credit in your opinion, do consumers spend more per month on average when they use a credit card or...

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.


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.


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


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


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?


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?


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


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


of Arizona

7.4.2.G1

Annual percentage rateAnnual

Percentage

Rate for Purchases

Grace



Balance

Calculation Method

for Purchases

Annual


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


$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


of Arizona

7.4.2.G1

Grace periodAnnual

Percentage

Rate for Purchases

Grace



Balance

Calculation Method

for Purchases

Annual


Cash Advances

Late

Payment Fees

19.9%

Not less

than 25 days

$.50 when a finance


charged

Average daily

balance method

(including new

purchases)

$20 per year


$29

• Grace Period – Amount of time allowed before finance charges are applied


of Arizona

7.4.2.G1

Minimum finance chargeAnnual

Percentage

Rate for Purchases

Grace



Balance

Calculation Method

for Purchases

Annual


Cash Advances

Late

Payment Fees

19.9%

Not less

than 25 days

$.50 when a finance


charged

Average daily

balance method

(including new

purchases)

$20 per year


$29

• Minimum finance charge – Minimum amount charged for card use


of Arizona

7.4.2.G1

Balance calculation methodAnnual

Percentage

Rate for Purchases

Grace



Balance

Calculation Method

for Purchases

Annual


Cash Advances

Late

Payment Fees

19.9%

Not less

than 25 days

$.50 when a finance


charged

Average daily

balance method

(including new

purchases)

$20 per year


$29

• Balance calculation method for purchases- Method used to determine balance for finance charges


of Arizona

7.4.2.G1

Annual feesAnnual

Percentage

Rate for Purchases

Grace



Balance

Calculation Method

for Purchases

Annual


Cash Advances

Late

Payment Fees

19.9%

Not less

than 25 days

$.50 when a finance


charged

Average daily

balance method

(including new

purchases)

$20 per year


$29

• Annual fees- Yearly charge for credit card ownership


of Arizona

7.4.2.G1

Cash advancesAnnual

Percentage

Rate for Purchases

Grace



Balance

Calculation Method

for Purchases

Annual


Cash Advances

Late

Payment Fees

19.9%

Not less

than 25 days

$.50 when a finance


charged

Average daily

balance method

(including new

purchases)

$20 per year


$29

• Transaction fees for cash advances – cash withdrawal fees


of Arizona

7.4.2.G1

Late payment feesAnnual

Percentage

Rate for Purchases

Grace



Balance

Calculation Method

for Purchases

Annual


Cash Advances

Late

Payment Fees

19.9%

Not less

than 25 days

$.50 when a finance


charged

Average daily

balance method

(including new

purchases)

$20 per year


$29

• Late payment fees – Penalty fee for payments not made by the due date


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


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


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)


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?


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.

credit in your opinion, do consumers spend more per month on average when they use a credit card or...

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