credit cards: what to know and understand before you obtain one financial education & training...
TRANSCRIPT
Credit Cards:what to know and understand before
you obtain one
Financial Education & Training Institute
June 2009
CENTS –
Consumer Education and Training Services
http://www.centsprogram.com
& “Debt Slapped” DVD
http://www.debtslapped.org
Molly GalbreathFamily and Consumer Sciences
Edmonds School DistrictLynnwood High School
Tony LeahyCENTS Executive Directorhttp://www.centsprogram.com
[email protected] or [email protected]
Phone: 206 267-7017Fax: 206 267-7099
Introduction
Molly Galbreath – Edmonds School District – Lynnwood High Family and Consumer Sciences Department 2008 WA-ACTE FACSE Teacher of the Year
Tony Leahy – Executive Director of CENTS Consumer Education and Training Services
– Based in Seattle, WA– Convened by the Honorable Karen A. Overstreet, a federal Bankruptcy Judge, and
was composed of attorneys, Chapter 7 Trustees, employees of the Bankruptcy Clerk's office, and the local Chapter 13 Trustee's office, local law school professors, and King County Bar Association (KCBA) staffers.
What we’re working on:Putting together a set of comprehensive curriculum to utilize “Debt Slapped” DVD in
the classroom.
http://www.debtslapped.org Hope to have the website up and running by August 2009 where this lesson
(along with others) can be accessed.
Standards
Jumpstart Coalitionhttp://www.jumpstart.org/national_standersK12.html
Credit and Debt– Standard 1
National Standards for Family and Consumer Sciences
http://www.aafcs.org/FCSstandards/ 2.0 – Consumer & Family Resources 2.5 Analyze relationships between the economic system and consumer
actions. 2.6 Demonstrate management of financial resources to meet the goals of
individuals and families across the life span. 3.0 – Consumer Services 3.3 Analyze factors in developing a long-term financial management plan
CREDIT IS…
A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some later date.
A privilege – it can be damaged or taken away… but if used wisely, can be of great benefit to the borrower
Important to understand – it can have great impact on your financial future
Types of Credit
INSTALLMENT CREDIT
Loan is paid back in set monthly payments. Buyer signs a legally binding contract. Secured loan means the seller owns product
until paid in full.
Installment credit is typically used for large purchases such as vehicles, homes,
education, etc.
REVOLVING CREDIT
Monthly payment varies depending on the amount spent.
Minimum payment = highest cost of credit Pay in full within grace period to avoid finance
charges. APR can be adjusted by creditor. Interest rates are higher than for installment credit. There is a limit on the amount that can be charged.
Bank cards and store/retail cards are examples of revolving credit.
Types of Credit Cards
Types of Credit Cards
Retail – also known as co-branded cards; these are store cards like Macy’s, GAP, etc.
These have the highest interest rates.
Bank Cards – Issued by a bank; examples include Mastercard, Visa, Discover, American Express
Secured Card – The amount that can be charged is prepaid; deposit is held in a special savings account and only used at the request of the customer or when account is closed. For example, if a person deposits $1000 – a credit line will be given between $500 - $1000.These are for students or those who have not
established credit.
Types of Credit Cards – cashing in on benefits…
Reward cards – offer perks such as airline miles, a percentage back on merchandise.
Affinity cards – a percent of your spending is donated to a university, sports franchise, or non-profit organization. These often have special discounts or deals for using these credit cards issued in partnership with a major bank.
Credit Terms and Vocabulary
CREDIT TERMS & VOCABULARY – Finance Charge & Principal
Principal– The total dollar amount of purchases made on a credit card.– The balance remaining on the loan not including interest.
Finance Charge– The cost of using credit – the amount charged to borrow
money. This includes interest, fees, and other charges billed to you on your statement.
You can avoid finance charges by
paying on time and in full each month.
CREDIT TERMS & VOCABULARY - (cont.) APR
A.P.R. - Annual Percentage Rate
This is typically known as the interest rate and will be shown in a percentage.
– The yearly percentage rate is charged when a balance is held on a credit card.
– This rate is applied each month that an outstanding balance is present.
CREDIT TERMS & VOCABULARY - (cont.) APR
APR rates: (interest rates)– Varies with how your credit card is used
Purchases – may have one or several (also known as tiers); typically determined by your credit history and credit score
Balance Transfer – when the outstanding balance of one credit card (or several credit cards) is moved to another credit card account; different than purchase percentage rate; typically has a corresponding fee
Cash Advance – cash loan from a credit card from an ATM or bank withdrawal; typically different than purchase percentage rate; typically has a corresponding fee and high interest rates – possibly no grace period
Only use Cash Advance option in an emergency (if ever!)
Figuring the $$$
It’s important to know how much money you will pay when using credit
(when you’re not paying off your balance in full each month).
Here’s an easy way to understand compound daily % (interest)
$Balance on card$ ___ x APR% ___ = ______Divide by 365 (days/year) = $_______ (daily rate)
Daily rate x 30 (days in month) = $____ (monthly interest)Example:
$2000.00 x 24% (.24) = $480$480 / 365 = $1.32 (interest accumulating each day)
$1.32 x 30 = $39.42 in additional interest paid/due in the next month’s billing cycle
= $2039.42 (if no other charges are made the next month)
Method of Computing Balances of Purchases
Average Daily Balance – Banks measure and compute how much you owe on an average day of your billing cycle and use this to calculate interest for one month.
Typical to see on most cards, but read carefully! It could be…
Two Cycle Billing – Issuers calculate the balance by making use of the last two months of account activity.
Most expensive for card holders.
Adjusted Balance - Balance is determined by subtracting payments or credits received during the current billing period from the ending balance. Purchases made during the billing period aren’t included.
Best for card holders.
CREDIT TERMS & VOCABULARY - (cont.) APR – Intro, Fixed, or Variable
Introductory APR - an annual percentage rate that changes after a specific period of time.
Fixed Rate (or Fixed APR) - an annual percentage rate that does not change throughout the year
Variable Interest Rate (or Variable APR) – an annual percentage rate that changes when interest rates or other economic indicators change; also known as a floating rate.
CREDIT TERMS & VOCABULARY - (cont.) Minimum Payment, Credit Limit
and Grace Period
Minimum payment– The least amount that can be paid on a revolving credit account.
ALWAYS pay more than the minimum
Credit Limit – Also known as a credit line– How much total money can be charged to a credit card account– Overlimit - refers to an account that has surpassed its credit limit
with a transaction (i.e. outstanding balance is beyond his/her credit limit).
Grace period – A period of time during which you are allowed to pay your credit
card bill without being charged a finance and/or late fee. This period is usually 10-28 days
CREDIT TERMS & VOCABULARY - (cont.) Fees
Late Payment fee– A fee charged when your payment is not received by the due date– Check fine print – some of them have a due time of when it has to
be received
Overlimit fee– A fee charged when your balance goes over your credit limit– Also known as Over the Limit Fee.
Balance Transfer fee– A fee charged by a credit card company to transfer a balance from
one account to another. – This fee can be anywhere from 1%-5% of the balance amount. – Contact the credit card issuer for their specific fees; many don’t
charge this fee.
CREDIT TERMS & VOCABULARY - (cont.) Fees
Cash advance fee– The fee is typically 3% of the amount withdrawn, with a
minimum dollar amount charged for smaller transactions. – Finance charges typically accrue from the date of the
advance– Does not typically have a normal grace period as with
purchases.
Annual fee– The once-a-year (annual/yearly) cost of owning a credit
card. – This is a separate fee from interest rate on purchases. – Not all cards have an annual fee.
RECOMMENDATIONS
Just starting out? Do your homework!
Get 1 credit card with a limit of $500-$1000 Pay it off (in full) every month If you must carry a balance, keep it under 35% of
your credit limit. Use resources on the Internet to help!
http://www.creditcardguide.com/
http://www.creditcards.com/best-credit-cards.php http://www.debtslapped.org
Resources Used:
CENTS – Consumer Education and Training Services Tony Leahy, Executive Director
Website: http://www.centsprogram.com E-mail: [email protected] or [email protected] Phone: 206 267-7017
Fax: 206 267-7099
“Debt Slapped” – DVD video made from grant from Consumer Protection & Education Fund – http://www.debtslapped.org
Molly Galbreath – Edmonds School District – Lynnwood High School Family and Consumer Sciences Department 2008 WA-ACTE Family and Consumer Sciences Teacher of the Year Website: http://teacher.edmonds.wednet.edu/lhs/mgalbreath/index.php
E-mail: [email protected]: 425-431-5262