AOF Financial Planning Lesson 9 Credit Cards Student Resources Resource Description Student Resource 9.1 Reading: Stories of Credit Card Debt Student Resource 9.2 Reading: Introduction to Credit Cards Student Resource 9.3 Example: Credit Card Fine Print Student Resource 9.4 Reading: Consumer Credit Rights
Student Resource 9.1 Reading: Stories of Credit Card Debt These are real-life stories of young people who lost their financial independence due to credit cards. What could they have done differently? Twenty-eight-year-old Tyrenia Richardson in Long Beach, Calif, has a full-time job as a medical assistant and a part-time job as a massage therapist. Yet even with her two jobs, she s having a hard time paying her living expenses and the minimum monthly payments on her credit card debts and student loans. She also has about $15,000 in credit card debt and a $3,000 car loan. Plus, while she attended graduate school at UCLA she had to take out hefty student loans for tuition, books, and living expenses. I feel like I can never get ahead, says Richardson. I make my minimum payments more every month on my credit cards, but the interest is so high, I feel like I m not making any progress. Her large debt is affecting her outlook for the future. She would marry, she says, but she would have to put off having children. **** Johanna Morris, an NYU journalism major, says she got hooked on credit cards as soon as she received one in her freshman year. She felt she needed more than one card since she quickly maxed out the spending limit on her first card. I realize that I was lured by the idea that I didn t need to pay off my bill all at once, Morris admits. With four credit cards, Morris soon found herself in debt for $1,000, which is the average amount of credit card debt among college students. Practically everything I earn goes into paying off my credit cards, said Morris, now 23 and working as a freelance reporter. And yet once I pay off my credit card I max it out again. Then I go out and buy more stuff and the cycle continues. **** Manuel Espinoza, 24, found that after graduating from the University of Chicago he had to move back home with his mother to make ends meet. He blames this on $3,000 in credit card debt and a $26,000 student loan. As a college freshman I didn t know any better when I filled out a credit card application, he says. I wish I had known the trouble it would create. He said he knows that many of his classmates and friends also ran up credit card debt to the limit. Espinoza pays some rent and utilities to his mother. Ultimately, he s looking forward to striking out on his own again.
Student Resource 9.2 Reading: Introduction to Credit Cards This presentation covers the some of the considerations that must be made when deciding on getting a credit card. It follows the story of Tran as he considers a credit card offer at his college.
Credit cards are one type of consumer borrowing. Credit cards can be very useful because they are accepted in many situations instead of cash, can be used to make online purchases or in an emergency, and proper use of credit cards can boost your credit score. It is also possible to get a loan from a bank or other lender. These loans can be used for many purposes, such as to buy a car or a house. Usually, the borrower must begin paying interest on the full amount of the loan immediately. Another type of borrowing is a home equity line of credit, where a bank or other lender will provide a line of credit at an agreed-upon amount with the house as collateral. Two advantages of a home equity line of credit over a bank loan is that you only pay interest on the money you borrow, rather than on the full amount of the loan. Many banks provide cards drawing from the line of credit, which are accepted as credit cards in many places, including with online vendors. There are illegal lenders, sometimes known as loan sharks, that will sometimes lend money when others won t. Usually, the interest rates of loan sharks are very high, and if you can t pay them back you might be forced to take out another loan, at even worse terms.
Credit cards are like an instant loan ❶ ❷ Tania purchases concert tickets for $50 on her new credit card. Next month, her credit card statement comes, and she owes $57.50, which includes the principal ($50), plus interest. The minimum payment is $10. ❸ If Tania only pays the $10, her next statement shows she owes $51.50 (the $47.50 from her last statement, plus new interest). Can you explain why Tania still owes $51.50, even after making a $10 payment on her $50 purchase? Basically, a credit card allows you to borrow money from a financial institution in a very convenient way. Like other forms of borrowing, the lenders charge you interest for the convenience of borrowing their money. In addition to the interest, most lenders charge a sometimes confusing variety of fees and penalties. It is important to know these fees and penalties so that you aren t surprised later! The amount you borrow is called the principal. Added to the principal on a regularly basis, sometimes daily and sometimes weekly or at other intervals, is the interest (and any penalties or fees). Each month, the credit card company sends out a statement or bill, usually with a minimum payment required to avoid penalties. It is important to know that if this minimum amount is paid, it may take a very long time to pay off the loan, and interest will continue to accrue. Interest can accrue rapidly, and it is not uncommon for people to owe more in interest than the original principal!
Like many students, Tran pays for his college education with a mixture of money from his parents, scholarships and grants, and a part-time job. For many young people, credit cards seem like an attractive and convenient way to borrow money.
Sometimes, it is difficult doing without things that others have. Tran is also hoping to avoid those emergency times when his money runs out at the end of the month. What can Tran do to make sure he doesn t run out of money before his next paycheck?
Credit card companies frequently set up tables at college campuses and offer special gifts and promotions to encourage young people to get their card.
Depending on your credit history and income, credit card companies set a limit to the amount of credit you are supposed to take out on the card. If you exceed this limit, there is often a fee, or interest rates are raised. Your credit history reflects all of the time you have used credit before. Lenders report your borrowing and repayment behavior to Fair Isaac & company, which gives you a score (commonly known as the FICO score or credit score). The higher your score, the more likely you are to get good terms on credit.
Credit card companies often offer good introductory rates to first-time card holders with their company. These rates usually last a year or two, and often go up significantly if the borrower breaks any of the rules in the card agreements. APR stands for Annual Percentage Rate, and is a simplified way of expressing how much interest you ll pay on the money you borrow. The prime rate is one of several standard rates, often set by governments, which credit card companies use to set their variable interest rates. Fixed interest rates always stay the same (again unless the borrower breaks the agreement) and variable rates go up and down, depending on the rate to which they are tied. Often when you sign up for a credit card, the card will allow you to transfer the money you owe from other cards to it. These transfers often have special interest rates. You should know that most credit card companies will apply payments to balances with the lowest rates first. This means that while your paying off your low-rate transfers first, your higher-rate balances will continue to accrue interest! Do you think it would be more fair to tell the credit card company where you want to apply your payment?
Many credit card companies offer attractive introductory rates, but if the borrower breaks any rules, including making a payment on time, these rates often go up significantly, to 30% or over for some cards.
Student Resource 9.3 Example: Credit Card Fine Print Section 1: Card interest rates can be fixed or variable. Variable rates are calculated based on a Variable Interest Rate Index combined with margins. Your account rate for Balance Transfers will be a fixed 7.99% with an introductory 0% until May 1, 2010 on requests made with the application. To maintain the introductory rate for the full-term offer, you must make all payments when due, you must not exceed your account credit limit, and you must not otherwise default on the account. Your account rate for Purchases will be Prime plus a Purchase Margin of 0.24%. Your account rate for cash transactions will be either Prime plus a Cash Advance Margin of 0.24% or Prime plus a Cash Advance Margin of 12.24% based on our assessment of your credit history and creditworthiness. Section 2: We allocate payments and credits to pay account balances bearing lower interest rates, such as introductory and promotional rate balances, before balances bearing higher interest rates. This means your savings may be reduced by having balances subject to standard rates. Default rates, when imposed, replace other rates, including introductory and promotional rates, and apply to previous balances as well as to new transactions and charges. Events of Default are listed in the card agreements and include, among other things, failing to make a minimum payment due so that it is received by its due date, or exceeding your account credit limit, or making a payment to us that is not honored by your bank, or being in default on any other account you have with us, or failing to keep your credit rating in good standing, or our concluding that you present an increased risk of future non-payment. Section 3: In accordance with applicable law and the terms of your Card Agreement, we may change all of your account terms, including rates and fees, at any time for any reason. Your Card Agreement also contains an arbitration provision, which replaces the right to have claims heard in court by a jury and precludes participation in class actions. Default APR: The higher of the account APR plus 3% or Prime plus a Default Margin of 22.24%. Section 4: Transaction Fees: Cash Advances other than Convenience Checks: 3% (minimum $5); Balance Transfers: 3% (minimum $5; maximum $90 with this introductory offer). Other Fees: Late Payment Fee $19 (on balances under $250) or $30 Overlimit Fee: $15 (on balances under $500) to $39 Returned Payment Fee: $35 Balance Transfer Cancellation Fee: $29 Bank Wire Payment Fee: $15
Student Resource 9.4 Reading: Consumer Credit Rights Did you know that credit cards are regulated by state and federal laws? This gives you consumer rights and obligations in dealing with credit card companies. Here is a summary of these rights and obligations: A credit card company must credit your account the same day it receives your payment. Your creditor is required by law to post payment received within 24 hours of receiving it. To guarantee that this system goes smoothly from your end, you should get familiar with the payment procedures for your card. Credit card companies are routinely audited to guarantee that their billing practices are proper. A credit card company must correct errors on your bill within a specified period. Under federal law, you are required to notify a credit card issuer in writing within 60 days of a billing error. Conversely, the credit card company is obligated to correct the error within 90 days of receiving your written notice. If you overpay your credit card bill that is the total amount, not a specific monthly bill, you have a right to receive a credit on your account. You can also ask your credit card company to send a refund of the overpaid balance. (Note: this only applies if you have completely paid off the total amount, and have issued additional payment; it does not apply to an overpayment of a monthly minimum payment.) A credit card company cannot make you pay for unauthorized charges. If fraudulent charges appear on your account, you can only be held accountable for up to $50 per card, even if the thief uses your card on an ATM machine. Of course, you should immediately report any unauthorized charges and the loss or theft of your credit card to the police and the credit card company. You can reject changes in your credit card agreement. A credit card company is required to provide you with written notice when it changes any terms in your agreement. Always read any changes carefully because they might adversely affect you, especially when the changes involve the calculation of interest; a change may very well be a way to get more money out of you. You have the right to reject changes by following the instructions provided with the notice. Request a written copy of your rights from your credit card company, and contact them if you have any questions or concerns. If you think a credit card company has violated your rights, you may file a complaint online with the Federal Trade Commission (FTC) at http://www.ftc.gov. You can also complain to your state s attorney general.