Credit, Credit Cards, Scores and Compound Interest
Credit, Credit Cards, Scores and Compound Interest Today, you will need: Spirals, writing utensils, brains. Please, and thank you. 10/6/13 Agenda: 1. Research savings accounts, savings strategies scenarios (small group) 2. “It’s more than a piece of plastic” (Discuss credit terms, credit cards, scores) 3. Kahn video: APR calculations 4. HW: Research the terms of 3 different credit cards, and record the information on your chart. Objectives: 1. Discriminate between various savings and investment accounts and select the “best” option for different goals. 2. Define key terms related to credit and credit cards. 3. Prove through mathematical calculations the “real” cost of credit. What is credit? • A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some date in the future, generally with interest. • Also refers to the borrowing capacity of an individual or company. Key terms: • 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. • Credit Line The maximum dollar amount that can be charged on a specific credit card account. • Cash back/rewards When a cardholder receives a cash rebate equal to a specified percentage of the amount charged to the card on an annual basis • 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. • 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. More terms: isn’t this fun? • • • • • 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 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. 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. Homework (due Wednesday) • Research 3 different credit cards and record the specific terms of each one on your chart. • On the back, record what you learn about each of the 4 major credit laws. Why use credit at all? Advantages of Using Credit • Immediate Access • Security • Record Keeping • Convenience • Bill Consolidation • Rewards Disadvantages of Using Credit • Expensive: Interest and fees add up. • Keep track of your spending and due dates! Credit Scores: a. FICO scores assess your level of risk to a lender, ability to repay the lender. b. Scores range from 300 to 850. c. Complex formula (loan repayment, outstanding debt, and your current salary) • Information on your credit report: 1. Payment history 2. Amount you owe 3. Length of credit history 4. Number of recently opened accounts Why do you want a good credit score? • • • • • • • • • • • • • • • The Three C’s of Credit A credit score is dynamic and can change positively or negatively depending upon how much debt you accrue and how you manage your bills. Character: From your credit history, a lender may decide whether you possess the honesty and reliability to repay a debt. Considerations may include: Have you used credit before? Do you pay your bills on time? How long have you lived at your present address? How long have you been at your present job? Capital: A lender will want to know if you have valuable assets such as real estate, personal property, investments, or savings with which to repay debt if income is unavailable. Capacity: This refers to your ability to repay the debt. The lender will look to see if you have been working regularly in an occupation that is likely to provide enough income to support your credit use. The following questions may help the lender determine this: What is your current salary? How many other loan payments do you have? What are your current living expenses? What are your current debts? How many dependents do you have? Estimator: http://www.whatsmyscore.org/estimator/ Make sure your credit score is strong: • Use your credit cards responsibly and don’t let them reach their limit or spend beyond your means. • Complete credit applications carefully and accurately. • Attempt to pay your credit card balance in full each month, but at least make the minimum payment by the due date. • Always pay bills on time. • If you have problems paying your bills, contact your creditors. In many cases, they will work with you to figure out a payment plan. • If you move, let your creditors know your new address as soon as possible to avoid losing bills or receiving them late. • If your credit card is lost or stolen, report it immediately. • Review your credit reports periodically for accuracy and report any errors immediately. • Establish a consistent work history Calculating APR • http://www.practicalmoneyskills.com/persona lfinance/experts/khanacademy/#anchorTop • Please, take notes as you watch. APRs and Compound Interest Total Purchase Amount This is the balance due on your credit card. $1,000 $1,000 $1,000 Credit Card APR This is the annual interest rate on your credit card. 10% 15% 25% Monthly Payment This includes paying just the minimum monthly payment, calculated in this example as $40. $40 $40 $40 29 31 36 $126 $207 $427 $1,126 $1,207 $1,427 Number of Months to Pay Off Purchase Amount* This is how long it will take you to pay off the entire balance. Total Finance Charge This is the total amount of money you will pay just in interest. Total Cost This is the final amount you will pay for your purchase.