Credit Cards

How to Use Them, But Not Abuse ThemHow to Use Them, But Not Abuse Them

Developed by Melissa KingDeveloped by Melissa King

Agenda

Credit Cards: The BasicsCredit Cards: The Basics Credit ReportsCredit Reports Positives and Disadvantages of Credit Positives and Disadvantages of Credit

CardsCards The Do’s and Don’ts of Credit CardsThe Do’s and Don’ts of Credit Cards

What is credit?What is credit? It is a loan, allowing you to receive goods It is a loan, allowing you to receive goods

and services now and pay for them laterand services now and pay for them later It is an agreement that the money borrowed It is an agreement that the money borrowed

will be paid backwill be paid back It is a debt, it is It is a debt, it is NOTNOT income income It comes with fees; interest and other chargesIt comes with fees; interest and other charges

Credit Cards: The Basics

Credit Cards: The Basics Fees, fees, and more feesFees, fees, and more fees

Interest rate fees--what you pay for using the $$Interest rate fees--what you pay for using the $$ usually 10% - 25% for students (after intro rate)usually 10% - 25% for students (after intro rate)

Annual fee for just having the credit cardAnnual fee for just having the credit card Over the limit fees, charged whenever you exceed your Over the limit fees, charged whenever you exceed your

credit limitcredit limit Late payment feesLate payment fees Transaction feesTransaction fees Other miscellaneous feesOther miscellaneous fees

read the fine print!!!read the fine print!!!

Plastic Money Charge CardsCharge Cards

must be paid back every thirty daysmust be paid back every thirty days provides convenience of not having to pay for provides convenience of not having to pay for

purchases with cash, but balance may not be carried purchases with cash, but balance may not be carried over month-to-monthover month-to-month

Credit CardsCredit Cards operate on a credit limit and revolving basisoperate on a credit limit and revolving basis if not paid-in-full within grace period, interest is if not paid-in-full within grace period, interest is

charged on the remaining balancecharged on the remaining balance

Plastic Money Debit or Check CardsDebit or Check Cards

allow access to checking account via ATMs and allow access to checking account via ATMs and point of sale (POS) terminalspoint of sale (POS) terminals

amount is deducted from checking accountamount is deducted from checking account not a charge card, must have the funds availablenot a charge card, must have the funds available

““Smart Cards”Smart Cards” these cards store personal informationthese cards store personal information may be “loaded” with a certain dollar value that can may be “loaded” with a certain dollar value that can

then be spent at POS terminalsthen be spent at POS terminals

Students & Credit Cards

Some recent statisticsSome recent statistics 76% of undergraduate students (18-24) have 76% of undergraduate students (18-24) have

credit cards (an 8% decrease from the 83% with credit cards (an 8% decrease from the 83% with cards in 2001)cards in 2001)

56% of final year students have four credit 56% of final year students have four credit cards or more (up from 27% in 1998 & 32% in cards or more (up from 27% in 1998 & 32% in 2000)2000)

2005 Nellie Mae Study

Credit Card Ownership by Grade Level

Year 1Year 1 Year 2Year 2 Year 3Year 3 Year 4/5Year 4/5

Percentage Percentage who have who have credit cardscredit cards

4242 7272 8383 9191

Average Average number of number of credit cardscredit cards

2.262.26 3.443.44 4.04.0 5.075.07

Percentage Percentage who have 4 who have 4 or more or more cardscards

1515 3434 4141 5656

Student Credit Card Balances19981998 20002000 20012001 20042004

Average Average credit card credit card debt per debt per studentstudent

$1879$1879 $2748$2748 $2327$2327 $2169$2169

Median credit Median credit card debt per card debt per studentstudent

$1222$1222 $1236$1236 $1770$1770 $946$946

Percentage Percentage with balances with balances $3000-$7000$3000-$7000

1414 1313 2121 1616

Percentage Percentage with balances with balances over $7000over $7000

1010 99 66 77

Stats on Credit Card Balances

By senior year, 31% of students have a balance By senior year, 31% of students have a balance of $3000-$7000of $3000-$7000

1 in 8 students owe $7,000 or more1 in 8 students owe $7,000 or more In the past 10 years, bankruptcy filings by those In the past 10 years, bankruptcy filings by those

under 25 have increased by 96%under 25 have increased by 96%

Credit Card Debt – EUP studentsSpring, 2001

Credit Card Debt

31.8

5.1

18.0

4.5

5.1

5.5

5.3

7.1

3.7

2.0

2.0

7.6

0.0 10.0 20.0 30.0 40.0

I don’t have a credit card

None, not responsible

None, pay full amount

$1 - $99

$100 - $249

$250 - $499

$500 - $999

$1000 - $1999

$2000 - $2999

$3000 - $3999

$4000 - $4999

$5000 or more

Percent

Total %

Credit Reports

Your financial resumeYour financial resume Shows financial responsibilityShows financial responsibility Follows you for life - just like your school Follows you for life - just like your school

transcripttranscript

Credit Reports

What is in a credit report?What is in a credit report? personal informationpersonal information payment historypayment history amount of credit you have access to and are amount of credit you have access to and are

usingusing inquiriesinquiries public records, judgments, liens, bankruptciespublic records, judgments, liens, bankruptcies

Credit Scores

Range from 300-850Range from 300-850

ComponentsComponents:: Payment history (35%)Payment history (35%) Outstanding debt (30%)Outstanding debt (30%) Length of credit history (15%)Length of credit history (15%) Number of inquiries on your report (10%)Number of inquiries on your report (10%) Types of credit currently (10%)Types of credit currently (10%)

More Info on Credit Scores

Check the InternetCheck the Internet

www.myfico.comwww.myfico.com

http://money.howstuffworks.comhttp://money.howstuffworks.com

www.bankrate.comwww.bankrate.com

The Positives

majority of students use credit cards majority of students use credit cards responsiblyresponsibly

provide convenience and securityprovide convenience and security allow students to establish credit historiesallow students to establish credit histories

The Disadvantages

college students are more likely than other college students are more likely than other types of credit card users to run up debts types of credit card users to run up debts they cannot paythey cannot pay

many students do not understand the many students do not understand the consequences of incurring excessive debt consequences of incurring excessive debt and making payments lateand making payments late

impaired credit ratingimpaired credit rating more difficult and costly to obtain credit latermore difficult and costly to obtain credit later

The Disadvantages (continued)

college students (with limited or no credit college students (with limited or no credit history and income) are charged higher history and income) are charged higher interest ratesinterest rates

many students pay only the minimum many students pay only the minimum amount due each month, not aware of how amount due each month, not aware of how much this will cost them in interest and much this will cost them in interest and timetime

Credit Card Payment BehaviorPay off all credit card balances on all cards each Pay off all credit card balances on all cards each monthmonth

21%21%

Make the minimum monthly payments on all Make the minimum monthly payments on all cards every monthcards every month

12%12%

Pay off some cards in full each month but make Pay off some cards in full each month but make only the minimum monthly payment on othersonly the minimum monthly payment on others

8%8%

Make more than the minimum payment but Make more than the minimum payment but always carry a balancealways carry a balance

44%44%

Make less then the minimum payment on some Make less then the minimum payment on some or all cards each monthor all cards each month

11%11%

My parents pay my credit card billsMy parents pay my credit card bills 4%4%

Interest savings between lowest/highest payment = $1,570;time saved = 75 months or 6.25 years!

Table 1. Minimum Repayment Schedule on a $2000 Credit Card Loan at 19 PercentMinimum monthly payment amount

Number of months to repay

Total Interest Payment

$40 100 $1,994

$50 64 $1,193

$75 35 $619

$100 25 $424

Source: Credit Card Minimum Payment Interest Calculator, Daniel C. Peterson

www.webwinder.com

Credit Cards: Possible Consequences Between 10 - 20% of students are risking Between 10 - 20% of students are risking

unacceptably high levels of debtunacceptably high levels of debt Many students must take on additional jobs to Many students must take on additional jobs to

pay their debtspay their debts Many cut back on the number of classes or drop Many cut back on the number of classes or drop

out of school all togetherout of school all together Career choices can be limitedCareer choices can be limited Some are forced to file bankruptcySome are forced to file bankruptcy

Credit Cards: The Risks

Characteristics of high-risk useCharacteristics of high-risk use Average credit card balances over $1,000Average credit card balances over $1,000 Owning four or more credit cardsOwning four or more credit cards Carrying a balance each monthCarrying a balance each month Using credit cards to charge tuition or feesUsing credit cards to charge tuition or fees

Credit Card Don’ts

Don’t use them for cash advancesDon’t use them for cash advances Don’t use them to pay for basics: rent, Don’t use them to pay for basics: rent,

groceries, etc.groceries, etc. Don’t charge more than you can pay off Don’t charge more than you can pay off

in a monthin a month Don’t let banks increase your credit limitDon’t let banks increase your credit limit

Source: USA Funds Life Skills -Module 1

Credit Card Do’s Limit the number of cards you haveLimit the number of cards you have Use a debit card instead of a credit cardUse a debit card instead of a credit card Use a card that has no annual fee and lower Use a card that has no annual fee and lower

interest ratesinterest rates Know all of your card’s feesKnow all of your card’s fees Pay your full balance each month or at least Pay your full balance each month or at least

pay more than the minimum amount duepay more than the minimum amount due Pay on time, all the timePay on time, all the time

Source: USA Funds Life Skills -Module 1

Questions ? ? ?

Student Financial Support and Services

can help!

www.youcandealwithit.com

Community Resources

Consumer Credit Counseling Service of Consumer Credit Counseling Service of Western Pennsylvania IncWestern Pennsylvania Inc4402 Peach St4402 Peach StErie, PA 16509Erie, PA 16509866-4509866-4509