Presentation on theme: "Understanding a Credit Card"— Presentation transcript:
1Understanding a Credit Card “Take Charge of Your Finances” Advanced Level
2What 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 dateCredit is derived from the Latin word “credo” meaning “I believe”Why would a person want to use credit?
3Obtaining CreditLender determines whether to grant the borrower credit based on perceived creditworthinessBorrower requests to receive credit from a lenderBorrower is in need of creditLender- person or organization who has the resources to provide the borrower moneyCreditworthiness- an individual’s ability and willingness to pay the money backBorrower- person or organization that is receiving the moneyWhy would a lender assess a borrower’s creditworthiness before granting credit?
4Paying Back CreditBorrower is usually expected to pay interest in addition to the money borrowedIf approved, the borrower will receive money from the lenderBorrower pays money backInterest - the price of moneyWhy would a lender charge a borrower interest?
5Different Forms of Credit How are these forms of credit different?VS.Closed-end CreditOpen-end Credit
6Closed-end vs. Open-end Credit Closed-end creditOpen-end(revolving) creditDefinitionPurpose of loan (what is purchased)Credit extended in advanceA one-time loanMay be used for a variety of purposesSpecified in application
7Closed-end vs. Open-end Credit Closed-end creditOpen-end creditPaymentsLoan AmountExamplesVaries- can be paid in one payment or a series of equal or unequal paymentsSpecified number of equal paymentsAgreed upon during the application processMay be increasedMortgage, automobile, education loansCredit cards
8What is a Credit Card?Buy Now, Pay LaterPre-approved credit which can be used for the purchase of goods and services now and payment of them laterMay continue to borrow as long as the credit limit (maximum dollar amount loaned) is not exceededCredit limit varies based upon the cardholder’s perceived creditworthiness
9Annual Percentage Rate (APR) Credit Card InterestInterest is charged each month the balance is not paid in fullRate at which interest is charged is referred to as:Annual Percentage Rate (APR)The cost of credit expressed asa yearly interest rate
10Minimum PaymentsRequired to make at least a minimum payment each monthUsually only a small percentage (2.5-5%) of the total balance due
11~ Total amount of interest paid Minimum PaymentsTo prepare for her first semester of college, Miranda purchased a new computer for $1000 and textbooks for $500, spending a total of $1500 on her credit card charging 15% APR. How much would Miranda pay in interest if she makes the minimum payment?Payment Made~ Time to pay off card~ Total amount of interest paid~ Total amount paidFull PaymentPartial PaymentMinimum Payment$15001 month$0$1500$1351 year$125$1625$3011 years$1413$2913
12Advantages & Disadvantages to Using Credit Cards Convenient payment toolUseful for emergenciesOften required to hold a reservationAble to purchase “big ticket” items and spread out paymentsProtection against fraudOpportunity to establish a positive credit historyOnline shopping is safer than using a debit cardPossibility of receiving bonusesInterest can be costly when a balance is revolvedAdditional penalty fees may applyTempting to overspendRisk of identity theftResponsible for lost/stolen cardsApplying for multiple accounts in a short period of time can lower your credit score
13What is the difference between a credit card and a debit card? What is a Debit Card?Plastic card which looks like a credit card but is electronically connected to the cardholder’s bank accountMoney is immediately withdrawn from the cardholders checking accountWhat is the difference between a credit card and a debit card?
14CreditworthinessCredit card approval depends on borrower’s perceived creditworthinessHow a person uses a credit card affects their creditworthinessCreditworthiness is determined by a credit report and/or credit score
15Credit History Credit Report Credit Score A record of a consumer’s credit history that includes information about credit card use as well as the use of other types of creditCredit ScoreA number that summarizes an individual’s credit record and history; a numeric “grade” of a consumer’s financial reliabilityCredit cards can have a positive or negative impact on an individual’s credit history
16Positive Credit Card Use Helps develop positive credit history and credit reportProper credit card useEarn a high credit scoreA high credit score gives 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
17Positive Credit Card Use Examples of positive credit card behaviors:Paying credit card balances in full every monthPaying credit card bills on timeApplying for only credit cards that are neededKeeping track of all charges by keeping receipts and using a check registerChecking the monthly credit card statement for errors
18Negative Credit Card Use Develops negative credit history and credit reportImproper credit card useLower credit scoreConsumers 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
19Negative Credit Card Use Examples of negative credit card behaviors:Making late credit card paymentsPaying only the minimum paymentExceeding the card’s credit limit (usually triggers a penalty fee)Charging items that can’t be paid off immediatelyOwning too many credit cards
20NO CreditIf an individual has not used credit, they will not have any information in their credit reportNot having a credit report can cause an individual to be denied credit