Understanding Your Credit Card Essentials Advanced Level

1. Understanding Your Credit Card Essentials Advanced Level The Essentials to Take Charge of Your Finances

2. What is 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 Credit is derived from the Latin word “credo” meaning “I believe” Brainstorm! Why would a person want to use credit?

3. Obtaining Credit Lender determines whether to grant the borrower credit based on the borrower’sperceived creditworthiness (an individuals ability and willingness to pay the money back) Borrower requests to receive credit from a lender (person or organization who has the resources to provide the borrower money) Borrower (person or organization that is receiving the money) is in need of credit Why would a lender assess a borrower’s creditworthiness before granting credit?

4. Paying Back Credit Borrower is usually expected to pay interest (the price of money) in addition to the money borrowed Depending on the type of credit, money is paid back in a series of equal or unequal payments If approved for credit, the borrower will receive money from the lender Why would a lender charge a borrower interest?

5. 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 • Cardholders may continue to borrow as long as the credit limit (maximum dollar amount loaned) is not exceeded A credit cards credit limit varies based upon the cardholder’s perceived creditworthiness

6. 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

7. 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

8. Minimum Payments What are the advantages and disadvantages of using a credit card? Brainstorm!

9. Advantages & Disadvantages to using Credit Cards • Convenient payment tool • Useful 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 • Possibility of receiving bonuses • Interest can be costly when a balance is revolved • Additional penalty fees may apply • 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

10. 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

11. Creditworthiness • Creditworthiness Credit card approval depends on the borrower’s perceived creditworthiness according to the lender Lenders assess an individual’s creditworthiness based upon their credit report and/or credit score • How a person uses a credit card affects their creditworthiness

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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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 Must direct consumers to the Federal Reserve website (http://www.federalreserve.gov/creditcard/ )to obtain more information about credit cards, including the following sample credit card offer

19. Credit cards may charge many different types of interest rates • Annual Percentage Rate (APR) for Purchases • Interest rate paid for purchases • Multiple interest rates may be listed - final interest rate may depend on creditworthiness of the applicant

20. Fixed vs. Variable-rate APR • Fixed-rate APR- an APR that cannot change during the period of time outlined in a credit card agreement • Variable-rate APR- an APR that may change depending on other factors (such as economic conditions) 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

21. Introductory Rate • Introductory rate- the APR that may be charged after a credit card account is opened • Will have a different APR (usually higher) after the introductory period ends • Not all credit cards have an introductory rate 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%

22. APR for Balance Transfers & Cash Advances • A balance transfer is the act of transferring debt from one credit card account to another • A cash advance includes withdrawing cash from an ATM using a credit card • Balance transfer and cash advance fees may also apply (even if the APR is 0%)

23. Penalty APR and • When it Applies • Discloses the penalty APR and 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%

24. How To Avoid Paying • Interest on Purchases • Explains how you can avoid interest charges by paying credit card bills in full every month • Minimum Interest Charge • Typically range from $0.50 to $2 per month

25. Credit cards may charge many different types of fees • Set-up and Maintenance Fees • Any set-up and maintenance fees for the card • Annual fee- a yearly fee that may be charged for having a credit card What is the annual fee for this credit card? $20

26. Transaction Fees • Discloses any transaction fees for the card • Balance transfer fees • Cash advance fees • May be charged in addition to APR

27. Penalty Fees • Discloses the penalty fees for the card (in addition to Penalty APR) • Late-payment- charged when a cardholder does not make the minimum monthly payment by the due date • Over-the-limit-charged if the account balance goes over the set credit limit • How we calculate your balance • Credit card companies can use one of several methods to calculate the outstanding balance on a credit card

28. 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%

29. Credit Card Chaos Why is it important to understand how to read a credit card offer? • 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

30. Receiving a Credit Card • Generally must be 21 years of age or older • UNLESS • Show documentation of sufficient income • Have a co-signer If someone is a co-signer on a an account, they are equally as responsible and their credit report is impacted

31. Receiving a Credit Card Credit card companies send pre-approved credit card applications in the mail when the individual has passed their initial credit check

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

33. Andrew’s Credit Card Statement 2 3 1 • Summary of Account Activity • Payment and credit amounts • Purchase totals • Balance transfer and cash advance totals • Fee and interest charges • Amount past due • New balance • Available credit 4 6 5 7 8 How much did Andrew charge in new purchases during this credit card billing cycle? 9 $529.57 10

34. Andrew’s Credit Card Statement • Payment Information • Includes: • Total new balance • Minimum payment amount • Date payment is due • Payment due dates must be consistent month to month • Monthly statements must be sent at least 21 days before a credit card payment is due 2 3 1 4 6 5 7 8 What is Andrew’s minimum payment due for this billing cycle? 9 $53.00 10

35. Late Payment Warning • States what will happen if a payment is late- usually additional fees and a higher interest rate Andrew’s Credit Card Statement 2 3 1 4 6 5 • Minimum Payment Warning • Estimate of how long it can take to pay off a credit card balance if only the minimum payment is made each month 7 8 How long will it take Andrew to pay off the balance of his credit card if he only pays the minimum payment? 9 10 years 10

36. Andrew’s Credit Card Statement 2 3 1 • Notice of Changes to Your Interest Rates • If a cardholder triggers the Penalty APR, they must be notified that their rates will be increasing 4 6 5 7 Has Andrew triggered the Penalty APR? 8 Yes, he will pay 28.99% on all transactions made after 4/9/12. 9 10

37. Andrew’s Credit Card Statement 2 • Important Changes to Your Account Terms • Cardholders must be notified of any raise in rates or fees or any other significant changes to the account at least 45 days before the changes take effect • Any changes can only apply to future transactions (new charges) • Consumer has the option of closing the account before the changes go into effect 3 1 4 6 5 7 8 9 10

38. Andrew’s Credit Card Statement 2 • Transactions • Includes a list of all the transactions that have occurred since the last statement • Should be reviewed for errors 3 1 4 6 5 7 • Fees and Interest Charged • Must list the fees and interest charges separately on the monthly statement 8 9 Did Andrew pay a late fee? Yes, he paid $35.00 for a late fee. 10

39. Year-to-Date Totals • Total amount paid in fees and interest charges for the current year Andrew’s Credit Card Statement 2 3 1 4 What is the total amount of interest Andrew has paid in the year 2012? 6 5 $18.27 7 • Interest Charge Calculation • Includes a summary of the the different types of transactions 8 9 Why is it important to understand how to read a credit card statement? 10

40. Truth in Lending Act Limits liability for unauthorized credit card charges to $50.00 per card Must write a letter within 60 days of the first bill containing the error If a credit card number is used fraudulently but the card itself was not used, the individual has no personal liability

41. Credit Card Safety Tips Brainstorm! What are safety tips for using a credit card? 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 Sign card with a signature and “Please see ID” 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

42. Summary 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 A credit card is pre-approved credit which can be used for the purchase of goods and services now and payment of them later

43. Summary 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 Credit card companies are required to disclose the terms and fees of a credit card in the Schumer’s box