Lesson 8 Getting a Credit Card

Key Terms APR Credit Credit Card Creditor Debtor Finance Charge Interest Rate Introductory Rate Late Fees Minimum Payment Principal

What Is Credit? Borrowing money from someone Receiving goods or services but not having to pay when you receive those goods or services – Since you are not paying at the time of delivery, you are essentially borrowing the money from the provider which you are paying back later

Common terminology – Lender a.k.a. creditor Person or institution loaning the money – Borrower a.k.a debtor Person or institution borrowing the money – Principal Amount borrowed

– Interest Money charged by lender for the privilege of using his/her money instead of your own Results in higher overall cost of the item purchased (pay back more than borrowed) – Balance The amount you still owe on the loan As you make payments on a loan, the balance goes down

Consumer Credit Plans regular charge credit – charge a purchase at any time – must pay by a certain date w/i 30 days finance charge if over that date – title (legal ownership) passes to buyer at the time of purchase – commercial credit (for businesses, not consumers) may be for longer w/ higher balance discounts offered for early payment Your typical business-to-business trade credit

installment credit – make payments over extended period of time – normally longer than regular charge credit – customer pays interest interest - payment to someone else for the privilege of using his/her money instead of your own – installment contract agreement to make regular payments until goods are fully paid for title does not pass until all the payments have been made no payment = items repossessed Your typical car loan, home loan, etc.

How Installment Credit Works

Monthly Payment Interest Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Principal Time Level (Even) Monthly Payment

Remaining Balance Over Time $ Time Loan Amount Loan Paid Off

revolving credit – combines features of regular credit and installment credit – purchase on credit at any time up to a specified amount – pay minimum amount each month includes interest charge can pay off early minimum payment varies based on amount of credit used Your typical credit card

How Credit Card Companies Make Their Money

Monthly Payment Monthly Payment Monthly Payment Monthly Payment Monthly Payment Monthly Payment Monthly Payment Interest Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Principal Time

Remaining Balance Over Time $ Time Loan Amount Loan Paid Off Loan Should Be Paid Off

What Is a Credit Card? Convenient way for creditor to loan money on demand to its customers Cardholder (customer of credit card company) simply uses credit card at store – Takes merchandise home – Credit card company pays for purchase – Cardholder now owes that money to credit card company

Credit or Debit – What’s the Difference? Credit Card Loan – You are borrowing money from the credit card company whenever you use the card You receive monthly statements from the credit card company telling you how much you owe them. If entire balance is not paid off during grace period, you will pay interest on the entire balance Debit Card Not a loan – Money comes out of your checking account as soon as your bank is notified of purchase by the credit card company Transactions show up on your bank statement No interest associated with the transaction

Credit or Debit – What’s the Difference? Credit CardDebit Card Run as “credit” sale at store (sign for transaction) Credit card company will handle processing of transaction (they pay the store) This is a loan (credit card company is loaning you $$ for purchase) This is NOT a loan (credit card company is getting the amount from your bank within 1 business day or so) Transactions appear on a monthly statement received from the credit card company Transactions appear on your bank statement Interest paid on entire balance if not paid within grace period No interest paid (seller paid fee for accepting your card)

Pros & Cons of Using Credit Pros (+) Can be big help in emergency Useful for making purchase online or over the phone Responsible use helps establish good credit history Payment in full every month helps avoid finance charges Convenient Cons (-) Easy to buy more than you can afford Interest rates usually very high Making only minimum payments extends the time until its paid off and results in much more interest paid

How Do I Get a Credit Card? Variety of sources – Your bank – Other banks – Stores – Offers in mail – Sign-ups at events Watch out for fine print

Do Credit Card Offers Differ? Annual Percentage Rate (APR) Introductory APR Grace period – Number of days you have after end of billing cycle to pay balance before you incur finance charges How interest is computed – Based on: Average Daily Balance High Balance for Month End-of-Month Balance

Example Credit Card: – APR 12% Periodic APR 1% – Average Daily Balance $2000 – High Balance $2500 – End-of-Cycle Balance $1500 Interest Owed: – Based on Average Daily Balance $20 – Based on High Balance $25 – Based on End-of-Cycle Balance $15

What Happens if I Don’t Pay Off My Balance? Will have interest on purchases added to balance Will have minimum monthly payment required – Can pay more!!!!!

What Should I Do if My Credit Card Is Stolen? Call the card issuer immediately – They will reverse any fraudulent charges that may have occurred Must file report for each charge that you didn’t authorize You can’t be held responsible for more than $50 in fraudulent charges – Company will cancel card & issue you new one Keep record of when/who you contacted in case a dispute arises