Credit Cards

Did you know that 183 million Americans are using credit cards?

Average credit card debt is ~ $7,100 per household in 1012.

Credit- write this

• Credit- the ability to make purchases with the promise that the money will be repaid later.

Allows us to purchase homes, cars, and other large items.• Credit card- card issued by a bank, allows

consumers to make small and large purchases on a daily basis.

Credit cards can be a dangerous thing and must be used wisely.

How easy is it to use them?

• In person- just swipe the card “will that be cash or charge?”

• Online- type in the card number, the expiration date, and the verification code on the back (also called the CSC or CVC code)

• Over the phone- with the number, the expiration date, and the code on the back.

Ease of use is what makes it so easy to overspend.

The Reality of Credit Cards

• A credit card is a loan by the financial institution

• There will be a credit limit on the card. You cannot charge (make purchases) on the card if you exceed the limit.

• You must pay for the money you borrow. The interest rate is the percentage that you pay for borrowing the money. (The bank must clearly state the interest rate.)

Credit Card Statement

• Mailed (or emailed) to you monthly

Turn to pages 18-19 in Banking Textbook

Minimum Payment

• Minimum payment- The smallest amount you can pay monthly OR– The bank will add extra fees– They might suspend the card– If they see a pattern that you don’t make

payments, this will be reported to credit rating agencies. Can make it harder to get credit later on (when you want to finance a car or house)

• Must pay by the due date.

How do banks make money off of credit cards?

• Finance charges- this is the interest you pay • Calculated by using the average daily balance,

which is the average amount that you owe each day of the billing cycle (usually 30 or 31 days)

• Look on pages 21-22 for an example of the daily balances on a credit card.

How to calculate finance charge (the interest)

• 1. Calculate the average daily balance• 2. Calculate the daily finance charge rate

(APR/365)• 3. Finance charge = daily finance rate * number

of days in billing cycle * average daily balance.• This is added to the amount that you oweJust like interest can compound in your savings account, interest will compound on your credit card.

The wise way to use credit cards:

• Don’t charge more than you can pay off each month

• Make sure bank receives your payment by the due date

• Remember that banks report credit rating agencies, being irresponsible with your credit cards can hurt you later on.

Assignment

• Read Chapter 3: Credit Cards• Independent practice worksheet/spreadsheet

– Due this Friday Feb. 6