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 Department of Health and Human Development at Montana State University – Bozeman
4.1.G1
Family Economics & Financial Education
Credit
• What are some advantages of using credit?
– Discuss as a small group then as a whole class
• What are some disadvantages of using credit?
– Discuss as a small group then as a whole class
© 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
4.1.G1
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 Department of Health and Human Development at Montana State University – Bozeman
4.1.G1
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 Department of Health and Human Development at Montana State University – Bozeman
4.1.G1
Family Economics & Financial Education
4.1.G1
Types of Credit
Closed End or Installment
• Loans, merchandise, services paid this way
• Fixed amount, fixed payments, interest, fixed period
of time.
• Secured (collateral such as house, auto)
• Unsecured (no collateral)
© 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
Types of Credit
Open End or Revolving credit
• Credit cards
• Limit set, can carry a balance, interest charged.
• Payment depends on amount spent, balance, &
interest rate.
• Billing cycle (30 to 35 days)
© 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
4.1.G1
Family Economics & Financial Education
Types of Credit Cards
• Bank Credit Cards
• Accepted anywhere
• Financial institution (commercial bank, credit union) +
service provider (Visa, MasterCard)
• Retail Credit Cards
• Purchases allowed only at the retailer
– i.e. Nordstrom, Old Navy
© 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
4.1.G1
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
© 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
4.1.G1
Family Economics & Financial Education
Types of Credit Cards cont.
• Affinity Cards
• Financial institution + Sponsoring organiztion
• 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 Department of Health and Human Development at Montana State University – Bozeman
4.1.G1
Family Economics & Financial Education
© 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
4.1.G1
4.1.G1
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
Late Payment
Fees
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 Department of Health and Human Development at Montana State University – Bozeman
$29
4.1.G1
Family Economics & Financial Education
Annual Percentage Rate
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 Department of Health and Human Development at Montana State University – Bozeman
$29
4.1.G1
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 Department of Health and Human Development at Montana State University – Bozeman
$29
4.1.G1
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 Department of Health and Human Development at Montana State University – Bozeman
$29
4.1.G1
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 Department of Health and Human Development at Montana State University – Bozeman
$29
Family Economics & Financial Education
4.1.G1
Balance Calculation Method cont.
• Balance Calculation Method
 Average daily balance excluding new purchases
 Average daily balance including new purchases with no grace
period
 Average daily balance + 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 Department of Health and Human Development at Montana State University – Bozeman
4.1.G1
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 Department of Health and Human Development at Montana State University – Bozeman
Late Payment
Fees
$29
4.1.G1
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 Department of Health and Human Development at Montana State University – Bozeman
4.1.G1
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 Department of Health and Human Development at Montana State University – Bozeman
Family Economics & Financial Education
Opening a Credit Account
1.
2.
3.
4.
5.
6.
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
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
4.1.G1
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 Department of Health and Human Development at Montana State University – Bozeman
4.1.G1
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
4.1.G1