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Credit, Credit Cards, Scores and Compound Interest

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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?
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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?
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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.
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