
• Annual fees- Yearly charge for credit card ownership
Cash advancesAnnual
Percentage
Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance
Calculation Method
for Purchases
Annual
FeesTransaction 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
• Transaction fees for cash advances – cash withdrawal fees
Late payment feesAnnual
Percentage
Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance
Calculation Method
for Purchases
Annual
FeesTransaction 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
• Late payment fees – Penalty fee for payments not made by the due date
Additional benefits
• Additional benefits of a credit card may include the following: – Rebates (money back)– Products or services given to the consumer
• Frequent flyer miles
– Additional warranties – Travel accident insurance – Credit card registration– A low introductory APR
Receiving a credit card
Understanding the bill
• Balance transfer – Transfer the balance from one card to another– Companies will advertise a lower
interest rate for balance transfers– These are often introductory rates and
will only last for a short time
Safety tips• Sign card with a 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 numbers unless
making purchases• Keep a list of all cards, account numbers,
and phone lists separate from cards • Report lost or stolen cards promptly
Fair Credit Billing Act • Helps to protect consumers while using a credit card to
make purchases • It allows the consumer to not pay for a product or
service for which the consumer has a complaint• Billing disputes are covered within the Fair Credit
Billing Act for credit cards • If products are not delivered or if it is not what they
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– Making credit cards a safer form of payment for online
purchases
Any Questions?