Personal Finance

1. Personal Finance 7.02: Understand ways to protect personal credit.

2. 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.

3. 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.

4. Journal Entry • What do you think Credit is?

5. Credit Overview

6. 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

7. Types of Consumer Credit • Sales Credit • Regular charge account • Installment account • Revolving credit account • Cash Credit---Secured and Unsecured • Company or retail store credit cards • Travel and entertainment credit cards • General-purpose credit cards

8. Solve Credit Problems • Actively deal with the problem • Stop using credit; focus on repayment • See a credit counselor • Develop a spending plan with living expenses and a plan for repayment • Ask creditors to adjust credit terms

9. Establish Credit • The importance of credit ratings • Credit ratings are based on the three Cs • Character • Capacity • Capital • Ways to establish credit • Open/manage checking/saving accounts • Pay utility bills in your name • Obtain a credit card from a local store • Get help from a cosigner • Obtain a secured credit card

10. Maintain Good Credit • Evaluate when you really need credit • Shop for the right type of credit for each purchase • Shop for the best credit terms • Know how you will pay back • Use only the amount of credit you can repay • Meet terms of credit agreements • Keep accurate records • Consult creditors immediately if you cannot pay on time • Resolve billing errors promptly

11. Understanding Your Credit Card Credit Unit Take Charge of Your Finances

12. Credit CREDIT- When goods, services or money is received in exchange for a promise to pay a definite sum of money at a future date INTEREST- The price of money- when referring to credit, interest is the charge for borrowing money

13. Lender and Borrower BORROWER- The person or organization that is receiving the money from the lender LENDER- The person or organization who has the resources to provide the individual with a loan

14. Closed-end vs. Open-end Credit

15. Closed-end vs. Open-end Credit

16. 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 creditworthiness • Credit limit is the maximum dollar amount loaned Creditworthiness is an individuals ability and willingness to pay the money back

17. Credit Card Interest • Rate at which interest is charged is referred to as: • Annual Percentage Rate (APR) • The cost of credit expressed as • a yearly interest rate Interest is charged each month the balance is not paid in full

18. 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

19. Minimum Payments

20. Advantages to using Credit Cards Convenient payment tool Protection against fraud Opportunity to establish a positive credit history Useful for emergencies Online shopping is safer than using a debit card because of the Fair Credit Billing Act protection Often required to hold a reservation Possibility of receiving bonuses, such as frequent flyer miles or cash rebates Able to purchase “big ticket” items and spread out payments

21. Disadvantages to using Credit Cards Interest can be costly when a balance is revolved Responsible for lost/stolen cards Additional penalty fees may apply Applying for multiple accounts can lower your credit score Tempting to overspend Risk of identity theft

22. Debit Cards What is the difference between a credit card and a debit card? • 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

23. Credit History Credit cards can have a positive or negative impact on an individuals credit history Credit Report A 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 CreditScore A number that summarizes an individual’s credit record and history. It is a numeric “grade” of a consumer’s financial reliability

24. Positive Credit Card use Helps develop positive credit history and credit report Proper credit card use 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

25. 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

26. Negative Credit Card Use Develops negative credit history and credit report Improper credit card use Lower credit score 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

27. 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

28. 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

29. 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

30. Annual Percentage Rate (APR) for Purchases This 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

31. Introductory Rate If 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 ends What 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%

32. Variable-rate APR Some 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

33. APR for Balance Transfers 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%

34. APR for Cash Advances 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%

35. Penalty APR and • When it Applies • 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%

36. How To Avoid Paying Interest on Purchases This section explains how you can avoid interest charges on a credit card How can a cardholder avoid paying interest on a credit card? By paying credit card bills in full by the due date

37. Minimum Interest Charge 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 offer What is the minimum interest charge for this credit card? $1.50

38. 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

39. Set-up and Maintenance Fees • This 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

40. Transcation Fees This 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)

41. Penalty Fees • This 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.

42. 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)

43. Loss of Introductory APR If 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 bill What APR will the cardholder be charged if the introductory rate is lost? The Penalty APR of 28.99%

44. 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

45. 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

46. 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

47. Receiving a Credit Card • Compare credit card offers and determine which card to apply for • 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

48. 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

49. 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

50. Credit Card Statements Andrew’s Credit Card Statement Please help Andrew interpret his credit card statement. 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