Family Economics Financial Education Sources of consumer credit

Family Economics & Financial Education Sources of consumer credit © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman 1. 4. 1. G 1

Family Economics & Financial Education Types of Borrowing • Secured Loan • Unsecured Loan © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman 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 Department of Health and Human Development at Montana State University – Bozeman

Family Economics & Financial Education 1. 4. 1. G 1 Secured Loans A Secured Loan is backed by something of value pledged to ensure payment. (house) § § § Property pledged to back a loan is collateral Safe for the lender Not safe for borrower Most secured loans are installment loans. Installment loans are paid back in a certain number of payments. (car loan) also called closed-end loans. © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Family Economics & Financial Education 1. 4. 1. G 1 Unsecured loans are not backed by any collateral. § Granted credit based on creditworthiness. § Generally will pay a higher interest rate than a secured loan. Lender is taking a bigger risk. § Most credit cards are unsecured loans because they are unspecified amounts up to the consumers credit limit. (sometimes referred to as open-end credit because the balance does not have to paid by a specific 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 Department of Health and Human Development at Montana State University – Bozeman

Family Economics & Financial Education 1. 4. 1. G 1 Types of Credit Cards • Regular Charge Accounts • You must pay your balance in full within a specified period. – No interest because you are not borrowing money • Entire balance must be repaid in 30 days. • American Express, Diner’s Club and some Department Stores • Revolving Charge Accounts • Most common credit card • Allows you to carry the balance from one month to the next. • You can pay any amount over the minimum each © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Family Economics & Financial Education 1. 4. 1. G 1 Types of Credit Cards cont. • Bank Credit Cards • Flexible Accounts • Accepted Anywhere • Available from a financial institution (commercial bank, credit union) with a service provider (VISA, Master. Card)

1. 4. 1. G 1 Family Economics & Financial Education Fees continued • 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 19. 9% Grace Period for Purchases Not less than 25 days Minimum Finance Charges $. 50 when a finance charge at a periodic rate is charged Balance Calculation Method for Purchases 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 © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

1. 4. 1. G 1 Family Economics & Financial Education Annual Percentage Rate for Purchases 19. 9% Grace Period for Purchases Not less than 25 days Minimum Finance Charges $. 50 when a finance charge at a periodic rate is charged Balance Calculation Method for Purchases 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 • 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 Department of Health and Human Development at Montana State University – Bozeman

1. 4. 1. G 1 Family Economics & Financial Education Grace Period Annual Percentage Rate for Purchases 19. 9% Grace Period for Purchases Not less than 25 days Minimum Finance Charges Balance Calculation Method for Purchases $. 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 Department of Health and Human Development at Montana State University – Bozeman $29

1. 4. 1. G 1 Family Economics & Financial Education Minimum Finance Charges Annual Percentage Rate for Purchases 19. 9% Grace Period for Purchases Not less than 25 days Minimum Finance Charges Balance Calculation Method for Purchases $. 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 Department of Health and Human Development at Montana State University – Bozeman $29

1. 4. 1. G 1 Family Economics & Financial Education Balance Calculation Method Annual Percentage Rate for Purchases 19. 9% Grace Period for Purchases Not less than 25 days Minimum Finance Charges $. 50 when a finance charge at a periodic rate is charged Balance Calculation Method for Purchases 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 $29 • 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 Department of Health and Human Development at Montana State University – Bozeman

Family Economics & Financial Education 1. 4. 1. G 1 Balance Calculation Method cont. • Balance Calculation Method § Average daily balance – You pay interest on the average balance owed during the billing cycle. § Adjusted balance – You pay interest on the opening balance after subtracting the payment or returns made during the month. § Previous balance – You pay interest on the opening balance, regardless of the payments made during the month. § Past-due balance – No finance charge is added if the full payment is received within the grace period. © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

1. 4. 1. G 1 Family Economics & Financial Education Annual Fees Annual Percentage Rate for Purchases 19. 9% Grace Period for Purchases Not less than 25 days Minimum Finance Charges Balance Calculation Method for Purchases $. 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 $29 • 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 Department of Health and Human Development at Montana State University – Bozeman

1. 4. 1. G 1 Family Economics & Financial Education Cash Advances Annual Percentage Rate for Purchases 19. 9% Grace Period for Purchases Not less than 25 days Minimum Finance Charges $. 50 when a finance charge at a periodic rate is charged Balance Calculation Method for Purchases 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 • 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 Department of Health and Human Development at Montana State University – Bozeman $29

1. 4. 1. G 1 Family Economics & Financial Education Late Payment Fees Annual Percentage Rate for Purchases 19. 9% Grace Period for Purchases Not less than 25 days Minimum Finance Charges $. 50 when a finance charge at a periodic rate is charged Balance Calculation Method for Purchases 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 • 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 Department of Health and Human Development at Montana State University – Bozeman $29

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 Department of Health and Human Development at Montana State University – Bozeman 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 Department of Health and Human Development at Montana State University – Bozeman

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 Department of Health and Human Development at Montana State University – Bozeman

Family Economics & Financial Education 1. 4. 1. G 1 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 Department of Health and Human Development at Montana State University – Bozeman

Family Economics & Financial Education 1. 4. 1. G 1 20 -10 Rule Never borrow more than 20% of your yearly net income. If you earn $400 a month after taxes, then your net income in one year is: 12 * $400 = $4, 800 Calculate 20% of your annual net income to find your safe debt load: $4, 800 * 20% = $960 You should never have more than $960 of debt outstanding. * Housing debt should not be included as part of the 20% © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

Family Economics & Financial Education 1. 4. 1. G 1 20 -10 Rule Monthly payments should not exceed 10% of your monthly net income. If your take-home pay is $400 a month: $400 * 10% = $40 Your total monthly debt payments should not total more than $40 per month. * Housing debt should not be included as part of the 20% © Family Economics & Financial Education – Revised October 2004 – Credit Unit – Selecting a Credit Card Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University – Bozeman

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 Department of Health and Human Development at Montana State University – Bozeman 1. 4. 1. G 1