credit in your opinion, do consumers spend more per month on average when they use a credit card or...
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CreditIn your opinion, do consumers spend more per month on
average when they use a credit card or cash?
© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University
of Arizona
7.4.2.G1
Types of Credit
• Single-Payment Credit– Consumer agrees to pay the full
balance owed each month– Interest is usually not charged– Most do not have credit limits– Examples: Utilities, American Express
Card, Phone Bills.
© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University
of Arizona
7.4.2.G1
Types of Credit
• Closed - End Credit– A one time loan for a specific reason. – Specific number of payments, always
the same amount each month.– The amount of the loan is agreed upon
during the application process.– Also called Installment Credit– Examples: Mortgage, Car Loans.
© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University
of Arizona
7.4.2.G1
Types of Credit
• Open - End Credit– Credit is extended in advance, and can be
used for a variety of things.– Amount of payment will be different each
month depending upon the amount that is owed.
– The amount of the loan can be increased or decreased depending upon the responsibility of the card holder.
– Also called revolving credit.– Examples: Credit Cards
© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University
of Arizona
7.4.2.G1
Credit vs. Debit cardsCharacteristics
Credit Card Debit Card
What is it? Pre-approved credit A card (looks similar to a credit card) that is linked to an individual’s bank account
Payment process
Charged to an individual’s account and they may pay later
Money is immediately deducted from the bank
Is interest charged?
Yes – because money is being borrowed from the credit card company
No
© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University
of Arizona
7.4.2.G1
Why use a credit card?
• Advantages– Convenient – Useful for emergencies– Often required to hold a reservation– Purchase ‘big ticket’ items earlier – Easy form of debt consolidation– Protection against rip-offs and fraud– Establish a good credit rating
What are advantages to using a credit card?
© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University
of Arizona
7.4.2.G1
Why use a credit card?
• Disadvantages – Interest is costly – Additional fees are common – Tempting to overspend– Privacy is an increasing concern – Personally responsible for lost/stolen
cards– Identity theft easier – Can lose financial freedom from
overspending
What are disadvantages to using a credit card?
© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University
of Arizona
7.4.2.G1
Interest
• Interest is referred to as the annual percentage rate (APR)
• The price of borrowing money to make a purchase and paying it later is interest
• Credit is often compounding interest which is interest added upon interest each month based upon the amount charged
• The interest rate varies greatly between credit cards
© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University
of Arizona
7.4.2.G1
Federal Truth in Lending Act
• The Federal Truth in Lending Act requires card issuers to display the costs of a credit card in an easy to read box format on most applications and solicitations
Annual
Percentage Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance
Calculation Method
for Purchases
Annual
FeesTransaction 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 August 2009– The Essentials to Take Charge of Your Finances – Credit AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University
of Arizona
7.4.2.G1
Annual percentage rateAnnual
Percentage
Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance
Calculation Method
for Purchases
Annual
FeesTransaction 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
• The lower the interest rate, the better
© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University
of Arizona
7.4.2.G1
Grace periodAnnual
Percentage
Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance
Calculation Method
for Purchases
Annual
FeesTransaction 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 August 2009– The Essentials to Take Charge of Your Finances – Credit AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University
of Arizona
7.4.2.G1
Minimum finance chargeAnnual
Percentage
Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance
Calculation Method
for Purchases
Annual
FeesTransaction 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 August 2009– The Essentials to Take Charge of Your Finances – Credit AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University
of Arizona
7.4.2.G1
Balance calculation methodAnnual
Percentage
Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance
Calculation Method
for Purchases
Annual
FeesTransaction 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 for purchases- Method used to determine balance for finance charges
© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University
of Arizona
7.4.2.G1
Annual feesAnnual
Percentage
Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance
Calculation Method
for Purchases
Annual
FeesTransaction 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 August 2009– The Essentials to Take Charge of Your Finances – Credit AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University
of Arizona
7.4.2.G1
Cash advancesAnnual
Percentage
Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance
Calculation Method
for Purchases
Annual
FeesTransaction 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
• Transaction fees for cash advances – cash withdrawal fees
© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University
of Arizona
7.4.2.G1
Late payment feesAnnual
Percentage
Rate for Purchases
Grace
Period for Purchases
Minimum Finance Charges
Balance
Calculation Method
for Purchases
Annual
FeesTransaction 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 August 2009– The Essentials to Take Charge of Your Finances – Credit AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University
of Arizona
7.4.2.G1
Safety tips• Sign card with a 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 numbers unless
making purchases• Keep a list of all cards, account numbers,
and phone lists separate from cards • Report lost or stolen cards promptly
© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University
of Arizona
7.4.2.G1
Fair Credit Billing Act • Created in 1974 - Helps to protect consumers
while using a credit card to make purchases • It allows the consumer to not pay for a product
or service for which the consumer has a complaint
• Billing disputes are covered within the Fair Credit Billing Act for credit cards
• If products are not delivered or if it is not what they consumer requested, any amount of money that was credited to the card above the $50.00 fee that consumers are responsible for will be issued back
• Debit cards do not have the same protection– Making credit cards a safer form of payment for
online purchases
© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University
of Arizona
7.4.2.G1
Other Legislation for Credit• Truth in Lending Act (1968)
– Makes sure consumers are fully informed about costs and conditions of borrowing.
• Fair Credit Reporting Act (1970)– Protects the privacy and accuracy in a credit
check.• Equal Opportunity Act (1974)
– Credit cannot be denied based on discrimination
Fair Debt Collection Practices Act (1977)- Prevents abuse by professional debt collectors. (does not apply to banks or other businesses collecting their own accounts)
© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University
of Arizona
7.4.2.G1
The 4 C’s of Credit• Collateral
– What do you have of value that a lender can take if you do not repay the loan as promised?
• Capacity– Do you have the financial ability to repay a
loan with your current income? – Lenders look at income and employment
history.• Capital
– Is the lender fully protected if you cannot repay the loan?
• Character– Are you responsible? Do you have good
credit history of paying your bills on time?
© Family Economics & Financial Education –Revised August 2009– The Essentials to Take Charge of Your Finances – Credit AdvancedFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University
of Arizona
7.4.2.G1
The 70-20-10 Rule
• How Do You Know if You Have Too Much Debt?
• 70% of your income should be spent on living expenses (rent, food, gas, utilities, etc)
• 20% of your income should be for investing and saving for financial goals.
• 10% of your income should be spent on debt repayments for items such as credit cards, car and school loans.
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