1. Credit 411 UNDERSTANDING HOW CREDIT CARDS WORK ADAPTED FROM “THE ABCS OF CREDIT CARD FINANCE: ESSENTIAL FACTS FOR STUDENTS” BY CAROL A. CAROLAN, PH.D.

2. Essential Information When used and managed properly, credit cards offer us convenience, a sense of security, and allow us to build a healthy credit history. Irresponsible credit card use can result in excessive debt and can produce a poor credit score and become a long term financial problem. Basic information is necessary to help you wisely choose and responsibly use a credit card.

3. What Should I Look For? Not all credit cards are equal since issuers are free to offer the terms, services, and perks they desire. Be sure to familiarize yourself with the issuer’s terms and conditions before applying for a card. When choosing a credit card, just remember to shop around and to ask questions. Don’t be embarrassed to ask a representative to explain the contract so that you clearly understand the terms and conditions.

4. CREDIT CARD BASICS LET’S FIRST EXAMINE THE MOST BASIC PARTS OF A CREDIT CARD.

5. What is a Credit Card? A credit card is plastic card issued by a bank or other financial institution. You use it to buy products and services. It is basically a loan. The financial institution will pay for the item or service, and then you have to pay them back. There are some options in how you pay them back. You can pay them back in full every month. They will send you a statement, which is a description of what you owe, and the details of your account every month, and you use this to decide how much to pay and when. You can pay through the mail, by phone, or through their website. If they offer other ways to pay, they will include this on your statement or on their website. If you cannot afford to pay them back in full every month, you can make a monthly payment. The minimum monthly payment (MMP) is described on your statement. You have to pay at least that amount to stay in good standing. Whatever you don’t pay gets charged interest and carries over to the next month. The interest is how the financial institution makes their money, plus additional fees that they can charge for different reasons.

6. Annual Fees Some issuers charge an annual fee for the privilege of using their card. This charge will appear on your account at the same time each year. It’s best to look for a card without an annual fee.

7. Interest Financial institutions charge card holders monthly interest on unpaid credit card balances. Interest rates are expressed as an Annual Percentage Rate (APR). The higher the APR, the more money you pay in interest. APRs can be variable or fixed. A variable rate APR is based on a published index, like the prime interest rate, plus a few percentage points more, which is determined by the card issuer. A fixed interest rate when it is the same amount month to month, but there are a few times that even this can change.

8. Changing an Interest Rate With few exceptions, interest rates cannot be increased on an existing balance during the first year the account is open. Exceptions are: If you were offered an introductory rate for a limited period of time and if the issuer disclosed what the new rate would be after the introductory period expired. Promotional rates must last at least six months. If you have a card with a variable rate. If you are more than 60 days behind in payment. If your rate had been temporarily lowered during a hardship arrangement. Per the Credit CARD Act of 2009, after the first year, your issuer can raise rates on new (not existing) balances with 45 days’ written notice. Your issuer must also give you 45 days’ written notice before changing certain fees such as annual, cash advance and late fees.

9. Low Interest Introductory Rates An introductory rate (promotional rate) is time-limited and must be of at least six months’ duration. Your issuer is required to disclose in the initial credit card offering the go-to rate that will occur at the completion of the first six months.

10. HOW LONG AND HOW MUCH DO I HAVE TO PAY?

11. $10 EXTRA – PAY OFF YOUR BALANCE FASTER

12. Fees and Payments THESE ARE SOME OF THE MOST COMMON FEES AND PAYMENTS ASSOCIATED WITH CREDIT CARDS. THE FOLLOWING IDENTIFIES THE VARIOUS COSTS AND FEES ASSOCIATED WITH CREDIT CARD USE. SOME ARE EVIDENT AND OTHERS ARE NOT SO OBVIOUS. THESE COSTS APPLY EQUALLY TO ALL CARDS, INCLUDING MASTERCARD, VISA, DISCOVER AND AMERICAN EXPRESS.

13. Late Fees A late fee will be applied when your payment is received after the due date. The Credit CARD Act of 2009 says your issuer cannot charge a fee greater than $25 unless one of your previous six payments was late. Then, your fee may be as high as $35. Also, a late fee cannot exceed the MMP so, if your MMP is $20, your late fee can’t be more than $20. Your statement must be sent to you at least 21 days before the due date, and the payment due date, date a late fee will be charged and amount of the late fee must all be disclosed in a conspicuous location on your statement. Your due date should remain the same each month and if it falls on a weekend or a holiday, your payment will be considered on-time if it is received by the next business day. Payments made at a local branch will be credited the same day.

14. Cash Advances These are cash loans you can get with your credit card. Cash advances typically have a one-time transaction fee applied at the time the money is issued, are usually assessed higher APRs, and are granted no grace period. That is, you immediately start paying interest on the borrowed money.

15. Convenience Checks (Credit Card Checks) These are pre-printed checks linked to your credit card account that are typically attached to your credit card statement. Similar to cash advances, they usually have a one-time transaction fee applied at the time of use, are assessed higher APRs, and are granted no grace period.

16. Penalty Rate (aka Default Rate) This is a high APR that can be applied to a credit card account for a variety of reasons like making a late payment. The CARD Act of 2009 states that the only way a card issuer can apply a penalty rate to an existing balance (purchases already made) is if your payment is not received by the issuer within 60 days after the due date. After the first year, your issuer can apply a higher rate to future transactions (purchases made 14 days after the notice was sent) with 45 days’ written notice.

17. Balance Transfers You may want to take advantage of a lower APR by transferring your credit card balance from one issuer to another. For example, you have $1,000 on one credit card, and a different companies offers you a lower APR if you open a card with them and use the new card to pay off the old card. There will likely be a balance transfer fee, the lower APR typically applies only to the transferred balance (not new purchases) and the low APR is often time-limited.

18. Over-Credit Limit Fees A credit card has a spending limit assigned to it and it is important to know what it is so that you stay within the card’s credit limit. If you opt in, your issuer can allow you to spend over your credit limit although they are free to decline such requests. If you do go over your limit, you will be charged an overcredit limit fee which often ranges from $29 to $39. The Credit CARD Act of 2009 says that if you exceed your credit limit by a small amount, you can’t be charged more than that amount. For example, if you go over your limit by $5, you can’t be charged an over-credit limit fee greater than $5. Issuers aren’t able to charge account holders more than one over-credit limit fee during each billing cycle and if you only go over the limit once, you cannot be charged over-limit fees more than three months in a row even if your payments don’t bring your account balance back under the limit. If you are brought over your credit limit because of interest charges or fees, your issuer cannot charge an over-credit limit fee.

19. Bounced Check Fees If your credit card payment check is returned due to insufficient funds, your credit card issuer will likely charge you a penalty fee of $29 to $39. Insufficient funds means that you did not have enough money in your bank account to cover the payment you made for the card.

20. Payment Fees Issuers are no longer allowed to charge a fee for making an automated payment by phone or Internet. However, your issuer may charge a fee if you require the assistance of a service representative.

21. Transaction Fees A transaction fee is an up-front fee (typically 3% of the transaction with a minimum of $5 to $10) often assessed when making a balance transfer, using a convenience check or taking out a cash advance.

22. RATES AND FEES AND THE SCHUMER BOX Credit card issuers detail their basic rates and fees in a table called a “Schumer Box,” named after Senator Chuck Schumer. This table makes it easier to compare credit card offers and facilitates your ability to choose the right card for your needs. Be responsible and read the Schumer Box provided with your credit card offer. Also familiarize yourself with the on-line contract so that you understand the credit card agreement to the best of your ability.

23. A sample Schumer Box looks like this: When choosing a credit card, it’s best to look for: A Low Annual Percentage Rate (APR) No Annual Fee A Long Grace Period. Low Fees