Credit Cards and Credit Scores Consumer Math Unit 3

What do you already know? Do your parents have credit cards? Do you have credit cards? It’s safe to borrow how much? List out all the things you already know about credit cards and credit scores!

Overview

Overview Basics Shopping For A Credit Card Reading your Statement Credit Cards– the real cost Amount of Debt Calculations

Basics

What are credit cards? Standard-sized plastic cards with magnetic strips that hold a machine readable code. Convenient substitute for cash or check Essential component of electronic commerce and internet commerce. Draw on a credit limit approved by the card-issuer (bank, store, service provider, company, etc.) Get one bill every 30 days and pay after purchases are made.

Advantages and Disadvantages Protection against theft of cash Spending beyond your means Purchase products and services as you need them Impulse buying Emergencies Only paying the minimum balance Money management High interest rates Builds credit Identity Theft

Terminology Annual Fee The once-a-year cost of owning a credit card. Some credit card providers offer cards with no annual fees. The annual fee is part of the total cost of credit. Annual Percentage Rate (APR) The yearly interest rate charged on outstanding credit card balances. Balance An amount of money. In personal banking, balance refers to the amount of money in a savings or checking account. In credit, balance refers to an amount of money owed. Credit Bureau A reporting agency that collects information on consumer credit usage. There are currently three main credit bureaus in the United States: Equifax, Experian, and Trans Union. Credit Line The maximum dollar amount that can be charged on a specific credit card account.

Terminology Credit Rating A financial institution's evaluation of an individual's ability to manage debt. It is necessary to have a good credit rating if you intend to borrow money or have credit cards. Grace Period The time a borrower is allowed after a payment is due to make that payment without adding to the interest owed. Introductory Rate Credit card issuers may offer low introductory annual percentage rates as special promotions. Be sure to fully understand how long the introductory rate will last and what the standard rate will be. Minimum Payment The lowest amount of money that you are required to pay on your credit card statement each month in order to keep the account in good standing. Overdraft Protection A banking service that allows you to link your checking account to your credit card, thereby protecting you from overdraft penalties or bounced checks in the case of insufficient funds.

Questions so far?

Shopping for a Credit Card?

Types of Credit Cards Bank Card What are the uses for each Store Card Visa, MasterCard of these? Store Card Macy’s, Sears, BP, etc. Travel and Entertainment Card American Express, Diners Club

What are you looking for in a credit card? Brainstorm! What are some things you should look for in a credit card? APR Late Fees Annual Fees Credit Limit Points/Rewards Overdraft Protection Grace Period Acceptance of card

Shopping for a Credit Card You are going to research three different types of credit cards, compare each based on your previous criteria and then determine the credit card which will best suit your needs. Use bankrate.com as a good starting point. Make sure to fill out the worksheet entirely!

Shopping for a Credit Card Discussion. What did you find when researching? APR Late Fees Annual Fees Credit Limit Points/Rewards Overdraft Protection Grace Period Acceptance of card

Who accepts what cards? Each group will be assigned a specific store. Your job is to research what types of cards that store accepts and what card types they do not accept. Share with the whole class. Which cards should you avoid getting from this research?

Denial of Credit If you are denied credit: Ask the creditor to explain why you were denied Review your credit history Do the things you can to improve your credit worthiness Apply to another creditor whose standards may be different. Credit Cards are NOT the only way to build your credit!

Reading a Statement

Statement Sample statement Answer the questions on the given worksheet.

Billing Errors Fair Credit Billing Act (1974) Challenge a billing statement for errors such as unauthorized purchases, charges for items that were never delivered, failure to credit a payment Must notify the creditor of a dispute within 60 days Creditor must investigate and correct the mistake or explain why the charge is not an error You do not have to pay the disputed amount until after the investigation is finished You have the usual amount of time to pay the bill once investigation is finished

Credit Cards– the real cost

Debt Interest accumulates and adds to your principal balance. This is the major reason people get into credit card trouble/debt.

Costs Calculating total costs of an item bought on credit, paying over time, with interest. Utilize online payment calculators: www.practicalmoneyskills.com Go to the calculators, find cost of credit calculator. Calculate for each of the given situations

Amount of Debt

20-10 Rule Never borrow more than 20% of your yearly NET income. If you earn $30,000 per year net, then: $30,000*.20 = $6,000 Monthly payments should not exceed 10% of your monthly NET income. If your take-home pay is $400 per month, then: $400 * .10 = $40

Calculations Practice Nancy and Thomas have a combined monthly net income of $1,200. What is the most they can afford to pay for installment and credit card debt? $120

Calculations Practice Jessie has a monthly net income of $800. His fixed monthly expenses consist of $150 for rent and he currently pays $80 each month for a credit card bill. He now wants to buy a car. How much does Jessie have left in his budget for a car payment to stay in his safe debt load? $0

Calculations Practice Carla has a monthly net income of $450. She wants to buy a new bike and pay for it using a credit card. What is the largest monthly payment she can commit to making? $45

Credit Scores

Three Major Credit Bureaus Experian TransUnion (one used by Discover) Equifax Each will give a different score based on their scoring system.

Scores Range from 300 (lowest) to 850 (highest)

Impact of Your Credit Score

FICO Credit Scores

FICO Credit Scores Payment History- want to know if you have paid past credit accounts on time. Amount Owed- want to know how much you have borrowed Length of Credit History- how long you have had credit (usually the longer you have credit the better your score will be) Types of credit in use- a mix of credits New credit- opening a lot of new accounts lowers your credit score

What’s not in your credit score Race, color, religion, national origin, sex, marital status Age Salary, occupation, title, employer, date employed or employment history Where you live Interest rates on accounts Items reported as child/family support obligations or rental agreements

Improve your credit score Check your credit report Setup Payment Reminders Reduce the amount of debt you owe Pay bills on time Keep balances low on credit cards Apply for and open new cards only as needed

Fact versus Fallacy Fallacy: My score determines whether or not I get credit. Fact: Lenders use a number of facts to make credit decisions, including your FICO® score. Lenders look at information such as the amount of debt you can reasonably handle given your income, your employment history, and your credit history. Based on their perception of this information, as well as their specific underwriting policies, lenders may extend credit to you although your score is low, or decline your request for credit although your score is high.

Fact versus Fallacy Fallacy: A poor score will haunt me forever. Fact: Just the opposite is true. A score is a “snapshot” of your risk at a particular point in time. It changes as new information is added to your bank and credit bureau files. Scores change gradually as you change the way you handle credit. For example, past credit problems impact your score less as time passes. Lenders request a current score when you submit a credit application, so they have the most recent information available. Therefore by taking the time to improve your score, you can qualify for more favorable interest rates. 

Fact versus Fallacy Fallacy: Credit scoring is unfair to minorities. Fact: Scoring considers only credit-related information. Factors like gender, race, nationality and marital status are not included. In fact, the Equal Credit Opportunity Act (ECOA) prohibits lenders from considering this type of information when issuing credit. Independent research has been done to make sure that credit scoring is not unfair to minorities or people with little credit history. Scoring has proven to be an accurate and consistent measure of repayment for all people who have some credit history. In other words, at a given score, non- minority and minority applicants are equally likely to pay as agreed.

Fact versus Fallacy Fallacy: Credit scoring infringes on my privacy. Fact: Credit scoring evaluates the same information lenders already look at - the credit bureau report, credit application and/or your bank file. A score is simply a numeric summary of that information. Lenders using scoring sometimes ask for less information - fewer questions on the application form, for example.

Fact versus Fallacy Fallacy: My score will drop if I apply for new credit. Fact: If it does, it probably won't drop much. If you apply for several credit cards within a short period of time, multiple requests for your credit report information (called “inquiries”) will appear on your report. Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.