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Credit Cards. How to Use Them, But Not Abuse Them Developed by Melissa King. Agenda. Credit Cards: The Basics Credit Reports Positives and Disadvantages of Credit Cards The Do’s and Don’ts of Credit Cards. Credit Cards: The Basics. What is credit?
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Credit Cards How to Use Them, But Not Abuse Them Developed by Melissa King
Agenda • Credit Cards: The Basics • Credit Reports • Positives and Disadvantages of Credit Cards • The Do’s and Don’ts of Credit Cards
Credit Cards: The Basics • What is credit? • It is a loan, allowing you to receive goods and services now and pay for them later • It is an agreement that the money borrowed will be paid back • It is a debt, it is NOT income • It comes with fees; interest and other charges
Credit Cards: The Basics • Fees, fees, and more fees • Interest rate fees--what you pay for using the $$ • usually 10% - 25% for students (after intro rate) • Annual fee for just having the credit card • Over the limit fees, charged whenever you exceed your credit limit • Late payment fees • Transaction fees • Other miscellaneous fees • read the fine print!!!
Plastic Money • Charge Cards • must be paid back every thirty days • provides convenience of not having to pay for purchases with cash, but balance may not be carried over month-to-month • Credit Cards • operate on a credit limit and revolving basis • if not paid-in-full within grace period, interest is charged on the remaining balance
Plastic Money • Debit or Check Cards • allow access to checking account via ATMs and point of sale (POS) terminals • amount is deducted from checking account • not a charge card, must have the funds available • “Smart Cards” • these cards store personal information • may be “loaded” with a certain dollar value that can then be spent at POS terminals
Students & Credit Cards • Some recent statistics • 76% of undergraduate students (18-24) have credit cards (an 8% decrease from the 83% with cards in 2001) • 56% of final year students have four credit cards or more (up from 27% in 1998 & 32% in 2000) 2005 Nellie Mae Study
Stats on Credit Card Balances • By senior year, 31% of students have a balance of $3000-$7000 • 1 in 8 students owe $7,000 or more • In the past 10 years, bankruptcy filings by those under 25 have increased by 96%
Credit Reports • Your financial resume • Shows financial responsibility • Follows you for life - just like your school transcript
Credit Reports • What is in a credit report? • personal information • payment history • amount of credit you have access to and are using • inquiries • public records, judgments, liens, bankruptcies
Credit Scores Range from 300-850 Components: • Payment history (35%) • Outstanding debt (30%) • Length of credit history (15%) • Number of inquiries on your report (10%) • Types of credit currently (10%)
More Info on Credit Scores • Check the Internet www.myfico.com http://money.howstuffworks.com www.bankrate.com
The Positives • majority of students use credit cards responsibly • provide convenience and security • allow students to establish credit histories
The Disadvantages • college students are more likely than other types of credit card users to run up debts they cannot pay • many students do not understand the consequences of incurring excessive debt and making payments late • impaired credit rating • more difficult and costly to obtain credit later
The Disadvantages (continued) • college students (with limited or no credit history and income) are charged higher interest rates • many students pay only the minimum amount due each month, not aware of how much this will cost them in interest and time
Repayment Table 1. Minimum Repayment Schedule on a $2000 Credit Card Loan at 19 Percent Minimum monthly payment amount Number of months to repay Total Interest Payment $40 100 $1,994 $50 64 $1,193 $75 35 $619 $100 25 $424 Source: Credit Card Minimum Payment Interest Calculator, Daniel C. Peterson www.webwinder.com Interest savings between lowest/highest payment = $1,570; time saved = 75 months or6.25 years!
Credit Cards: Possible Consequences • Between 10 - 20% of students are risking unacceptably high levels of debt • Many students must take on additional jobs to pay their debts • Many cut back on the number of classes or drop out of school all together • Career choices can be limited • Some are forced to file bankruptcy
Credit Cards: The Risks • Characteristics of high-risk use • Average credit card balances over $1,000 • Owning four or more credit cards • Carrying a balance each month • Using credit cards to charge tuition or fees
Credit Card Don’ts • Don’t use them for cash advances • Don’t use them to pay for basics: rent, groceries, etc. • Don’t charge more than you can pay off in a month • Don’t let banks increase your credit limit Source: USA Funds Life Skills -Module 1
Credit Card Do’s • Limit the number of cards you have • Use a debit card instead of a credit card • Use a card that has no annual fee and lower interest rates • Know all of your card’s fees • Pay your full balance each month or at least pay more than the minimum amount due • Pay on time, all the time Source: USA Funds Life Skills -Module 1
Questions ? ? ?Student Financial Support and Servicescan help!
Community Resources • Consumer Credit Counseling Service of Western Pennsylvania Inc4402 Peach StErie, PA 16509866-4509