1. Sources of consumer credit
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

2. Types of Borrowing Secured Loan Unsecured Loan
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

3. (Source: http://www.fcs.iastate.edu/financial)
Statistics
92% of college students have a credit card by their sophomore year
1 out of every 5 college students owes between $3,000 and $7,000 in credit card debt
Almost half (47%) of all college students carry four or more credit cards
(Source:
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

4. Secured Loans
A Secured Loan is backed by something of value pledged to ensure payment. (house)
Property pledged to back a loan is collateral
Safe for the lender
Not safe for borrower
Most secured loans are installment loans.
Installment loans are paid back in a certain number of payments. (car loan) also called closed-end loans.
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

5. Unsecured loans are not backed by any collateral.
Granted credit based on creditworthiness.
Generally will pay a higher interest rate than a secured loan. Lender is taking a bigger risk.
Most credit cards are unsecured loans because they are unspecified amounts up to the consumers credit limit. (sometimes referred to as open-end credit because the balance does not have to paid by a specific date).
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

6. Regular Charge Accounts
Types of Credit Cards
Regular Charge Accounts
You must pay your balance in full within a specified period.
No interest because you are not borrowing money
Entire balance must be repaid in 30 days.
American Express, Diner’s Club and some Department Stores
Revolving Charge Accounts
Most common credit card
Allows you to carry the balance from one month to the next.
You can pay any amount over the minimum each month, but the balance could take months or years to pay off.
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

7. Types of Credit Cards cont.
Bank Credit Cards
Flexible Accounts
Accepted Anywhere
Available from a financial institution (commercial bank, credit union) with a service provider (VISA, MasterCard)
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

8. Fair Truth in Lending Act
Fees continued
Fair Truth in Lending Act
Information required by law to inform consumer of all costs associated with use of a credit card
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
19.9%
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 – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

9. Annual Percentage Rate
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
19.9%
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
Annual Percentage Rate (APR) – Interest rate charged for amount borrowed in terms of per dollar per year
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

10. Grace Period
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
19.9%
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
Grace Period – Amount of time allowed before finance charges are applied
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

11. Minimum Finance Charges
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
19.9%
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
Minimum Finance Charge – Minimum amount charged for card use
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

12. Balance Calculation Method
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
19.9%
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
Balance Calculation Method – Method used to determine balance for finance charges
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

13. Balance Calculation Method cont.
Average daily balance – You pay interest on the average balance owed during the billing cycle.
Adjusted balance – You pay interest on the opening balance after subtracting the payment or returns made during the month.
Previous balance – You pay interest on the opening balance, regardless of the payments made during the month.
Past-due balance – No finance charge is added if the full payment is received within the grace period.
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

14. Annual Fees – Yearly charge for credit card ownership
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
19.9%
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
Annual Fees – Yearly charge for credit card ownership
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

15. Cash Advance Transaction Fees – Cash withdrawal fees
Cash Advances
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
19.9%
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
Cash Advance Transaction Fees – Cash withdrawal fees
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

16. Late Payment Fees – Penalty fee for payments not made by the due date
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
19.9%
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
Late Payment Fees – Penalty fee for payments not made by the due date
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

17. Opening a Credit Account
Applicant completes a credit application
Lender conducts a credit investigation
Applicant is given a credit rating
Lender accepts or denies the credit request
If accepted, applicant evaluates the credit card details
Applicant accepts or refuses credit terms
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

18. Understanding the Bill
Minimum Payment Due – The minimum amount to be paid
If this amount is paid and a balance is left on the account, additional finance charges will be included in the following month’s balance
Past Due Amount – The required amount not paid before the due date
Due Date – The day by which the company requires a payment to be made
New Balance – The total amount owed on a credit card
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

19. Understanding the Bill cont.
Credit Line – The maximum amount of charges allowed to an account
Closing Date – Last day for transactions to be reported on the statement
Charges, Payments, and Credits – The transactions which occur with the use of a credit card
Finance Charge – Charges assessed for credit card use
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

20. Using a Credit Card Properly
Only use a card when there is no doubt about ability to pay off the charges at the end of the billing cycle
Record all expenses and keep receipts
Check credit statement for errors
Always pay off balance completely and timely
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

21. Never borrow more than 20% of your yearly net income.
20-10 Rule
Never borrow more than 20% of your yearly net income.
If you earn $400 a month after taxes, then your net income in one year is: 12 * $400 = $4,800
Calculate 20% of your annual net income to find your safe debt load: $4,800 * 20% = $960
You should never have more than $960 of debt outstanding.
* Housing debt should not be included as part of the 20%
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

22. Monthly payments should not exceed 10% of your monthly net income.
20-10 Rule
Monthly payments should not exceed 10% of
your monthly net income.
If your take-home pay is $400 a month:
$400 * 10% = $40
Your total monthly debt payments should not total more than $40 per month.
* Housing debt should not be included as part of the 20%
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

23. Safety Tips Sign card with 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 number unless making purchases
Keep a list of all cards, account numbers, and phone numbers separate from cards
Report lost or stolen cards promptly
© Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card
Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman