Understanding Your Credit Card

Understanding Your Credit Card
Credit Unit Take Charge of Your Finances

Credit CREDIT- When goods, services or money is received in exchange for a promise to pay a definite sum of money at a future date INTEREST- The price of money- when referring to credit, interest is the charge for borrowing money

Lender and Borrower BORROWER- The person or organization that is receiving the money from the lender LENDER- The person or organization who has the resources to provide the individual with a loan

Closed-end vs. Open-end Credit

Credit Card 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 an individual’s perceived creditworthiness Credit limit is the maximum dollar amount loaned Creditworthiness is an individuals ability and willingness to pay the money back

Credit Card Interest Rate at which interest is charged is referred to as: Annual Percentage Rate (APR) The cost of credit expressed as a yearly interest rate Interest is charged each month the balance is not paid in full

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

Minimum Payments

Advantages to using Credit Cards Convenient payment tool Protection against fraud Opportunity to establish a positive credit history Useful for emergencies Online shopping is safer than using a debit card because of the Fair Credit Billing Act protection Often required to hold a reservation Possibility of receiving bonuses, such as frequent flyer miles or cash rebates Able to purchase “big ticket” items and spread out payments

Disadvantages to using Credit Cards Interest can be costly when a balance is revolved Responsible for lost/stolen cards Additional penalty fees may apply Applying for multiple accounts can lower your credit score Tempting to overspend Risk of identity theft

Debit Cards What is the difference between a credit card and a debit card? 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which looks like a credit card, but is electronically connected to the cardholder’s bank account Money is immediately withdrawn from the cardholders checking account

Credit History Credit cards can have a positive or negative impact on an individuals credit history Credit Report A 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 CreditScore A number that summarizes an individual’s credit record and history. It is a numeric “grade” of a consumer’s financial reliability

Positive Credit Card use Helps develop positive credit history and credit report Proper credit card use 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

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

Negative Credit Card Use Develops negative credit history and credit report Improper credit card use Lower credit score 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

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

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

Credit Card Offers Credit 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

Annual Percentage Rate (APR) for Purchases This section discloses the interest paid for purchases on the card. Multiple interest rates may be listed here, because the final interest rate may depend on the creditworthiness of the applicant

Introductory Rate If the credit card has an introductory rate it will be shown in this section, which is the APR charged during the credit card's introductory period after a credit card account is opened. The card will have a different APR after the introductory period ends What 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%

Variable-rate APR Some cards will have a variable-rate APR, which is an APR that may change depending on other factors, such as the prime rate. The prime rate is an index that represents the interest rate most banks charge their most credit-worthy customers 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

APR for Balance Transfers This section discloses the interest paid for balance transfers, which is the act of transferring debt from one credit card account to another. Balance transfer fees may apply, even if the balance transfer APR is 0% What is the APR for balance transfers for this credit card offer? 15.99%

APR for Cash Advances This section discloses the interest paid for cash advances, such as withdrawing cash from an ATM using a credit card. Cash advance fees may also apply What is the APR for cash advances for this credit card offer? 21.99%

Penalty APR and When it Applies This section discloses the penalty APR, as well as 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 triggered What is the Penalty APR for this credit card offer? 21.99%

How To Avoid Paying Interest on Purchases This section explains how you can avoid interest charges on a credit card How can a cardholder avoid paying interest on a credit card? By paying credit card bills in full by the due date

Minimum Interest Charge Credit card companies often have a minimum interest amount. These charges typically range from $0.50 to $2 per month and are disclosed in this section of the credit card offer What is the minimum interest charge for this credit card? $1.50

For Credit Card Tips from the Federal Reserve Board This section directs consumers to the Federal Reserve website to obtain more information about credit cards

Set-up and Maintenance Fees This section discloses any set-up and maintenance fees for the card, which can include annual fees, account set-up fees, participation fees, and additional card fees Annual fee is a yearly fee that may be charged for having a credit card What is the annual fee for this credit card? $20

Transcation Fees This section discloses any transaction fees for the card, which can include balance transfer fees, cash advance fees, and foreign transaction fees What is the fee for cash advances for this card? $5 or 3% of the amount of each cash advance (whichever is greater)

Penalty Fees This section discloses the penalty fees for the card, which can include late-payment, over-the-limit, and returned payment fees Late payment fee is charged when a cardholder does not make the minimum monthly payment by the due date Over-the-limit fee is charged if the account balance goes over the set credit limit Does this card have an over-the limit fee? Yes, the over-the-limit fee is $29.

How we calculate your balance Credit card companies can use one of several methods to calculate the outstanding balance on a credit card. The method used is disclosed in this section What method is used to calculate the balance on this card? Average daily balance (including new purchases)

Loss of Introductory APR If 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 bill What APR will the cardholder be charged if the introductory rate is lost? The Penalty APR of 28.99%

Credit Card Benefits Research benefits that may be received from the card Cash rebates Warranties for items purchased with the card Travel accident insurance Frequent flyer miles Make sure to know all terms and conditions of card benefits Cards that offer benefits may charge fees or higher interest rates

Receiving 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 and the applicant’s age Can be completed through the mail, the internet or over the phone

Receiving a Credit Card 3. Lenders conduct a credit investigation A comparison of information on credit application to information on a credit report 4. Applicants may or may not be approved for the card they apply for Approval depends on the applicant's credit history

Pre-Approved Credit Card Applications Credit card companies send pre-approved credit card applications in the mail If an individual is pre-approved for that particular card, they have passed the initial credit check

Credit Card Statements Andrew’s Credit Card Statement Please help Andrew interpret his credit card statement. 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 statement

Andrew’s Credit Card Statement 2 3 1 Summary of Account Activity This section includes payments, credits, purchases, balance transfers, cash advances, fees, interest charges, amounts past due, the new balance, available credit, and the last day of the billing period 4 6 5 7 8 How much did Andrew charge in new purchases during this credit card billing cycle? 9 $529.57 10

Andrew’s Credit Card Statement 2 3 1 Payment Information This section includes the total new balance, the minimum payment amount, and the date payment is due 4 6 5 7 What is Andrew’s minimum payment due for this billing cycle? 8 $53.00 9 10

Andrew’s Credit Card Statement 2 3 1 4 Late Payment Warning This section states any additional fees and the higher interest rate that may be charged if a payment is late 6 5 7 How much is Andrew’s late payment fee? 8 $35 9 10

Minimum Payment Warning This section includes an estimate of how long it can take to pay off a credit card balance if only the minimum payment is made each month, and an estimate of the total amount paid, including interest, if the bill is paid in three years (assuming no additional charges are made) Andrew’s Credit Card Statement 2 3 1 4 6 5 7 8 How long will it take Andrew to pay off the balance of his credit card if he only pays the minimum payment? 9 10 years 10

Andrew’s Credit Card Statement 2 Notice of Changes to Your Interest Rates If a cardholder triggers the Penalty APR, the credit card issuer must notify them on their statement that their rates will be increasing 3 1 4 6 5 7 Has Andrew triggered the Penalty APR? 8 Yes, he will pay 28.99% on all transactions made after 4/9/12. 9 10

Andrew’s Credit Card Statement 2 Important Changes to Your Account Terms In this section of the statement, cardholders must be notified of any raise in rates or fees or any other significant changes to the account 3 1 4 6 5 7 Other than implementation of the Penalty APR, will there be any other changes to Andrew’s account terms? 8 Yes, his APR for Purchases is increasing to 16.99%. 9 10

Transactions This section includes a list of all the transactions that have occurred since the last statement (purchases, payments, credits, cash advances, and balance transfers). This section should be carefully reviewed by the cardholder to ensure there are no unauthorized charges or errors Andrew’s Credit Card Statement 2 3 1 4 6 5 7 8 How much did Andrew charge on his credit card to Store #1? 9 $529.57 10

Andrew’s Credit Card Statement 2 3 1 Fees and Interest Charged Credit card issuers must list the fees and interest charges separately on the monthly statement. Interest charges must be listed by type of transaction 4 6 5 7 Did Andrew pay a late fee? 8 Yes, he paid $35.00 for a late fee. 9 10

Andrew’s Credit Card Statement 2 3 1 4 Year-to-Date Totals The total amount paid in fees and interest charges for the current year must be shown on the statement 6 5 7 What is the total amount of interest Andrew has paid in the year 2012? 8 $18.27 9 10

Andrew’s Credit Card Statement 2 Interest Charge Calculation This section includes a summary of the interest rates on the different types of transactions, account balances, the amount of each, and the interest charged for each type of transaction 3 1 4 6 5 7 What interest rate is Andrew paying on cash advances? 8 21.99% 9 10

Cardholder Protections & Rights Limits liability for unauthorized credit card charges to $50.00 per card Must 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

Cardholder Protections & Rights 2009 CARD Act To receive a credit card, consumers must be 21 years of age or older Consumers under 21 have to either have a co-signer or show documentation of sufficient income to make payments If someone agrees to be a co-signer on an account, they are equally responsible for the loan Interest rates on existing balances generally can’t be raised unless a cardholder is 60 days or more past due

Cardholder Protections & Rights 2009 CARD Act Must be notified of any significant changes in rates and fees at least 45 days before the changes take effect Any changes made to an account can only apply to future transactions (new charges) Have the option of closing the account before the changes go into effect Cardholders now have to “opt-in” to allowing transactions that take them over their credit limit

Cardholder Protections & Rights 2009 CARD Act Credit card issuers are required to send a monthly statement at least 21 days before a credit card payment is due Credit card payment due dates must be consistent month to month

Cardholder Protections & Rights 2009 CARD Act Credit card companies cannot increase rates for the first 12 months after an account is open unless: The card has a variable interest rate The cardholder is more than 60 days late in paying their bill The card has an introductory rate (the introductory rate must be in place for at least 6 months and then the rate can increase)

Cardholder Protections & Rights 2009 CARD Act Some set-up and maintenance fees are charged before the card is used This may reduce the amount of credit initially available These non-penalty fees cannot exceed 25% of the initial credit limit For example, if a card has a credit limit of $1,000 the total fees for the first year (not including penalty fees) cannot exceed $250

Credit Card Safety Tips 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 Sign card with a signature and “Please see ID” Keep a list of all cards, account numbers, and phone lists separate from cards Shred all pre-approved credit card offers, applications, or solicitations Do not give out account numbers unless making a purchase

Online Shopping Safety Tips 1. Use a temporary credit card number This is a one-time use only number A set amount will be charged to your credit card Then a number will be given to you to do your shopping 2. Use a credit card rather than a debit card Fair Credit Billing Act

Fair Credit Billing Act Helps to protect consumers while using a credit card to make purchases Allows the consumer to not pay for a product or service for which the consumer has a complaint If products are not delivered or if it is not what the consumer requested, any amount of money that was credited to the card above the $50.00 fee that consumers are responsible for will be issued back Debit cards do not have the same protection

Summary 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 A credit card is pre-approved credit which can be used for the purchase of goods and services now and payment of them later

Summary 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 Credit card companies are required to disclose the terms and fees of a credit card in the Schumer’s box

Understanding Your Credit Card