1. Credit Cards 101

2. Did You Know
The percentage of undergraduate students carrying at least 1 credit card has risen 24% since 1998
92% of college students have a credit card by their sophomore year
Almost half (47%) of all college students carry four or more credit cards
21% of undergrads owed between $3000 & $7000 on their credit card – a 61% increase from 2000
Source: Nellie Mae, April Undergraduate Students & Credit Cards, pp. 1 & 2
Discussion Topic: Have students turn to a neighbor or break into groups of two-four people and present these questions:
Do you have a credit card?
Do you think credit cards are ok to own and use ? Or that people should avoid having credit cards as much as possible?
Do you feel these statistics are surprising or did you expect them?
If willing, share one thing you have learned about credit cards by using them (if you use them) that you wish you would have learned before you started to use them.

3. What are Credit Cards?
Pre-approved credit which can be used for the purchase of items now and payment of them later.
Discussion Topics:
Ask people to give their answers to What are Credit Cards? Before giving the “formal” definition.

4. Are Debit Cards a type of Credit Card?
Debit Cards are:
Not the same as credit cards
Not a form of credit at all
Directly linked to your bank account.
May ask you “credit or debit”—still NOT credit
NO!
Debit=Credit
Debit cards allow payment and purchase
to happen simultaneously

5. Why Use a Credit Card?
Proper use can help establish good credit rating
Conveniently accepted across United States and abroad
Emergency buying power
Additional form of identification
Record of purchases on bill statement
Often required to hold a reservation
Discussion Topic:
What other reasons can the students come up with for having a credit card, or ask them for their ideas before presenting the ones on the slide.

6. Why Not Use a Credit Card?
Improper use can damage credit rating
Higher risk for impulsive buying and overspending
Debt trap when used unwisely
Expensive way to borrow due to high interest rates
Less to spend in the future due to paying off purchases from past
Possible hidden fees & surcharges
Privacy is an increasing concern
Identity theft easier
Discussion Topic:
What other reasons can the students come up with for not having a credit card, or ask them for their ideas before presenting the ones on the slide.

7. Cards where purchases can be made in many locations
Types of Credit Cards
Cards where purchases can be made in many locations
Bank Credit Cards
Card issued by financial institution
Credit is issued by service provider (Wells Fargo Visa card)
Balance paid-off at end of month or extended over period of time
Travel and Entertainment Credit Cards
Credit and card issued by service provider (Diner’s Club)
Not accepted at as many locations as bank cards
Entire balance must be repaid in 30 days

8. Cards where purchases are made in particular location
Types of Credit Cards
Cards where purchases are made in particular location
Retail Credit Cards
Credit and card issued by particular retailer (Old Navy, The Bon, Home Depot, Shell Oil)
Balance paid-off at end of month or extended over period of time

9. Obtaining a Credit Card
Comparison shop when choosing the right card
Know the facts
Terms and conditions of credit card accounts differ
Be aware of “hidden” costs of card(s)
Federal Truth in Lending Act
Requires card issuer to display the cost of credit card
Schumer Box: easy to read box format

10. A Schumer Box you May Expect To See
Annual Percentage Rate for purchases and balance transfers*
2.99% APR (.00819% daily periodic rate) on purchases and balance transfers until the first day of the billing cycle that includes the six (6) month anniversary date of the opening of your account. In the absence of the introductory rate, 12.99% APR(.03559% daily periodic rate) on purchases and balance transfers.**
Grace period for repayment of the balance for purchases
You will have a minimum of 25 days without a finance charge on new purchases if the total New Balance is paid in full each month by the statement closing date.
Method of computing the balance used in calculating finance charges for purchases
Average daily balance (including new purchases)
Annual fee
$25
Minimum finance charge
For each Billing Period that your Account is subject to a finance charge, a minimum total Finance Charge of $0.50 will be imposed.
Miscellaneous fees
Cash advance fee: 2.5% of amount of the cash advance, but not less than $2.50. Late payment fee: $25 Over-the-credit-limit fee: $25 Returned check fee: $25
Schumer box source:

11. A Schumer Box and Credit Card Terms Explained
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 percentage per year
Grace Period: amount of time allowed before finance charges (interest or cost of credit) are applied

12. A Schumer Box and Credit Card Terms Explained
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
Balance Calculation Method: method used to determine balance including finance charges

13. Balance Calculation Methods
Creditors use a number of ways to determine how
interest, often called finance charges, accumulate
Average Daily Balance Method (including new purchases with a grace period)
If the balance is not zero, interest is applied to new purchases when they are made, if balance is zero, a grace period is allowed before interest is charged
Average Daily Balance Method (including new purchases with no grace period)
Regardless of the previous month’s balance, interest is applied to new purchases as they are made

14. Balance Calculation Methods (continued)
Previous Balance Method
Interest is only paid on the previous balance, not on purchases made since the last payment
Two-cycle Average Daily Balance (including new purchases)
This method should be avoided by consumers!
The interest is paid on the current balance as well as the previous month’s balance, this leads to double finance charges
A zero-balance must be held for two months in order to avoid charges

15. A Schumer Box and Credit Card Terms Explained
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
Cash Advance Transaction Fees: cash withdrawal fees
Late Payment Fees: penalty fee for payments not made by the due date

16. 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 (USE THE SCHUMER BOX!)
Applicant accepts or refuses credit terms

17. Understanding the Bill
Minimum Payment Due: 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 previous amount due which was 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

18. Understanding the Bill (continued)
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

19. 1. In the case of any unauthorized use of your card…
Handling Disputes
Two Types of Disputes:
1. In the case of any unauthorized use of your card…
Liability Limited to $50
Must Notify Company ASAP
Phone AND Written Notice Required

20. Handling Disputes (continued)
2. In the case of a billing error…
Notify Company Within 60 Days
Letter must include
Name
Account
Dollar Amount Involved
Reason for Dispute
Any Other Clarifying Information

21. Using a Credit Card Properly
Only use 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

22. When You Buy “STUFF” You bought “STUFF” with your credit card.
In fact, you bought $500 worth of “STUFF” with your credit card.
Your APR is 18%.
You plan to pay $10 a month to pay it off.
Paying only the minimum on a revolving account comes at a great cost.
(Review slides)
You will pay $431 in interest
Final cost of your purchases = $931.40
Paying that off will take 7 YEARS and 9 MONTHS 1

23. How Long Will Paying Take???
You owe $3,000.
Paying it off will take nearly
11 YEARS
APR = 18%
Payment: 4% of current balance
Finance charge: $1,715.69
Total cost of original $3,000 loan = $4,715.69
After you’ve made the last payment, will what you purchased still be around??? 1

24. And paying it off will take more than
Cost of Using Credit
$700 for a game system
And paying it off will take more than
7 years
APR = 24%
Payment: 4% of current balance
Finance charge: $550.04
Your CD player REALLY cost $1,250.04
After you’ve made the last payment, will your CD player still be around??? 1

25. Cost of Using Credit Payment = 4% of current balance
Interest Rate = 24%
Payment = 4% of current balance
BALANCE
TIME TO PAY OFF
INTEREST CHARGED
TOTAL COST
$2,000
11 Years
6 Months
$1,850
$3,850
$6,000
16 Years
1 Month
$5,850
$11,850
$10,000
18 Years
2 Months
$9,850
$19,850 1 2 3

26. Cost of Using Credit You owed $3,000 but you paid $6,065+
$3,000 charged to credit account
APR = 21%
Payment: 4% of current balance
You owed $3,000
but
you paid
$6,065+
Includies annual fees
Finance charges: $2,220.57
Annual credit card fee: $65
Paying the minimum, you will need 11 YEARS and 11 MONTHS to pay off your debt. 1

27. Safety Tips 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

28. Financial Consequences of Debt
Could put you in a state of overspending and perpetual debt, where you get used to carrying a balance and paying extremely high interest rates
Could adversely affect your credit rating, which makes getting loans when you really need them more difficult

29. Bankruptcy
The road of last resort when someone gets too deeply into debt is bankruptcy. Bankruptcy is a legal process to get out of debt when you can no longer make all your required payments. There are two types of bankruptcy:

30. Chapter 7 effectively allows you to erase most of your debt
Chapter 7 effectively allows you to erase most of your debt. To qualify, you typically must be unemployed or have a very low income. You must also undergo financial counseling as part of the process.
Chapter 13 allows you to repay many of your debts over a period of time, usually no more than five years. A court typically oversees the repayment plan to make sure that you do.

31. Note that not all debts will be erased by bankruptcy
Note that not all debts will be erased by bankruptcy. Some common types that aren’t usually erased include student loans, child support and alimony, and any penalties and fines for crimes a person committed.
Also, because of the growing rate of bankruptcy abuse, Congress changed the bankruptcy law in It is now much harder to declare Chapter 7 bankruptcy.

32. Going bankrupt is a very serious action to take because it can stay on your credit record for up to 10 years.
Bankruptcy makes it much harder and more expensive to buy a house or get other types of credit during that time.
It’s also very costly to everyone else, because lenders usually end up raising rates on all of their loans and services available to the public to cover their losses.

33. Many people have to file for bankruptcy because of unforeseen and unavoidable misfortune. For people in this situation, bankruptcy provides a “clean slate” and a chance to rebuild their lives.
But for many others, bankruptcy is the result of irresponsible borrowing by people who simply decided to default on their obligations

34. Financial Consequences of Debt
What if you took the $120 monthly payment in the last example and INVESTED $120 a month for the 12 years paying off the $3,000 debt took, and your investment got an 8% rate of return?
Instead of $6,000 paid out for $3,000 worth of “stuff,” your $120 monthly investments would amount to $28,799 in your pocket. f

35. What Are the Priorities?
Using the credit information below, prioritize the order of the debts to be paid.
A car loan with a balance of $6,000, monthly payments of $250, and an interest rate of 8.9%.
A bank credit card with a balance of $800, minimum monthly payments of $20, and an interest rate of 19.5%.
A student loan with a balance of $30,000, monthly payments of $175, and an interest rate of 6%.
A store credit card with a balance of $2,300, minimum monthly payments of $70, and an interest rate of 15.9%.
A credit union credit card with a balance of $3,500, minimum monthly payments of $110, and an interest rate of 12%.