Financial Literacy : Credit

1. Financial Literacy: Credit

2. Using credit is a way of life. People use credit online and for everyday purposes. Some do it so they don’t have to carry cash. Some use it to buy things that they cannot afford to pay cash for. Most common forms of credit: • Credit cards • installment loans

3. What is credit? We use credit to pay for : • Cars • Clothing • Tuition • Books • Groceries • Homes

4. APR-Annual Percentage Rate • Calculate 1/12 X APR= Monthly Rate • Monthly rate X balance owed = interest you owe plus the balance owed • APR is based on current prime rate and your credit rating Payments and minimum payments are calculated by APR.

5. Delinquency • Default –when you stop making payments • Banks and financial institutions have the right and ability to legally come after you for money owed. • Collection agencies must follow laws when contacting you but you must pay the amount that you owe • It is better to contact creditors if you foresee not being able to make your payments on time than to let a debt collector start contacting you. They will normally work out a payment plan for you to take care of debts.

6. Pros/Cons of credit Pros • Covers large costs or unforeseen expenses • Homes • Cars • Flexibility • Convenience Cons • Easy to get into debt • Higher costs due to interest $100 of groceries and only paying minimum could cost you double.

7. Credit Card Statements A monthly credit card statement has the following: • Opening balance - amount owed from previous months’ statement. • Purchases and payments • Closing balance - amount after your most recent payment and purchases are taken into account. The statement closing date is important because all transactions made after this date will not show on your current statement, but will be on the next month’s billing cycle.

8. Charges and Purchases • Charges are all fees associated with your credit card, including the interest. • Purchases are transactions that you authorized to be put on your credit card account.

9. Credit limits and availability • Credit limit is the amount you can spend on credit. It is based on your income, credit rating, and your ability to repay the debt. Finance charges • Interest charged on the amount you owe the credit card company. 3 ways credit card companies charge interest: • Adjusted balance • Average daily balance • Previous balance-most expensive form of calculating interest and should be avoided if possible

10. Reconciling Your Account • Checking your account throughout the month, make it easier to reconcile your statement. • You can use a financial software program or simply match receipts to a paper statement. • It is important to match your receipts to your credit card statement to avoid fraudulent credit card activity.

11. The Cost of Credit Basic costs: • Annual fees- Fees charged to carry the card. Half credit card companies charge fees, they range from $50-$125 • Finance charges – the amount of interest you are charged monthly. You are charged 1/12 of your APR on the balance you carry on your account each month. Companies make their money on interest; average is 17-21%. • APR = 12%/12 months = 1% monthly • Grace periods – Time between the billing statement and due date, usually 15 days. Costs nothing unless the credit card companies charges interest on purchases made during the grace period.

12. Other Fees • Late payment fees – Fees for payments due even 1 day late; fees average $29-$39. Paying your bills late will negatively impact your credit rating. • Over limit fees – fee charged for exceeding your credit limit; $29-$39 and is charged until you pay enough to reduce your balance below credit limit. • Cash advance fees – transaction fees of $6-$10 per transaction plus higher APR on cash advances.

13. Did you know? • The average consumer owes $15,100 in credit card debt with a rate of 17-21%. What influences your rate? • Credit History • Do you make payments as required? • Do you make your payments on time? • Do you go over your credit limits? • Credit rating is assigned to each consumer, the higher the rating the better and the lower your interest rate will be. • Prime Rate

14. Minimize costs of credit/help you build credit • Keep Credit Limits Low. • Charge only what you can afford to pay off each month and paying off balance each month. • Do not exceed your credit limit. • Make your payments on time.

15. Protecting Yourself • If you have an error on your statement, you must notify your credit card company in writing within 60 days. • The credit card has 30 days to respond and up to 60 days to investigate the charges. • If you lose your credit card or it is stolen, immediately contact your credit card company so that the card can be canceled • The most you will be responsible for is $50 of any fraudulent charges.

16. Protecting Yourself • If you are no longer using a credit card. You should request in writing that the account be closed. 3 basic safety tips: 1. Keep your PIN # in a safe location. 2. Do not give your credit card to merchants that you are not familiar with. 3. Shred all receipts after reconciling your statement.

17. Common/Don’t Common debts: • Student loans & Credit Cards Common ways to get into Debt: • Job loss • Illness • Don’t:: • Make purchases on credit you can’t afford • Live beyond your means

18. Consequences • Repossession • Credit score drops • Legal action-lawsuits and garnishments • Physical-due to stress • Relationships- money problems are leading causes to divorce

19. Get out of debt • Contact creditors and discuss ways to lower your debt-payment plans and lower rates. • Loan consolidation • Bankruptcy • Loss of assets • Harm to credit • Not all debts are taken care of

20. Types of Loans • Secured loans (collateral) • Automobiles • Unsecured loans (signature) • Lump sum (90-180 day loan) • Installment loan • Line of credit (revolving-similar to credit card) Components of a loan: • Principle – amount borrowed • Interest rate – fixed or adjustable • Term – length of loan

21. The Loan Process Lenders look at: • Time at residence - stability • Time on job • Income • Credit report- Other debts When applying for a loan: • Purpose of the loan • Amount to borrow • Why you want the loan • How you will repay • How much you can afford

22. 10 Warning Signs of Credit Trouble • Paying only the minimum amount due on your credit cards • Charging more each month than you make in payments. • Using credit and cash advances for items that used to be purchased with cash, like gas and groceries. • Your total credit balance rarely goes down. • Being at or near your credit limit and still applying for new cards. • Needing a consolidation loan to pay new debt. • Not knowing the total amount you owe. • Feeling stress whenever you use your charge cards. • Draining your savings to pay debts. • Making bill payments late.