MONEY 2004Made available to the CARE Program courtesy of

Carol Kenner, retired Bankruptcy Judge from D. of Mass.

• 1. You must be 18 or older to obtain a credit card in your own name.

• 2. All credit cards charge the same annual percentage rate (APR) of interest on the balance you owe.

True or False?

• 3. If you pay your credit card balance in full each month, it doesn’t matter what rate the bank charges on your credit card.

• 4. You pay no interest on a debit card purchase.

• 5. There is a credit report for everyone over age 18.

• 6. If you are late in making a few payments on your credit card, the interest rate you pay may increase sharply.

• 7. If you miss just one or two payments on your credit card, it won’t hurt your credit rating.

• 8. If you apply for a car loan, the lender will probably review your credit report.

• 9. When you apply for a job, your prospective employer may review your credit report.

• 10. Bouncing just one check won’t cause you credit problems.

11. The average college undergraduate owes credit card debt of

• (A) none

• (B) $500

• (C) $1,500

• (D) $3,000

12. What do the following people have in common?

Tony Braxton

Burt Reynolds

Kim Bassinger

M.C. Hammer and Shannen Doherty

Answers

• 1. You must be 18 years old or older to obtain a credit card in your own name.

• 1. TRUE. • Before you become

18, you may obtain a credit card where an adult is the authorized user. Once you become 18, you can legally incur debt in your own name.

• 2. All credit cards charge the same annual percentage rate of interest on the balance you owe.

• 2. FALSE • Different banks charge

different rates. Other important terms vary also, such as annual fees, late fees, grace period.

• Check out this website for a comparison of terms: www.cardtrak.com. See also smartmoney.com

• 3. If you pay your credit card balance in full each month, it doesn’t matter what rate the bank charges on your credit card.

• 3. TRUE• Since you only

pay interest on the unpaid amount each month, you never pay any interest charge if you pay the entire debt. Banks hate when you do this.

• 4. You pay no interest on a debit card purchase.

• 4. TRUE

• A debit card works just like a check. Your ATM card is probably a debit card.

• 5. There is a credit report for everyone over age 18.

• 5. FALSE• There is a credit

report only for people who have established a credit history. Having no credit history can have adverse consequences.

• 6. If you are late in making a few payments on your credit card, the interest rate you pay may increase sharply.

• 6. TRUE For example, on one Platinum VISA card, the rate jumps from 4.9% to 24% if you pay late or miss even one payment. Late charges also accrue.

• 7. If you miss just one or two payments on your credit card, it won’t hurt your credit rating.

• 7.FALSE

• That negative information can legally remain on your report for up to 7 years.

• 8. If you apply for a car loan, the lender will probably review your credit report.

• 8. TRUE

• People who lend you money will almost always review your credit report. To get a free copy of your credit report, call 1-888-experian.

• 9. When you apply for a job, your prospective employer may review your credit report.

• 9.TRUE

• A prospective employer can review your credit report if you give written authorization. More employers are asking to see credit reports.

• 10. Bouncing just one check won’t cause you credit problems.

• 10. FALSE • If you bounce

a check your bank may put your name in ChexSystems. You could be “blacklisted” for up to 5 years - this means you cannot use a checking account.

The average college student owes about $3,000 in credit card debt today.

12. What do these people have in common?

• They are all bankrupt. Kim Bassinger pays $7,000 for pet care and $9,000 for alimony - each month. M.C. Hammer has a bath tub seating 8 people, a 40-person entourage, 17 cars, several racehorses and a $3 million swimming pool.

How do you spend money?

What are the good reasons to use credit cards?

• convenience

• safety - $50 limit on liability

• good ID

• to purchase something necessary that you otherwise could not afford (e.g., you buy a car in order to commute to a job) or to purchase something that saves you money (e.g., storm windows which save you heating costs)

• internet purchases

• They often provide special consumer protections

• They can provide you leverage with a merchant

• Different credit cards offer different “rewards”, such as air mileage, savings bonds, sporting equipment. Evaluate whether these features are worth any extra credit costs to you.

What are the downsides of using credit?

• If your payment record is poor, your credit rating will suffer.

• A poor credit rating means credit will cost you more - you’ll pay higher interest.

• Or you may be denied credit entirely.

• Money troubles can be embarrassing

What if you bought ...

• Speakers for $1,200.00

• CD player $500 and

• Tuner $300• TOTAL: $2,000

• And what if you use your credit card to buy the system and you make monthly payments of $300?

• Assume you never miss a payment and the annual percentage rate on your card is 8%.

What will the system end up costing you?

How long will it take to pay for it?

• Your total cost will be $2052

• It will take you

SEVEN MONTHS to pay for it

• Now, instead of an 8% rate, assume that, because your credit rating is poor, you must pay interest at a rate of 24%.

• Also assume that you pay the MINIMUM MONTHLY PAYMENT of only $50 per month.

How long will it take you to pay for the system?

How much will you end up paying for the system?

• It will take you 82 MONTHS (almost SEVEN YEARS). Total payment: $4,062!

Your choices:• pay $2,000

cash

• pay $2,052 over seven months

• pay $4,062 over seven years

What if you take the $2,000 you save as a result of paying cash for

the stereo and invest it together with $2,000 every year until you

are age 60?

You’ll have a nest egg of approximately $1,200,000.

Tips • Limit the number of cards you use to just one

or two. Keep track of where they are.• Cancel unused cards. Unused cards are a

factor lenders consider in extending credit.• Either use credit only for essential purchases

or pay off the entire debt each month.• Keep your card in view whenever you hand it

to a merchant.

• Check your credit report yearly and correct errors. Find out what your credit score is.

• Shop around for a credit card with the best terms.

• Establish good credit by using a checking account, a debit card and paying all bills on time.

• Take out a small loan (perhaps with parent as co-signer) and repay it timely in order to establish a track record.

• New credit products come out frequently (prepaid cards, secured credit cards); determine which works best for you

The End