Understanding Your Credit Card Essentials Advanced Level

7.4.2.G1

Understanding Your Credit Card

Essentials Advanced Level

The Essentials to Take Charge of

Your Finances

7.4.2.G1

© Family Economics & Financial Education –September 2010– The Essentials to Take Charge of Your Finances– Understanding Your Credit Card Essentials – Slide # 2

Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

What is Credit?

Why would a person want to use credit?

Brainstorm!

Credit- when goods, services or money is

received in exchange for a

promise to pay a definite sum of

money at a future date

Credit is derived from the Latin word “credo” meaning “I believe”

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Obtaining Credit

Borrower (person or

organization that is receiving the money) is in need of credit

Borrower requests to

receive credit from a lender

(person or organization who

has the resources to provide the

borrower money)

Lender determines

whether to grant the borrower

credit based on the borrower’s

perceived creditworthiness (an individuals

ability and willingness to pay the money back)

Why would a lender assess a borrower’s creditworthiness

before granting credit?

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Paying Back Credit

If approved for credit, the

borrower will receive money

from the lender

Why would a lender charge a borrower interest?

Borrower is usually

expected to pay interest (the price of money) in addition to the money borrowed

Depending on the type of

credit, money is paid back in

a series of equal or unequal

payments

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What is a Credit Card?

Pre-approved credit which can be used for the purchase of goods and services now

and payment of them later

A credit cards credit limit varies based upon the cardholder’s perceived

creditworthiness

Cardholders may continue to borrow as long as the credit limit (maximum dollar

amount loaned) is not exceeded

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Credit Card Interest

Interest is charged each month the balance is not

paid in full

The cost of credit expressed as a yearly interest rate

Rate at which interest is charged is referred to as:

Annual Percentage Rate (APR)

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Minimum Payments

• Required to make at least a minimum payment each month– Usually only a small percentage (2.5-

5%) of the total balance due• Cardholders who only make the

minimum payment:–Make slow progress paying off card

balance– Pay substantially more than what was

initially charged to the card

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Minimum PaymentsAmount charged to credit card in

one purchas

e

APRMinimu

m payment

Time to pay off

the credit card

Total amount paid in interest

Total amount

paid

$2,000 18% $50.00 62 months $1,077.25 $3,077.25

$500 12% $25.00 23 months $60.67 $560.67

What are the advantages and disadvantages of using

a credit card?

Brainstorm!

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Advantages & Disadvantages to using

Credit Cards

• Convenient payment tool

• Useful for emergencies

• Often required to hold a reservation

• Able to purchase “big ticket” items and spread out payments

• Protection against fraud

• Opportunity to establish a positive credit history

• Online shopping is safer than using a debit card

• Possibility of receiving bonuses

• Interest can be costly when a balance is revolved

• Additional penalty fees may apply

• Tempting to overspend

• Risk of identity theft• Responsible for

lost/stolen cards• Applying for multiple

accounts in a short period of time can lower your credit score

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Debit Cards

• What is a debit card?– A plastic card which looks like a credit

card, but is electronically connected to the cardholder’s bank account

–Money is immediately withdrawn from the cardholders checking accountWhat is the difference between a credit card and a debit card?

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Creditworthiness

Credit card approval depends on the borrower’s

perceived creditworthiness according to the

lender

Lenders assess an individual’s

creditworthiness based upon their

credit report and/or credit

score

How a person uses a credit card affects

their creditworthine

ss

Creditworthiness

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Credit History

Credit ReportA record of a consumer’s credit history that includes information about credit card use as well as the use of other types of credit, such as auto loans, student

loans and mortgage loans

A number that summarizes an individual’s credit record and history. It is a numeric “grade” of a consumer’s

financial reliability

Credit Score

Credit cards can have a positive or negative impact on an individuals

credit history

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Positive Credit Card Use

Proper credit card

use

Helps develop positive credit history

and credit report

Earn a high credit score

A high credit score gives the consumer the opportunity to have lower interest rates on loans, the privilege to use different forms of credit, and an easier approval process

for future credit

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Positive Credit Card Use

• Examples of positive credit card behaviors:– Paying credit card balances in full every

month– Paying credit card bills on time – Applying for only credit cards that are

needed– Keeping track of all charges by keeping

receipts and using a check register– Checking the monthly credit card

statement for errors

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Negative Credit Card Use

Consumers with low credit scores have difficulty getting loans, difficulty renting apartments, pay higher interest rates, pay higher insurance rates, and have

difficulty obtaining a job

Improper credit card

use

Develops negative

credit history

and credit report

Lower credit score

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Negative CreditCard use

• Examples of negative credit card behaviors:–Making late credit card payments– Paying only the minimum payment– Exceeding the card’s credit limit (usually

triggers a penalty fee)– Charging items that can’t be paid off

immediately– Owning too many credit cards

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NO Credit

• If an individual has not used credit, they will not have any information in their credit report

• Not having a credit report can cause an individual to be denied credit

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Credit Card OffersCredit card issuers are required to disclose

the terms and fees of credit cards in an easy to read box format

This is called the Schumer box

Must direct consumers to the Federal Reserve website (

http://www.federalreserve.gov/creditcard/ )to obtain more information about credit cards,

including the following sample credit card offer

http://www.federalreserve.gov/creditcard/

© Family Economics & Financial Education –July 2010 – The Essentials to Take Charge of Your Finances– Understanding a Credit Card EssentialsFunded 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

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Interest Rates and Interest ChargesAnnual Percentage Rate (APR) for Purchases

12.99%, 13.99% or 14.99%, introductory APR for one year, based on your creditworthiness.After that, your APR will be 14.99%. This is a variable-rate APR that will vary with the market based on the Prime Rate.

APR for Balance Transfers

15.99% This APR will vary with the market based on the Prime Rate

APR for Cash Advances


Penalty APR and When it Applies

28.99%This APR may be applied to your account if you:1. Make a late payment;2. Go over your credit limit;3. Make a payment that is returned; or4. Do any of the above on another account that you have with us.How long will the Penalty APR apply? If your APR’s are increased for any of these reasons, the Penalty APR will apply until you make six consecutive minimum payments when due.

How to Avoid Paying Interest on Purchases

Your due date is at least 25 days after the close of each billing cycle. We will not charge you any interest on purchases if you pay your entire balance by the due date each month.

Minimum Interest Charge

If you are charged interest, the charge will be no less than $1.50.

For Credit Card Tips from the Federal Reserve Board

To learn more about factors to consider when applying for or using a credit card, visit the website of the Federal Reserve Board at http://www.federalreserve.gov/creditcard

FeesSet-up and Maintenance Fees

NOTICE: Some of these set-up and maintenance fees will be assessed before you begin using your card and will reduce the amount of credit you initially have available. For example, if you are assigned the minimum credit limit of $250, initial available credit will be only about $209. Annual Fee: $20 Account Set-up Fee: $20 (one-time fee) Participation Fee: $12 annually ($1 per month) Additional Card Fee: $5 annually (if applicable)

Transaction Fees

Balance Transfer: Either $5 or 3% of the amount of each transfer, whichever is greater (maximum fee: $100)

Cash Advance: Either $5 or 3% of the amount of each cash advance, whichever is greater

Foreign Transaction: 2% of each transaction in U.S. dollarsPenalty Fees Late Payment: $29 if balance is less than or equal to $1000

OR $35 if balance is more than $1000 Over-the-limit: $29 Returned Payment: $35

* How We Will Calculate Your Balance: We use a method called “average daily balance (including new purchases).”* Loss of Introductory APR- We may end your introductory APR and apply the Penalty APR if you become more than 60 days late in paying your bill

Annual Percentage Rate (APR) for

Purchases• Interest rate paid for

purchases• Multiple interest rates

may be listed - final interest rate may depend on creditworthiness of the applicant

Credit cards may charge many

different types of interest rates


of Arizona

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Transaction Fees






Fixed vs. Variable-rate APR

• Fixed-rate APR- an APR that cannot change during the period of time outlined in a credit card agreement

• Variable-rate APR- an APR that may change depending on other factors (such as economic conditions)What is the APR for Purchases for this credit

card offer?14.99%Is this a variable-rate APR

or a fixed-rate APR?Variable-rate APR


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Transaction Fees






Introductory Rate• Introductory rate-

the APR that may be charged after a credit card account is opened

• Will have a different APR (usually higher) after the introductory period ends

• Not all credit cards have an introductory rateWhat is the introductory

rate for this credit card offer?The introductory rate

depends on the creditworthiness of the applicant, but it

will be 12.99%, 13.99%, or 14.99%


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Transaction Fees






APR for Balance Transfers & Cash

Advances• A balance transfer

is the act of transferring debt from one credit card account to another

• A cash advance includes withdrawing cash from an ATM using a credit card

• Balance transfer and cash advance fees may also apply (even if the APR is 0%)


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Transaction Fees







Discloses the penalty APR and the penalty

terms that trigger the penalty APR to take

effect • Penalty APR is the

interest rate charged on new transactions if the penalty terms in the credit card contract are triggeredWhat is the Penalty APR for this credit card offer?

21.99%


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Transaction Fees






How To Avoid Paying Interest on Purchases

• Explains how you can avoid interest charges by paying credit card bills in full every monthMinimum Interest

Charge• Typically range from

$0.50 to $2 per month


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Transaction Fees






Set-up and Maintenance Fees• Any set-up and

maintenance fees for the card• Annual fee- a

yearly fee that may be charged for having a credit card What is the annual fee

for this credit card?$20

Credit cards may charge many

different types of fees


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Transaction Fees






Transaction Fees• Discloses any

transaction fees for the card• Balance transfer

fees• Cash advance

fees• May be

charged in addition to APR


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Transaction Fees






Penalty Fees• Discloses the penalty

fees for the card (in addition to Penalty APR)• Late-payment-

charged when a cardholder does not make the minimum monthly payment by the due date

• Over-the-limit-charged if the account balance goes over the set credit limit

How we calculate your balance

• Credit card companies can use one of several methods to calculate the outstanding balance on a credit card


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Transaction Fees






Loss of Introductory APRIf the card has an

introductory rate, this area will list how the lower introductory rate can be lost

How can the introductory APR be lost on this card?If the cardholder is more than 60 days

late in paying the billWhat APR will the cardholder be charged if the introductory rate

is lost?The Penalty APR of 28.99%

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Credit Card Chaos

• Fixed-rate APR for Purchases vs. Variable-rate APR for Purchases

• Introductory Rate vs. No Introductory Rate• APR for Purchases Greater than or Equal to 15% vs.

APR for Purchases Less than 15%• No Minimum Interest Charge vs Minimum Interest

Charge• Annual Fee vs. No Annual Fee• Balance Transfer Fee vs. No Balance Transfer FeeWhy is it important to

understand how to read a credit card offer?

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Receiving a Credit Card

• Generally must be 21 years of age or older

UNLESS• Show documentation of sufficient

income• Have a co-signer If someone is a co-signer on a

an account, they are equally as responsible and their credit

report is impacted

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Receiving a Credit Card

Comparison shop for a credit card

Compare credit card offers and determine which card to apply for

Complete a credit application

A form requesting information about a person’s ability to repay

Lenders conduct a credit investigationA comparison of information on credit application to information on a credit report

Approval?

Applicant may or may not be approved for the card they apply for (depends on creditworthiness)

Credit card companies send pre-approved credit card applications in

the mail when the individual has passed their initial credit check

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Credit Card Statements

• Outline important information about the card

• The 2009 CARD Act required credit card companies to include specific information about a card account in the statementAndrew’s Credit Card Statement

Please help Andrew interpret his credit card statement


of Arizona

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TransactionsReference Number

Trans Date

Post Date

Description of Transaction or Credit Amount

XXXX1 2/22 2/23 Store #1 $529.57XXXX2 2/25 2/26 Payment $450.00 -XXXX3 2/26 2/26 Cash Advance $318.00XXXX4 3/15 3/17 Balance Transfer $785.00

FeesXXXX5 2/23 2/23 Late Fee $35.00XXXX6 2/27 2/27 Balance Transfer Fee $23.55XXXX7 2/28 2/28 Cash Advance Fee $10.90 Total Fees for this Period $69.45

Interest Charged Interest Charge on Purchases $6.31 Interest Charge on Cash Advances $4.58 Total Interest for this Period $10.89

Payment InformationNew Balance $1784.53Minimum Payment Due $53.00Payment Due Date 4/20/12Late Payment Warning: If we do not receive your minimum payment by the date listed above, you may have to pay a $35 fee and your APR’s may be increased up to the Penalty rate of 28.99%Minimum Payment Warning: If you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance. For example…

Interest Charge CalculationType of Balance Annual Percentage Rate

(APR)Balance Subject to Interest

Rate Interest ChargePurchases 14.99% $512.14 $6.31Cash Advances 21.99% $253.50 $4.58Balance Transfers 0.00% $637.50 $0.00

Summary of Account Activity

Previous Balance 535.07Payments -450.00Purchases +529.57Balance Transfers +785.00Cash Advances +318.00Past Due Amount +0.00Fees Charged +69.45Interest Charged +10.89New Balance $1,784.53 Credit Limit $2,000.00Available credit $215.47Statement closing date

3/22/2012

Days in billing cycle 30

If you make no additional charges using this card and

each month you pay…

You will pay off the balance shown on this statement in

about…

And you will end up paying an

estimated total of…

Only the minimum payment 10 years $3,284

$62 3 years $2,232

Notice of Changes to Your Interest RatesYou have triggered the Penalty APR of 28.99%. This change will impact your account as follows:Transactions made on or after 4/9/12: As of 5/10/12, the Penalty APR will apply to these transactions. We may keep the APR at this level indefinitely.Transactions made before 4/9/12: Current rates will continue to apply to these transactions. If you become more than 60 days late on your account, the Penalty APR will apply to those transactions as well.

Important Changes to Your Account TermsThe following is a summary of changes that are being made to your account terms. For more detailed information, please refer to the booklet enclosed with this statement. These changes will impact your account as follows:Transactions made on or after 4/9/12: As of 5/10/12, APR for Purchases will increase to 16.99%.Transactions made before 4/9/12: Current APRs will continue to apply to these transactions.

2012 Totals Year-to-DateTotal fees charged in 2012 $90.14Total interest charged in 2012 $18.27

Andrew’s Credit Card Statement


• Payment and credit amounts

• Purchase totals• Balance transfer and

cash advance totals• Fee and interest

charges• Amount past due• New balance• Available creditHow much did Andrew

charge in new purchases during this credit card

billing cycle?$529.57 10

9

8

7

65

43

2

1


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Trans Date

Post Date











3/22/2012





about…




$62 3 years $2,232





10

9

8

7

65

43

2

1

Payment Information• Includes:• Total new balance• Minimum payment

amount • Date payment is

due• Payment due dates

must be consistent month to month

• Monthly statements must be sent at least 21 days before a credit card payment is dueWhat is Andrew’s

minimum payment due for this billing cycle?$53.00


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Trans Date

Post Date











3/22/2012





about…




$62 3 years $2,232





10

9

8

7

65

43

2

1

Late Payment Warning

• States what will happen if a payment is late- usually additional fees and a higher interest rate

Minimum Payment Warning

• Estimate of how long it can take to pay off a credit card balance if only the minimum payment is made each month How long will it take Andrew to pay off the

balance of his credit card if he only pays the minimum

payment?10 years


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Trans Date

Post Date











3/22/2012





about…




$62 3 years $2,232





10

9

8

7

65

43

2

1Notice of Changes to Your Interest Rates• If a cardholder

triggers the Penalty APR, they must be notified that their rates will be increasing

Has Andrew triggered the Penalty APR?

Yes, he will pay 28.99% on all transactions made after 4/9/12.


of Arizona

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Trans Date

Post Date











3/22/2012





about…




$62 3 years $2,232





10

9

8

7

65

43

2

1

Important Changes to Your Account

Terms• Cardholders must be

notified of any raise in rates or fees or any other significant changes to the account at least 45 days before the changes take effect

• Any changes can only apply to future transactions (new charges)

• Consumer has the option of closing the account before the changes go into effect


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Trans Date

Post Date











3/22/2012





about…




$62 3 years $2,232





10

9

8

7

65

43

2

1

Transactions• Includes a list of all

the transactions that have occurred since the last statement

• Should be reviewed for errorsFees and Interest

Charged• Must list the fees

and interest charges separately on the monthly statement

Did Andrew pay a late fee?Yes, he paid $35.00 for

a late fee.


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Trans Date

Post Date











3/22/2012





about…




$62 3 years $2,232





10

9

8

7

65

43

2

1

Year-to-Date Totals• Total amount paid in

fees and interest charges for the current yearWhat is the total amount of interest Andrew has paid in the year 2012?$18.27

Interest Charge Calculation

• Includes a summary of the the different types of transactionsWhy is it important to

understand how to read a credit card statement?

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Truth in Lending Act

Limits liability for unauthorized credit card

charges to $50.00 per cardMust write a letter within 60

days of the first bill containing the error

If a credit card number is used fraudulently but the card itself was

not used, the individual has no personal liability

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Credit Card Safety Tips

Sign card with a signature and “Please see ID”

Do not leave cards lying around, and report lost or stolen cards

promptly

Close unwanted accounts by writing and

phone, then cut up the card

Do not give out account

numbers unless making a purchase

Keep a list of all cards, account numbers, and

phone lists separate from

cards

Shred all pre-approved credit

card offers, applications, or

solicitations

What are safety tips for using a credit card?

Brainstorm!

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SummaryA credit card is pre-approved credit

which can be used for the purchase of goods and services now and payment

of them later

To avoid paying interest on a credit card, pay the balance in full every

month

A credit card can have a positive or a negative impact on an individual’s credit history

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Summary

Credit card companies are required to disclose the terms and fees of a credit

card in the Schumer’s box

Credit card statements outline important information about a credit card and should

be checked carefully for errors

Consumers have many protections and rights in

regards to credit card use

Documents

Understanding Your Credit Card Essentials Advanced Level