Credit Cards and Credit Scores

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Credit Cards and Credit Scores

Consumer Math Unit 3

What do you already know?

Do your parents have credit cards?

Do you have credit cards?

It’s safe to borrow how much?

List out all the things you already know about credit cards and credit scores!

Overview

Overview

Basics

Shopping For A Credit Card

Reading your Statement

Credit Cards– the real cost

Amount of Debt

Calculations

Basics

What are credit cards?

Standard-sized plastic cards with magnetic strips that hold a machine readable code.

Convenient substitute for cash or check

Essential component of electronic commerce and internet commerce.

Draw on a credit limit approved by the card-issuer (bank, store, service provider, company, etc.)

Get one bill every 30 days and pay after purchases are made.

Advantages and Disadvantages

Advantages

Disadvantages

Protection

against theft of cash

Spending beyond your means

Purchase

products and services as you need them

Impulse buying

Emergencies

Only paying the minimum balance

Money management

High interest rates

Builds credit

Identity Theft

Terminology

Annual Fee

The once-a-year cost of owning a credit card. Some credit card providers offer cards with no annual fees. The annual fee is part of the total cost of credit.

Annual Percentage Rate (APR)

The yearly interest rate charged on outstanding credit card balances.

Balance

An amount of money. In personal banking, balance refers to the amount of money in a savings or checking account. In credit, balance refers to an amount of money owed.

Credit Bureau

A reporting agency that collects information on consumer credit usage. There are currently three main credit bureaus in the United States: Equifax, Experian, and Trans Union.

Credit Line

The maximum dollar amount that can be charged on a specific credit card account.

Terminology

Credit Rating

A financial institution's evaluation of an individual's ability to manage debt. It is necessary to have a good credit rating if you intend to borrow money or have credit cards.

Grace Period

The time a borrower is allowed after a payment is due to make that payment without adding to the interest owed.

Introductory Rate

Credit card issuers may offer low introductory annual percentage rates as special promotions. Be sure to fully understand how long the introductory rate will last and what the standard rate will be.

Minimum Payment

The lowest amount of money that you are required to pay on your credit card statement each month in order to keep the account in good standing.

Overdraft Protection

A banking service that allows you to link your checking account to your credit card, thereby protecting you from overdraft penalties or bounced checks in the case of insufficient funds.

Questions so far?

Shopping for a Credit Card?

Types of Credit Cards

Bank Card What are the uses for each

Visa, MasterCard

of these?

Store Card

Macy’s, Sears, BP, etc.

Travel and Entertainment Card

American Express, Diners Club

What are you looking for in a credit card?

Brainstorm!

What are some things you should look for in a credit card?

APR

Late Fees

Annual Fees

Credit Limit

Points/Rewards

Overdraft Protection

Grace Period

Acceptance of card

Shopping for a Credit Card

You are going to research three different types of credit cards, compare each based on your previous criteria and then determine the credit card which will best suit your needs.

Use bankrate.com as a good starting point.

Make sure to fill out the worksheet entirely!

Shopping for a Credit Card

Discussion.

What did you find when researching?

APR

Late Fees

Annual Fees

Credit Limit

Points/Rewards

Overdraft Protection

Grace Period

Acceptance of card

Who accepts what cards?

Each group will be assigned a specific store. Your job is to research what types of cards that store accepts and what card types they do not accept.

Share with the whole class.

Which cards should you avoid getting from this research?

Denial of Credit

If you are denied credit:

Ask the creditor to explain why you were denied

Review your credit history

Do the things you can to improve your credit worthiness

Apply to another creditor whose standards may be different.

Credit Cards are NOT the only way to build your credit!

Reading a Statement

Statement

Sample statement

Answer the questions on the given worksheet.

Billing Errors

Fair Credit Billing Act (1974)

Challenge a billing statement for errors such as unauthorized purchases, charges for items that were never delivered, failure to credit a payment

Must notify the creditor of a dispute within 60 days

Creditor must investigate and correct the mistake or explain why the charge is not an error

You do not have to pay the disputed amount until after the investigation is finished

You have the usual amount of time to pay the bill once investigation is finished

Credit Cards– the real cost

Debt

Interest accumulates and adds to your principal balance.

This is the major reason people get into credit card trouble/debt.

Costs

Calculating total costs of an item bought on credit, paying over time, with interest.

Utilize online payment calculators:

www.practicalmoneyskills.com

Go to the calculators, find cost of credit calculator.

Calculate for each of the given situations

Amount of Debt

20-10 Rule

Never borrow more than 20% of your yearly NET income.

If you earn $30,000 per year net, then:

$30,000*.20 = $6,000

Monthly payments should not exceed 10% of your monthly NET income.

If your take-home pay is $400 per month, then:

$400 * .10 = $40

Calculations Practice

Nancy and Thomas have a combined monthly net income of $1,200. What is the most they can afford to pay for installment and credit card debt

?

$120

Calculations Practice

Jessie has a monthly net income of $800. His fixed monthly expenses consist of $150 for rent and he currently pays $80 each month for a credit card bill. He now wants to buy a car. How much does Jessie have left in his budget for a car payment to stay in his safe debt load

?

$0

Calculations Practice

Carla has a monthly net income of $450. She wants to buy a new bike and pay for it using a credit card. What is the largest monthly payment she can commit to making

?

$45

Credit Scores

Three Major Credit Bureaus

Experian

TransUnion (one used by Discover)

Equifax

Each will give a different score based on their scoring system.

Scores

Range from 300 (lowest) to 850 (highest)

Impact of Your Credit Score

FICO Credit Scores

FICO Credit Scores

Payment History- want to know if you have paid past credit accounts on time.

Amount Owed- want to know how much you have borrowed

Length of Credit History- how long you have had credit (usually the longer you have credit the better your score will be)

Types of credit in use- a mix of credits

New credit- opening a lot of new accounts lowers your credit score

What’s not in your credit score

Race, color, religion, national origin, sex, marital status

Age

Salary, occupation, title, employer, date employed or employment history

Where you live

Interest rates on accounts

Items reported as child/family support obligations or rental agreements

Improve your credit score

Check your credit report

Setup Payment Reminders

Reduce the amount of debt you owe

Pay bills on time

Keep balances low on credit cards

Apply for and open new cards only as needed

Fact versus Fallacy

Fallacy:

My score determines whether or not I get credit.

Fact:

 Lenders use a number of facts to make credit decisions, including your FICO® score. Lenders look at information such as the amount of debt you can reasonably handle given your income, your employment history, and your credit history. Based on their perception of this information, as well as their specific underwriting policies, lenders may extend credit to you although your score is low, or decline your request for credit although your score is high.

Fact versus Fallacy

Fallacy

:

A poor score will haunt me forever.

Fact:

 Just the opposite is true. A score is a “snapshot” of your risk at a particular point in time. It changes as new information is added to your bank and credit bureau files. Scores change gradually as you change the way you handle credit. For example, past credit problems impact your score less as time passes. Lenders request a current score when you submit a credit application, so they have the most recent information available. Therefore by taking the time to improve your score, you can qualify for more favorable interest rates. 

Fact versus Fallacy

Fallacy

:

Credit scoring is unfair to minorities.

Fact:

 Scoring considers only credit-related information. Factors like gender, race, nationality and marital status are not included. In fact, the Equal Credit Opportunity Act (ECOA) prohibits lenders from considering this type of information when issuing credit. Independent research has been done to make sure that credit scoring is not unfair to minorities or people with little credit history. Scoring has proven to be an accurate and consistent measure of repayment for all people who have some credit history. In other words, at a given score, non-minority and minority applicants are equally likely to pay as agreed.

Fact versus Fallacy

Fallacy

:

Credit scoring infringes on my privacy.

Fact:

 Credit scoring evaluates the same information lenders already look at - the credit bureau report, credit application and/or your bank file. A score is simply a numeric summary of that information. Lenders using scoring sometimes ask for less information - fewer questions on the application form, for example.

Fact versus Fallacy

Fallacy

:

My score will drop if I apply for new credit.

Fact:

 If it does, it probably won't drop much. If you apply for several credit cards within a short period of time, multiple requests for your credit report information (called “inquiries”) will appear on your report. Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.