WHAT IS A CREDIT CARD?
A credit card allows you to make purchases based on your promise to pay for the good and/or services. Credit cards allow the holder to get something today and pay for it later.
BEFORE opening a credit card, consider the:
1. Annual Fee: The amount a credit card company charges a credit card holder to use the card for a year. Save money by getting a card with no annual fee. Some credit card companies offer an “introductory rate” – most rates will rise drastically after this period.
ASK: What is the annual fee and when is it charged?
2. Annual Percentage Rate (APR): A rate used to compare different loans which takes into account the interest rate, term, and fees. When borrowing money, you want a low APR.
ASK: What is the APR?
3. Credit Limit: The maximum amount of money you can charge on your card. Once the limit is reached, the card is “maxed out.”
ASK: What is the credit limit of this card?
4. Grace Period: Period of time after the purchase date when your balance could be paid in full to avoid paying any finance charges. No interest or finance charges are applied at this time.
ASK: How long is the grace period?
5. Minimum Payment: The amount of payment required by the due date. This can be a percentage of the amount charged or a flat rate minimum dollar payment. Small payments may seem manageable, but the balance remaining will be hit with a large finance charge. The best approach is to pay off the balance in full each month in order to avoid paying more than needed.
ASK: What is the minimum payment and when is it due?
Credit cards are NOT the same as debit cards:
Credit Cards Debit Cards
Payment Pay later Pay NOW
Interest Yes, interest is charged on the remaining balance No interest charges
Pros Build credit history
Potential to earn points/ “freebies”
Payments are automatically deducted from your account; prevents major debt
Cons Sometimes additional fees are associated Risk of overspending
Risk of hurting your credit history if you don’t manage your credit properly
Risk of identity theft if you lose or misplace your card
Fees if you overdraw
Risk of identity theft if you lose or misplace your card
CREDIT CARD RESEARCH
Directions: Visit the website of at least one credit card company and try to locate the information below. Time permitting, visit additional company websites to compare their credit card offerings. Search for “student” or “basic” credit cards to find credit card options that are most relevant to you.Some institutions to start with include Bank of America, Citi Bank, Discover, and Capital One.
Name of Credit Card: Name of Credit Card: Name of Credit Card:
What is the APR?
What is the annual fee? When is it charged?
$ $ $
Are there any other fees associated with this card and if so, what are they (late fee, over-the-credit-limit fee, etc.)?
How long is the grace period?
What is the credit limit? $ $ $
What is the minimum payment? When is it due?
What are the benefits/incentives (points earned, etc.)?
Remember to read the fine print. Look for a low, fixed APR, no annual fee, reasonable grace period (generally about 25 days), and minimal penalty fees. Contact the card’s customer service agent if you have questions.
READING A SAMPLE CREDIT CARD STATEMENT
Obtained from http://www.federalreserve.gov
SECTIONS:
(1) Summary of Account Activity: Summarizes the transactions (each charge and payment made) on your account. This includes:
Balance:Current amount due to the credit card company
Payments made
Interest and fees charged
Credit Limit: Maximum amount you can charge on your card at any time
Available Credit: Credit limit minus amount owed
Statement Closing Date: Date the billing statement was created
(2) Payment Information: Lists your:
Balance:Current amount due to the credit card company
Minimum Payment: The minimum amount due to the credit card company though it is
recommended to pay as much of the bill as possible
Payment Due Date: Date the payment is due to the credit card company.
(3) Late Payment Warning: States that if your payment is received after this date, you may be charged a late fee and increased interest rate.
(4) Minimum Payment Warning:States that paying the minimum amount will increase your number of payments and total amount of interest.
(5) Notice of Changes to Your Interest Rates: If you trigger your penalty rate (by exceeding your credit limit or making late payments), you may be notified of an increased APR.
(6) Changes to Your Account Terms: Summarizes account changes including those to your APR. (7) Transactions: Lists all charges and payments made to your account since your last statement. May
be listed by date or type of transaction. Review this section carefully for any errors. (8) Fees and Interest Charges: Lists any fees and interest charges for the statement period.
(9) Fees and Interest Charge Year-to Date Total: Lists the total amount of feed and interest for the current year. Some fees –such as late fees – can be easily avoided.
(10) Interest Charge Calculation: Summarizes the interest rates of different transactions, account balances, and interest charged for each.
BONUS:
Payment Coupon: Includes the key information on your statement and needs to be sent with your check if you pay your bill by mail.
