1. Financial Literacy: Credit Cards
Lesson Adapted from FDIC Financial Education Curriculum

2. Why are we doing this lesson?
84% of undergraduates indicated they needed more education on financial management topics. In fact, 64%would have liked to receive information in high school
(Source: Sallie Mae, "How Undergraduate Students Use Credit Cards," April 2009)

3. Why is credit important?
Credit is having the ability to borrow money
Credit is a loan that must be repaid with interest

4. Why is credit important?
It is convenient when you don’t have cash or don’t want to carry cash
It is good for emergencies
With credit, you can make payments over time instead of paying all at once
Can affect other areas of your life including housing (rental applications and mortgages), insurance, and employment

5. Other Cards
A charge card is a revolving line of credit that must be paid off at the end of the month.
A debit card looks like a credit card, but the money comes directly out of your checking account
Charge Card
Debit Card

6. What is a credit card?
A credit card is a revolving line of credit with a pre-approved credit limit and minimum monthly payments
Example: You owe $600 to a credit card that has a minimum monthly payment of $15.

7. Credit Cards Statistics
The average age at which a U.S. consumer gets their first credit card is 21
84% of college students have credit cards
The average American has 2.6 credit cards
In 2015, the average American household has over $15,000 in credit card debt according to a Nerd wallet survey

8. How do credit card companies make money?
A.P.R. – Annual Percentage Rates (i.e. 15.9%)
Annual Fess
Late Fees
Over the limit fees
Cash advance fee
Balance transfer fees
Returned check fees
Penalty A.P.R.

9. Universal Default
Default – make a late payment or no payment to a creditor.
If you default on one creditor, other creditors may raise your rates!

10. What is a grace period?
A grace period is time you are allowed to pay your bill without being charged any interest.
All credit cards must give you at least a 21 day grace period on purchases.
You can borrow the money with no interest if you pay the full amount owed before the grace period ends!

11. Truth in Lending Disclosure
Credit card companies must disclose (tell you about) their rates, fees, and other key terms

12. Bait and Switch
Credit card companies offer low or no interest for a short period of time to bait you.
Then they switch the rates. By this time you usually have a balance and they make more money off of you.
Credit card companies can change the terms of the contract as long as they give you at least 45 days notice.

13. Bait and Switch Example
This practice is legal because the terms have been disclosed in writing.

14. How Interest is Calculated
If you don’t pay off your purchases during the grace period, here’s how interest is calculated:
Balance x A.P.R. x Days in Billing Cycle
Days in Calendar Year
$200 x 0.10 x 30
365
$1.64 in interest for that month =

15. How is your credit limit determined?
Based mostly on your FICO score
Higher FICO scores get you better A.P.R.s (interest rates) and higher credit limits.
Other factors include your income and amount of debt you already have
A FICO score of 720 or above gets you the best interest rates on loans

16. What Makes Up Your Credit Score?

17. How Long Would It Take? (Trick Question)
Pretend you owe $9,000 to your credit card company
If the interest on your credit card is 18%
The minimum payment is $135 per month.
How long would it take to pay off the $9,000 debt and finance charges?

18. How Long Would It Take?
Trick question! You will NEVER pay off the $9,000 debt paying the minimum payment of $135 per month.
Do the math: $9,000 x .18 = $1,620 finance charge.
$1,620 divided by 12 = $135 per month

19. The Cost of Time
Let’s say you owe $3,000 on a credit card with a 15% interest rate
If you make the minimum payment of $75, it would take Over 4 ½ years to pay off your credit card!

20. The Cost of Minimum Monthly Payments
Item
Price
APR
Interest Paid
Total Paid
Total Years to Pay Off TV
$500
18%
$132
$632 3
Computer
$1,000
$863
$1,863 8
Furniture
$2,500
$5,363
$7,863 23

21. Credit Card Debt Illustration
Running Time 3:24

22. The Benefits of Paying More Than Minimum Monthly Payments
Original Balance
APR
Monthly Payments
Total Years to Pay Off
Interest Paid
Total of Payments
$2,500
18%
Minimum Payment (MP) 23
$5,363
$7,863
MP + $24 4
$1,025
$3,525
MP + $41 3
$754
$3,254

23. Credit Card Tips
Pay on time. Late payments negatively affect your credit score. There may be fees for late payments.
Avoid cards with annual fees.

24. Credit Card Tips Ask yourself, “Do I really need this?”
Make more than the minimum payment
Avoid reaching the credit card limit. Keep a portion of your credit limit for emergencies
Late fees may also put you over your credit limit and raise your rates

25. Say No to Skip Payments Usually occur before or after holidays
Interest is still being added to your balance

26. Reduce the Interest Rate
If you have a long history with the credit card company and have made payments on time, call and ask for a rate reduction

27. Credit Cards Can Be Good
Establishes credit history
- Helpful in the future when you go
to buy a house or a car
Some credit cards give you cash back
You can borrow money for free if it is paid back during the grace period (21 days or more depending on your credit card)

28. Building Credit as a Teen
At age 18, become an authorized user on your parent’s credit card and stay on it until you turn 21 (only if they have good credit).
To get your own credit card (if you are under 21), you have to prove that you can make payments on your own.
At age 21, apply for your own credit card (if you have a job).
Pay the full amount owed on the credit card every month.

29. Building Credit as a Teen (Continued)
Apply for store credit cards/charge cards
Apply for a secured credit card (requires a deposit and has high A.P.R)
Ask a friend or relative to cosign a loan for you
Pay your bill on time.
Don’t carry a balance over 30% of your credit limit (Example: If your credit limit is $1,000, don’t have a balance over $300.)

30. When Shopping for Credit Cards, Compare:
Annual Percentage Rates (A.P.R.) for:
Purchases
Balance transfers
Cash advances
Fees
Late fees
Annual fees
Over the limit
Grace periods
Rewards
Cash back
Miles programs

31. Free Annual Credit Report
Free once per year
Visit:
Call:

32. On Your Own