Understanding a Credit Card Take Charge of Your Finances 1.4.1

© Family Economics & Financial Education –Updated April 2009– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona Types of Credit CharacteristicsClose-end Credit (Installment Credit/Loan) Open-end credit (revolving credit) DefinitionA one-time loanCredit is extended in advance Purpose of the loanSpecified in application May be used for a variety of purposes PaymentsSpecified number of equal payments Vary depending upon amount charged Loan amountAgreed upon during the application process May be increased for responsible consumers ExamplesMortgage, Automobile Loan Credit Card

© Family Economics & Financial Education –Updated April 2009– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona Credit vs. Debit cards CharacteristicsCredit CardDebit Card What is it? Payment process Is interest charged? Pre-approved credit A card (looks similar to a credit card) that is linked to an individual’s bank account Charged to an individual’s account and they may pay later Money is immediately deducted from the bank Yes – because money is being borrowed from the credit card company No

© Family Economics & Financial Education –Updated April 2009– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona Why use a credit card? Advantages - Convenient - Useful for emergencies - Often required to hold a reservation - Purchase ‘big ticket’ items earlier - Easy form of debt consolidation - Protection against rip-offs and fraud - Establish a good credit rating

© Family Economics & Financial Education –Updated April 2009– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona Why use a credit card? Disadvantages - Interest is costly - Additional fees are common - Tempting to overspend - Privacy is an increasing concern - Personally responsible for lost/stolen cards - Identity theft easier - Can lose financial freedom from overspending

© Family Economics & Financial Education –Updated April 2009– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona Interest The interest rate varies greatly between credit cards Interest is referred to as the Annual Percentage Rate (APR) The price of borrowing money to make a purchase and paying it later is interest Credit is often compounding interest which is interest added upon interest each month based upon the amount charged

© Family Economics & Financial Education –Updated April 2009– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona Credit Score - Questions What is a credit score? An equation that helps lenders determine a persons creditworthiness A credit score is between what two numbers? This is called the ____________ score FICO

© Family Economics & Financial Education –Updated April 2009– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona Credit scores are composed by the following five elements : 35% - Payment History 30% - Amounts Owed 15% - Length of Credit History 10% - New Credit 10% - Types of Credit Used

© Family Economics & Financial Education –Updated April 2009– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona Schumer box The Federal Truth in Lending Act requires card issuers to display the costs of a credit card in an easy to read box format on most applications and solicitations - Called the Schumer Box Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual Fees Transaction Fees for Cash Advances Late Payment Fees % National Average Not less than 25 days $.50 when a finance charge at a periodic rate is charged Average daily balance method (including new purchases) $20 per year 2% with a minimum fee of $3 $29

© Family Economics & Financial Education –Updated April 2009– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona Additional benefits Additional benefits of a credit card may include the following: - Rebates (money back) - Products or services given to the consumer * Frequent flyer miles - Additional warranties - Travel accident insurance - Credit card registration - A low introductory APR

© Family Economics & Financial Education –Updated April 2009– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona Receiving a credit card * A form requesting information about a person’s ability to repay debt completed by the consumer * This step may be skipped if the consumer has been “pre-approved” by the credit card company Credit Application * A comparison of information on a credit card application to their credit report conducted by the credit card company Credit Investigation * Consumer receives the credit card and can activate and begin using it or * Consumer does not receive a credit card. **They can request information about why they were denied credit. Award or denial of credit

© Family Economics & Financial Education –Updated April 2009– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona Understanding the bill Balance transfer – Transfer the balance from one card to another –Companies will advertise a lower interest rate for balance transfers –These are often introductory rates and will only last for a short time

© Family Economics & Financial Education –Updated April 2009– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona Safety tips Sign card with a signature and “Please See ID” Do not leave cards lying around Close unused accounts in writing and by phone, then cut up the card Do not give out account numbers unless making purchases Keep a list of all cards, account numbers, and phone lists separate from cards Report lost or stolen cards promptly

© Family Economics & Financial Education –Updated April 2009– Credit Unit – Understanding a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona Fair Credit Billing Act Helps to protect consumers while using a credit card to make purchases It allows the consumer to not pay for a product or service for which the consumer has a complaint Billing disputes are covered within the Fair Credit Billing Act for credit cards If products are not delivered or if it is not what they consumer requested, any amount of money that was credited to the card above the $50.00 fee that consumers are responsible for will be issued back Debit cards do not have the same protection –Making credit cards a safer form of payment for online purchases

Any Questions?