Guide to Credit

Credit can be a confusing thing for those that are new to it.  There are so many aspects of it.  Credit can affect many aspects of your life.  It can determine whether you can get a credit card, a loan, and potential employers could look at your credit history and determine whether or not you would be a good candidate for a job.  This module will cover basics of the following:
  • Know your credit report
  • The pros and cons of credit
  • Choosing the right card

Part 1 - Credit Reports and Scores

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Knowing what is on your credit report is very important in understanding your options with credit.  The major problem is that there are many people out there that are trying to sell you something.  They even come up with fancy commercials with clever jingles to get your attention.  They are not really interested in you seeing your credit report.  There is a free and easy way to view your credit report from each of the three credit reporting agencies once per year for free.  

 The Credit Reporting Agencies:  Equifax, Trans Union, and Experian are the 3 major credit bureaus.  When you pay a bill (or don’t pay a bill), the credit card companies report that to these agencies.  The agencies have been keeping track of your payment history since the first time you tried to obtain credit.  The law requires them to release a copy of your credit report once per year for free to you.  You can go to www.annualcreditreport.com to obtain your report once per year from each of the agencies.  

 These reports will allow you to see exactly what is on your credit report.  However, they will charge you somewhere between $7 and $20 just to see your score.  In most cases you should not need to pay this fee.  You can get a more detailed report for free at http://www.creditkarma.com.  This will show you how your score is determined, and give you suggestions on how to improve it.  

 Your credit score is made up of the following components:
  • Payment history (35%)
  • Amounts owed (30%)
  • Length of credit history (15%)
  • New credit (10%)
  • Types of credit used (10%)

Part 2 - The Pros and Cons of Credit

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Just because you have a good credit score, you should not necessarily just run out and get as many credit cards and loans as possible.  It is critical that you examine whether or not a credit card is good for you.  While thinking about it, be sure to take into account these pros and cons.  

 Pros
  • Convenience – It is easier to carry around a credit card than a debit card.
  • Security – It is safer to carry credit cards than cash.  Any fraudulent activities is taken care of by the card.
  • Rewards – Many credit cards offer cash back, travel, or other rewards just for using the card.
  • Purchase protection – Some cards offer extended warranties on electronic purchases or insurance on car rentals at no additional cost. 
Cons
  • High Interest Rates – Credit cards have very high interest rates compared to other forms of debt.
  • The debt trap – People often get into debt and try to dig their way out by using more credit.  This often leads to them owing more money than they could ever pay back.
 Although there are only 2 cons listed, they are very important to look at.  Debt can cause stress in peoples lives and can become very difficult to cope with.  Take these cons into careful consideration when choosing whether or not to get a card.

 

Choosing a Credit Card

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So you’ve made the decision that a credit card is right for you.  There are so many to choose from that it can make your head spin.  

 Step 1 – Know what you want - The first step in choosing a card is to understand what you want from the card.  Are you using this card to establish credit?  Are you getting it to earn reward points?  Are you looking to transfer a balance from another card onto this one?  Answering these questions will help you get started in choosing a card that is right for you.  

 Step 2 – Understand the terminology - Once you have answered this question, it is important that you understand basic credit card terminology listed below:

  • Annual percentage rate (APR) – The APR is the annual rate of interest charged on the outstanding balance. The lower it is, the lower the cost of borrowing. The APR can either be fixed, meaning it never changes, or variable, meaning it fluctuates according to an index.  For credit cards, a variable rate is common, as is charging a different rate for different types of transactions. (For example, the APR for cash advances is usually higher than the APR for purchases.) For mortgages and other large loans, a fixed rate is usually preferable because the payment is set. You may be able to get a lower rate initially with an adjustable-rate loan, but if the interest rate rises, the payment does too.
  • Grace period – For credit cards, a grace period is the number of days, usually 21 to 30, before interest is assessed on new purchases. (It is only given if you paid off your balance in full the previous month. Also, there is usually no grace period for cash advances.) If your credit is good, you should have no problem finding a card with a grace period.
  • Annual fee – Unless you want special features, if you have good credit, you should be able to find a credit card that does not charge an annual fee. If you have no or a poor credit history, you may be out of luck. However, once you build a positive credit history, request that the fee be reduced or eliminated, or shop for a card that doesn’t charge one.
  • Late fee – Virtually every credit issuer charges a late fee. You should always make your payments on time, but it does not hurt to look for an account with a low late fee just in case.
  • Application or activation fee – For secured loans, you may have to pay an application fee (which should be refunded if you are denied). However, if you have good credit, you should not have to pay one when applying for a credit card. Neither should you have to pay a fee to activate the card.
  • Miscellaneous fees – Some credit card issuers charge for a variety of other activities, such as for not carrying a balance or carrying a balance under a certain sum. The better your credit history is, the less you have to accept such expensive terms.
 Step 3 – Shop around:  Now that you have a basic understanding of the terminology, you can use it to pick the card that is right for you.    They allow to search for cards in different categories.  You can use this credit card comparison worksheet to compare different cards.  A good place to search for cards is www.creditcards.com.  Once you have picked three that you would like to take a closer look at, you can use this credit card comparison worksheet to compare different cards.  A good place to search for cards is www.creditcards.com.

 

Checking for Understanding

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The quiz for this section can be found on the teacher resource page.

For the credit module, you will be completing a credit card comparison sheet   You must fill out the sheet and answer the following questions.  Be sure to check out the rubric for the credit assignment.

  1. Which of these cards would be the best offer for you?  Give at least 3 reasons why.
  2. Is it a good time in your life for you to get a credit card?  Provide 3 points of support for your answer.
  3. If you found out that an irresponsible friend is getting a credit card, what advice would you give them to make sure they do not overspend?