1. Credit Cards

2. CREDIT DEFINITIONS Credit Trust given to another person for future payment of a loan, credit card balance, etc. Creditor A person or company to whom a debt is owed. Slide 1 – Credit Definitions Lesson Reference: Credit, Activity 1 – Handout 1 2

3. Slide 2 - The Five Cs of Credit Lesson Reference: Credit, Activity 1 – Overhead 1 THE FIVE Cs OF CREDIT C = Capacity C = Capital C = Collateral C = Conditions C = Character 3

4. C = Capacity Capacity to repay is the most critical of the five factors. It is the primary source of repayment — existing cash and your income. Potential lenders also will want to know about other possible sources of repayment, such as investments that can be liquidated if needed to make a repayment.

5. C = Capital The property you possess that is worth more than your debts. Capital is the money you personally have and is an indication of how much you have at risk should you experience job or other income loss.

6. C = Collateral Collateral or guarantees are additional items of value you can provide the lender. Giving a lender collateral means that you pledge an asset you own, such as your home, to the lender with the agreement that it will be the repayment source in case you can’t repay the loan.

7. A guarantee, on the other hand, is just that — someone else signs a guarantee document promising to repay the loan if you can’t. Some lenders may require such a guarantee in addition to collateral as security for a loan.

8. C = Conditions Conditions describe the intended purpose of the loan. Will the money be used for personal use, a car, a home, or home repairs?

9. C = Character Character is the general impression you make on the prospective lender and is based on your credit report and credit history (your past use of credit).

10. WHEN TO USE CREDIT Can you describe a situation when it is a good time to use credit and when it is NOT a good time to use credit? Slide 3 – When to Use Credit Lesson Reference: Credit, Activity 1 – Handout 2 10

11. When it is a good time … Great to have in times of emergencies, family crisis, unexpected illness, etc.

12. When it is a good time … Could be a convenient way to manage income by keeping track of spending – provided bills are paid in full each month.

13. When it is a good time … Allows the benefit of having large items such as home, car and appliances while still paying for them.

14. When it is not a good time … Can lead to spending beyond one’s means because it is so convenient and easy to use.

15. When it is not a good time … If one is tempted to live on credit.

16. When it is not a good time … When credit takes away the opportunity to use the income that pays off the credit, which is needed for other things.

17. When it is not a good time … When there is concern that the credit cards and credit account numbers may be stolen and used by others. Secure Sockets Layer (SSL)

18. Questions to ask before using credit 1. Is this a necessity or luxury item? 2. Do I really need this good or service? 3. Can I meet my obligation to pay for it without hurting my existing cash flow? 4. Do I really understand all of the terms and obligations that I must agree to when purchasing this? 5. Do I realize that this would cost less if I paid cash? 6. H ave I really thought about the consequences of making this purchase? 7. Can I repay the debt in a timely fashion to avoid finance charges?

20. TYPES OF CREDIT CARDS Private Label Issued by a single source. Can only be used at a single source. Examples: Department Stores, Gasoline Companies General Label Issued by a single source. Can be used in many places. Examples: Bank Card, Major Credit Card

21. QUESTIONS TO ASK WHEN SHOPPING FOR A CREDIT CARD Annual Fee Annual charge for using a particular credit card. Most common with general label credit cards.

22. Additional Fees Cash advance fee. Charged when you use the card for a cash advance; may be a flat fee (for example, $3.00) or a percentage of the cash advance (for example, 3%) Balance-transfer fee. Charged when you transfer a balance from another credit card (Your credit card company may send you “checks” to pay off the other card. The balance is transferred when you use one of these checks to pay the amount due on the other card.) Late-payment fee. Charged if your payment is received after the due date Over-the-credit-limit fee. Charged if you go over your credit limit Credit-limit-increase fee. Charged if you ask for an increase in your credit limit

23. APR (Annual Percentage Rate) Annual cost of credit on a loan. M ay include up-front fees and other internal costs. Expressed as a percentage rather than a dollar amount. True gauge of the cost of borrowing. Truth in Lending law requires lender to tell the APR.

24. APRs The APRs for cash advances and balance transfers often are higher than the APR for purchases (for example, 14% for purchases, 18% for cash advances, and 19% for balance transfers).

25. Minimum Payment Amount of payment required by the account due date, usually billed monthly.

26. Computation Method How finance charges are determined. Methods may include previous balance, average daily balance, or something similar.

27. Grace Period Period of time after purchase date when balance may be paid in full to avoid finance charges

28. Finance Charges Dollar amount of interest paid on money borrowed, plus fees for arranging the loan. Also known as interest paid on unpaid balances.

29. Card Incentives Special rewards when the card is used. Could be a refund of money, free tickets to special events, or rewards for use with hotels, airlines, restaurants, or purchases.