Credit Card Basics
Getting the idea
• Debit cards can be used almost anywhere that
credit cards can be used. But there is a big
difference between them. The money you spend
using a debit card gets quickly withdrawn from
your bank account. In other words, it is almost
like paying cash.
• One specific use of a debit card is for withdrawing
money from an ATM. This withdrawal comes
directly from your bank account. Normally banks
do not charge a fee if the ATM withdrawal is
made at a bank where you have an account. A
fee may be charged if the withdrawal is made at a
competitor’s bank.
Credit Cards
• When you use a credit card, you are borrowing
money from a credit card company. These
companies charge you interest on your balances.
The amount of interest varies from company to
company and may depend on how you manage
your credit card account.
• A cash advance is a service that allows a
cardholder to borrow cash against the credit
limit. Typically the interest rates used for cash
advances are higher than interest rates used for
purchases.
Credit Scores
• Every consumer has a credit score that is managed by
companies called credit bureaus. These companies
provide credit reports to lenders. How you use your
credit cards affects your credit score. A credit score is a
number that predicts your ability to repay a loan.
Lenders look at this score when you want to buy a
house, a car, or take out a loan. Having too many
credit cards that are at their limits may negatively
impact one’s credit score.
• Typically, credit scores range from 300 to 900, and the
greater the score, the better the credit.
Credit Cards
Advantages
Disadvantages
•Easy to use
•Good for emergencies
•Can help establish and maintain a good
credit score
•Easy to spend money you don’t have
•Can ruin your credit score if you don’t
pay on time
•May have annual fees
•Late fees
Debit Cards
Advantages
Disadvantages
•Easy to use
•Protected by your PIN (personal
identification number)
•Spending is limited to what’s in your
account
Credit Reports
•
•
•
•
There are several life experiences that negatively
affect one’s credit score.
A late payment is when credit card balances are
past their due dates.
A foreclosure is when the bank takes ownership of a
house from someone who has failed to make
mortgage payments.
Bankruptcy is when a court gets involved because a
person cannot repay debts he or she owes.
A tax lien is a legal claim to a homeowner's property
who is behind on paying taxes or other fees.
Credit Reports
Action
Years on Credit Report
Late payments
7
Foreclosures
7
Bankruptcy- Chapter 13
7
Bankruptcy- Chapter 7
10
Paid tax liens
7
Example 1
Jasmine has a credit card. She usually does
not make her monthly payment on time and is
often charged large late fees. Jasmine thinks
because she makes a payment every month,
this will not affect her credit score. Is she
correct? Explain
Strategy:
Analyze how Jasmine pays her bill
• Jasmine is always late on her payment. Credit
card companies view this as irresponsible. By
agreeing to the credit card terms, she is
promising to pay her bill on time.
• Solution: Jasmine is incorrect. Not paying her
bill on time will negatively affect her credit
score.
Example 2
Leo has a credit card. Whatever he charges
during the month, he pays off at the end of
the month and is never late with his
payments. Will Leo’s way of paying his credit
card bill increase or decrease his credit score?
Explain.
Strategy:
Analyze how Leo pays his bill
• Leo pays his bill in full and on time every
month. This shows that he is always able to
repay what he borrows.
• Solution: Leo’s method of payment will
increase his credit score.