AOF Financial Planning Unit 3 Lesson 9 Introduction

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AOF Financial Planning Unit 3, Lesson 9 Introduction to Credit Cards Copyright © 2008–

AOF Financial Planning Unit 3, Lesson 9 Introduction to Credit Cards Copyright © 2008– 2015 NAF. All rights reserved.

Credit cards are one type of borrowing Credit Cards Bank Loans Home Equity Lines

Credit cards are one type of borrowing Credit Cards Bank Loans Home Equity Lines of Credit Loan Sharks Borrowing Why do you think going to a loan shark is the worst way to borrow money?

Credit cards are like an instant loan Tania purchases concert tickets for $50 on

Credit cards are like an instant loan Tania purchases concert tickets for $50 on her new credit card. Next month, her credit card statement comes, and she owes $57. 50, which includes the principal ($50), plus interest. The minimum payment is $10. If Tania only pays the $10, her next statement shows she owes $51. 50 (the $47. 50 from her last statement, plus new interest). Can you explain why Tania still owes $51. 50, even after making a $10 payment on her $50 purchase?

At age 18 you can get your own credit card Let’s look at an

At age 18 you can get your own credit card Let’s look at an example: Tran is a senior at City College of New York. He has a scholarship and works part time as an assistant for the basketball team.

Full-time students can be short on cash So far he has not had to

Full-time students can be short on cash So far he has not had to take out student loans, but he doesn’t have much money. While Tran usually has enough money to pay for his needs, he sometimes runs out before his next paycheck. Tran would like to be able to borrow money for these times, and also to help pay for some nicer clothes, and maybe to go out with friends.

Students are offered many credit cards A credit card company has set up a

Students are offered many credit cards A credit card company has set up a table in front of his school’s bookstore. It is giving away free sports water bottles to students who sign up for more information. Tran is interested in finding out if a credit card will give him the access to cash that he wants.

Credit card rates depend on your credit history The nice woman behind the table

Credit card rates depend on your credit history The nice woman behind the table tells Tran that he can have a credit limit of at least $5, 000 even if he has no credit history, as long as he is enrolled at the school. However, because Tran does not have a credit history, the interest rate on the card after the introductory period is over is 12%.

It is important to understand credit card terms The credit card company offers students

It is important to understand credit card terms The credit card company offers students a low introductory APR of just 3% for one year, and then the rate is variable, based on the prime rate plus 8. 0%. It also provides balance transfers with 0% interest for one year.

Taking on credit is a big decision Tran looks over the brochures. Being able

Taking on credit is a big decision Tran looks over the brochures. Being able to borrow up to $5, 000 and having only 3% interest seems like a good deal. He asks the representative what happens if he can’t make a minimum payment one month. She answers that the company understands that sometimes things happen, and that the company would just raise the interest rate to reflect that he is a higher risk borrower. Tran is not sure he likes the sound of that. … He decides to think about it for a week and talk to his parents and other friends who have credit cards.