Family Economics Financial Education Selecting a Credit Card

Family Economics & Financial Education Selecting a Credit Card © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 1. 4. 1. G 1

Family Economics & Financial Education What is a Credit Card? • Pre-approved credit • Used for purchase of items now • Payment of items later © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 1. 4. 1. G 1

Family Economics & Financial Education 1. 4. 1. G 1 Statistics • 92% of college students have a credit card by their sophomore year • 1 out of every 5 college students owes between $3, 000 and $7, 000 in credit card debt • Almost half (47%) of all college students carry four or more credit cards (Source: http: //www. fcs. iastate. edu/financial) © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Family Economics & Financial Education 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 © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 1. 4. 1. G 1

Family Economics & Financial Education 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 © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 1. 4. 1. G 1

Family Economics & Financial Education 1. 4. 1. G 1 Types of Credit Cards • Bank Credit Cards • Flexible account • Accepted anywhere • Available from a financial institution (commercial bank, credit union) with a service provider (Visa, Master. Card) – Electronic network • Retail Credit Cards • Purchases allowed at a particular retailer – i. e. The Buckle or Old Navy • Can work with bank to offer a bank credit card with the retailer’s logo © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Family Economics & Financial Education Types of Credit Cards cont. • Travel and Entertainment Cards • Similar to bank credit cards – Can make purchases at a number of businesses • Entire balance must be repaid in 30 days • Prestige Cards • High status accounts • Higher credit qualifications • Special benefits – i. e. Free travelers checks, higher credit limits 1. 4. 1. G 1

Family Economics & Financial Education Types of Credit Cards cont. • Affinity Cards • Accounts through financial institutions • Logo of sponsoring organization – Example: Mothers Against Drunk Driving • Financial institution donates percentage of charges to organization © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 1. 4. 1. G 1

1. 4. 1. G 1 Family Economics & Financial Education Schumer Box • Fair Truth in Lending Act • Information required by law to inform consumer of all costs associated with use of a credit card Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases 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) Annual Fees $20 per year Transaction Fees for Cash Advances 2% with a minimum fee of $3 © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Late Payment Fees $29

1. 4. 1. G 1 Family Economics & Financial Education Annual Percentage Rate for Purchases 19. 9% Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases Not less than 25 days $. 50 when a finance charge at a periodic rate is charged Average daily balance method (including new purchases) Annual Fees $20 per year Transaction Fees for Cash Advances Late Payment Fees 2% with a minimum fee of $3 • Annual Percentage Rate (APR) – Interest rate charged for amount borrowed in terms of per dollar per year © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona $29

1. 4. 1. G 1 Family Economics & Financial Education Grace Period Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases 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) Annual Fees $20 per year Transaction Fees for Cash Advances Late Payment Fees 2% with a minimum fee of $3 • Grace Period – Amount of time allowed before finance charges are applied © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona $29

1. 4. 1. G 1 Family Economics & Financial Education Minimum Finance Charges Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases 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) Annual Fees $20 per year Transaction Fees for Cash Advances Late Payment Fees 2% with a minimum fee of $3 • Minimum Finance Charge – Minimum amount charged for card use © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona $29

1. 4. 1. G 1 Family Economics & Financial Education Balance Calculation Method Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases 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) Annual Fees $20 per year Transaction Fees for Cash Advances Late Payment Fees 2% with a minimum fee of $3 • Balance Calculation Method – Method used to determine balance for finance charges © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona $29

Family Economics & Financial Education 1. 4. 1. G 1 Balance Calculation Method cont. • Balance Calculation Method § Average daily balance excluding new purchases – Interest is only paid on the previous balance, not on purchases made since the last payment § Average daily balance including new purchases with a grace period – If the balance is not zero, interest is applied to new purchases when they are made, if the balance is zero, a grace period is allowed before interest is charged © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Family Economics & Financial Education 1. 4. 1. G 1 Balance Calculation Method cont. • Balance Calculation Method § Average daily balance including new purchases with no grace period – Regardless of the previous month’s balance, interest is applied to new purchases as they are made § Two-cycle average daily balance including new purchases – This method should be avoided by consumers, as it is the leastbeneficial. The average daily balance is determined on 60 days, rather than 30 days, so finance charges are doubled. A zero balance must be held for two months in order to avoid charges © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1. 4. 1. G 1 Family Economics & Financial Education Annual Fees Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases 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) Annual Fees $20 per year Transaction Fees for Cash Advances 2% with a minimum fee of $3 • Annual Fees – Yearly charge for credit card ownership © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Late Payment Fees $29

1. 4. 1. G 1 Family Economics & Financial Education Cash Advances Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases 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) Annual Fees $20 per year Transaction Fees for Cash Advances 2% with a minimum fee of $3 Late Payment Fees $29 • Cash Advance Transaction Fees – Cash withdrawal fees © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1. 4. 1. G 1 Family Economics & Financial Education Late Payment Fees Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases 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) Annual Fees $20 per year Transaction Fees for Cash Advances 2% with a minimum fee of $3 Late Payment Fees $29 • Late Payment Fees – Penalty fee for payments not made by the due date © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Family Economics & Financial Education Opening a Credit Account 1. 2. 3. 4. 5. Applicant completes a credit application Lender conducts a credit investigation Applicant is given a credit rating Lender accepts or denies the credit request If accepted, applicant evaluates the credit card details 6. Applicant accepts or refuses credit terms © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 1. 4. 1. G 1

Family Economics & Financial Education 1. 4. 1. G 1 Understanding the Bill • Minimum Payment Due – The minimum amount to be paid § If this amount is paid and a balance is left on the account, additional finance charges will be included in the following month’s balance • Past Due Amount – The required amount not paid before the due date • Due Date – The day by which the company requires a payment to be made • New Balance – The total amount owed on a credit card © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Family Economics & Financial Education 1. 4. 1. G 1 Understanding the Bill cont. • Credit Line – The maximum amount of charges allowed to an account • Closing Date – Last day for transactions to be reported on the statement • Charges, Payments, and Credits – The transactions which occur with the use of a credit card • Finance Charge – Charges assessed for credit card use © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Family Economics & Financial Education Using a Credit Card Properly • Only use a card when there is no doubt about ability to pay off the charges at the end of the billing cycle • Record all expenses and keep receipts • Check credit statement for errors • Always pay off balance completely and timely © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 1. 4. 1. G 1

Family Economics & Financial Education Safety Tips • Sign card with 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 number unless making purchases • Keep a list of all cards, account numbers, and phone numbers separate from cards • Report lost or stolen cards promptly © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 1. 4. 1. G 1