Credit Cards

Credit Cards How to Use Them, But Not Abuse Them Developed by Melissa King Agenda Credit Cards: The Basics  Credit Reports  Positives and Disadvantages of Credit Cards  The Do’s and Don’ts of Credit Cards  Credit Cards: The Basics  What is credit?  It is a loan, allowing you to receive goods and services now and pay for them later  It is an agreement that the money borrowed will be paid back  It is a debt, it is NOT income  It comes with fees; interest and other charges Credit Cards: The Basics  Fees, fees, and more fees  Interest rate  usually fees--what you pay for using the $$ 10% - 25% for students (after intro rate) for just having the credit card  Over the limit fees, charged whenever you exceed your credit limit  Late payment fees  Transaction fees  Other miscellaneous fees  read  Annual fee the fine print!!! Plastic Money  Charge Cards be paid back every thirty days  provides convenience of not having to pay for purchases with cash, but balance may not be carried over month-to-month  must  Credit Cards  operate on a credit limit and revolving basis  if not paid-in-full within grace period, interest is charged on the remaining balance Plastic Money  Debit or Check Cards access to checking account via ATMs and point of sale (POS) terminals  amount is deducted from checking account  not a charge card, must have the funds available  allow  “Smart Cards”  these cards store personal information  may be “loaded” with a certain dollar value that can then be spent at POS terminals Students & Credit Cards  Some recent statistics of undergraduate students (18-24) have credit cards (an 8% decrease from the 83% with cards in 2001)  56% of final year students have four credit cards or more (up from 27% in 1998 & 32% in 2000)  76% 2005 Nellie Mae Study Credit Card Ownership by Grade Level Year 1 Year 2 Year 3 Year 4/5 Percentage who have credit cards Average number of credit cards 42 72 83 91 2.26 3.44 4.0 5.07 Percentage who have 4 or more cards 15 34 41 56 Student Credit Card Balances 1998 Average credit card debt per student Median credit card debt per student Percentage with balances $3000-$7000 Percentage with balances over $7000 2000 $2748 2001 $2327 2004 $2169 $1879 $1222 14 10 $1236 13 9 $1770 21 6 $946 16 7 Stats on Credit Card Balances  By senior year, 31% of students have a balance of $3000-$7000  1 in 8 students owe $7,000 or more  In the past 10 years, bankruptcy filings by those under 25 have increased by 96% Credit Card Debt – EUP students Spring, 2001 Credit Card Debt $5000 or more $4000 - $4999 $3000 - $3999 $2000 - $2999 $1000 - $1999 $500 - $999 $250 - $499 $100 - $249 $1 - $99 None, pay full amount None, not responsible I don’t have a credit card 0.0 10.0 20.0 Percent 5.1 31.8 30.0 40.0 2.0 2.0 3.7 7.1 5.3 5.5 5.1 4.5 18.0 Total % 7.6 Credit Reports Your financial resume  Shows financial responsibility  Follows you for life - just like your school transcript  Credit Reports  What is in a credit report?  personal information  payment history  amount of credit you have access to and are using  inquiries  public records, judgments, liens, bankruptcies Credit Scores Range from 300-850 Components:  Payment history (35%)  Outstanding debt (30%)  Length of credit history (15%)  Number of inquiries on your report (10%)  Types of credit currently (10%) More Info on Credit Scores  Check the Internet www.myfico.com http://money.howstuffworks.com www.bankrate.com The Positives majority of students use credit cards responsibly  provide convenience and security  allow students to establish credit histories  The Disadvantages college students are more likely than other types of credit card users to run up debts they cannot pay  many students do not understand the consequences of incurring excessive debt and making payments late   impaired credit rating  more difficult and costly to obtain credit later The Disadvantages (continued) college students (with limited or no credit history and income) are charged higher interest rates  many students pay only the minimum amount due each month, not aware of how much this will cost them in interest and time  Credit Card Payment Behavior Pay off all credit card balances on all cards each month Make the minimum monthly payments on all cards every month Pay off some cards in full each month but make only the minimum monthly payment on others Make more than the minimum payment but always carry a balance Make less then the minimum payment on some or all cards each month 21% 12% 8% 44% 11% My parents pay my credit card bills 4% Table 1. Minimum Repayment Schedule on a $2000 Credit Card Loan at 19 Percent Minimum monthly payment amount Number of months to repay Total Interest Payment $40 100 $1,994 $50 $75 64 35 $1,193 $619 $100 www.webwinder.com 25 $424 Source: Credit Card Minimum Payment Interest Calculator, Daniel C. Peterson Interest savings between lowest/highest payment = $1,570; time saved = 75 months or 6.25 years! Credit Cards: Possible Consequences      Between 10 - 20% of students are risking unacceptably high levels of debt Many students must take on additional jobs to pay their debts Many cut back on the number of classes or drop out of school all together Career choices can be limited Some are forced to file bankruptcy Credit Cards: The Risks  Characteristics of high-risk use  Average credit card balances over $1,000  Owning four or more credit cards  Carrying a balance each month  Using credit cards to charge tuition or fees Credit Card Don’ts Don’t use them for cash advances  Don’t use them to pay for basics: rent, groceries, etc.  Don’t charge more than you can pay off in a month  Don’t let banks increase your credit limit  Source: USA Funds Life Skills -Module 1 Credit Card Do’s Limit the number of cards you have  Use a debit card instead of a credit card  Use a card that has no annual fee and lower interest rates  Know all of your card’s fees  Pay your full balance each month or at least pay more than the minimum amount due  Pay on time, all the time  Source: USA Funds Life Skills -Module 1 Questions ? ? ? Student Financial Support and Services can help! www.youcandealwithit.com Community Resources  Consumer Credit Counseling Service of Western Pennsylvania Inc 4402 Peach St Erie, PA 16509 866-4509