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CREDIT CARDS What to know and understand before you obtain one… CREDIT IS… A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some later date. A privilege – it can be damaged or taken away… but if used wisely, can be of great benefit to the borrower Important to understand – it can have great impact on your financial future Types of Credit INSTALLMENT CREDIT Loan is paid back in set monthly payments. Buyer signs a legally binding contract. Secured loan means the seller owns product until paid in full. Installment credit is typically used for large purchases such as vehicles, homes, education, etc. REVOLVING CREDIT Monthly payment varies depending on the amount spent. Minimum payment = highest cost of credit Pay in full within grace period to avoid finance charges. APR can be adjusted by creditor. Interest rates are higher than for installment credit. There is a limit on the amount that can be charged. Bank cards and store/retail cards are examples of revolving credit. Credit Terms and Vocabulary CREDIT TERMS & VOCABULARY Principal – The total dollar amount of purchases made on a credit card. – The balance remaining on the loan not including interest. Finance Charge – The cost of using credit – the amount charged to borrow money. This includes interest, fees, and other charges billed to you on your statement. You can avoid finance charges by paying on time and in full each month. CREDIT TERMS & VOCABULARY Introductory APR Grace Period Fixed Rate (or Fixed Late Fee APR) Over Limit Fee Variable Rate (or Balance Transfer Variable APR) Fee Minimum Payment Cash Advance Fee Credit Limit Annual Fee Method of Computing Balances of Purchases Average Daily Balance – Banks measure and compute how much you owe on an average day of your billing cycle and use this to calculate interest for one month. Typical to see on most cards, but read carefully! It could be… Two Cycle Billing – Issuers calculate the balance by making use of the last two months of account activity. Most expensive for card holders, but as of 2009, the law no longer permits Adjusted Balance - Balance is determined by subtracting payments or credits received during the current billing period from the ending balance. Purchases made during the billing period aren’t included. Best for card holders. Credit CARD Act 2009 – What changed? Must be 21 to get a credit card – Unless they can show proof they earn enough income to repay the debt – Or have adult co-signers on their account No more double-cycle (two-cycle) billing Minimum 25 day grace period No over-limit fees (transactions rejected instead) Additional changes… – http://www.creditcards.com/credit-card-news/help/what-the- new-credit-card-rules-mean-6000.php Good Debt vs. Bad Debt GOOD DEBT BAD DEBT – The purchase outlasts – Financial obligations last the debt. longer than the purchase. – The ratio of debt to income does not exceed – The ratio of debt to 20%. income exceeds 20% or jeopardizes financial security if payments cannot be made. Benefits of Using Credit Use of product or service before you “own” it Free loan if you pay bill in full Convenient- no-hassle shopping More secure than cash – report to the bank that issued the card within two business days and you are not liable for more than $50 Useful in emergencies Universal acceptance – global Necessary for rental car and hotel reservations Use for catalog/Internet shopping Establish a good credit score Disadvantages of Using Credit “Too convenient” – can lead to overspending Finance charges Predetermines future income Can hurt your credit score The 3 C’s of Getting Credit CHARACTER – Can you be counted on to pay your bills? CAPACITY – Do you have a steady source of income? CAPITAL – How many assets do you have? How much debt do you have? Types of Credit Cards Retail - Highest interest rates. Bank Cards – Visa-MC-Discover-AE Secured Card - For people to be able to establish credit. Reward Cards - Perks Affinity Cards - Organizations Choosing a Credit Card Which One Is Best for YOU? What is the APR? What are the fees – penalty for over the limit, late payments, etc.? How long is the GRACE PERIOD? READ THE FINE PRINT BEFORE YOU SIGN ANYTHING!!!! RECOMMENDATIONS Just starting out? Do your homework! Get 1 credit card with a limit of $500-$1000 Pay it off (in full) every month If you must carry a balance, keep it under 35% of your credit limit. Use resources on the Internet to help! http://www.creditcardguide.com/ http://www.creditcards.com/best-credit-cards.php http://www.debtslapped.org Tips to PROTECT Your Credit Card Account Never lend your card to anyone. Never give your card number over the phone or Internet unless you initiated the call and you are certain of the company or organization. Sign the back of your cards as soon as you receive them. Do not leave your card as a security deposit or as identification. Keep a record of your card number, expiration date, and phone number of card company separate from your wallet. Contact the credit card issuer if any questionable charges appear on your statement. Federal Laws Protect You Truth in Lending Law – Discloses all terms of loan Fair Credit Billing Act – May dispute billing errors & unauthorized use of your account. Equal Credit Opportunity Act – Fair opportunity for credit based on race, creed or gender. Unauthorized charges – You’re only liable for $50 Credit Card Jeopardy! Show What You Know! Whose Team will be the Hot Tamales?
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