Understanding Credit Cards: Benefits, Risks, and Creditworthiness

1. Bennie Waller Longwood University201 High StreetFarmville, VA 23901 Much of this material from fefe.arizona.edu

2. Credit cards are not money trees

3. Or ATM machines

4. Credit- when goods, services or money is received in exchange for a promise to pay a definite sum of money at a future date Credit is derived from the Latin word “credo” meaning “I believe” Why would a person want to use credit?

5. Pre-approved credit which can be used for the purchase of goods and services now and payment of them later • May continue to borrow as long as the credit limit (maximum dollar amount loaned) is not exceeded Credit limit varies based upon the cardholder’s perceived creditworthiness

6. Buy Now, Pay Later!! NOT a good idea.

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

8. Required to make at least a minimum payment each month • Usually only a small percentage (2.5-5%) of the total balance due

9. Silly Willie has just moved into a new apartment and needed (wanted) some new furniture. He spent a total of $5000 all on his credit card. His annual rate (APR) is 18%. How much will Silly Willie pay in total interest and how long will it take to pay off this debt assuming no additional charges are made on the card?

10. If Silly Willie makes the minimum payment (2% of balance), it will take approximately 35 years. Willie will pay a total of almost $18,000 in payments of which $13,000 will go to interest. Recall the initial amount of credit was $5,000.

11. Convenient payment tool • Useful for emergencies • Needed for most reservations • 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 • Interest can be costly when a balance is revolved • Penalty fees may be excessive • Tempting to overspend • Risk of identity theft • Responsible for lost/stolen cards • Applying for multiple accounts in a short period of time can lower your credit score

12. Credit card approval depends on borrower’s perceived creditworthiness • How a person uses a credit card affects their creditworthiness Creditworthiness is determined by a credit report and/or credit score

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

14. Credit Card terms and language can be confusing

15. Penalty APR and • When it Applies • Discloses the penalty APR and the penalty terms that trigger it to take effect • Penalty APR - interest rate charged on new transactions if the penalty terms in the contract are triggered What is the Penalty APR for this credit card offer? 28.99%

17. 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