The CT Department of Higher Education, in partnership with UConn and CPTV, has created a new online program, "Who Wants to Be Financially Responsible?" to educate students about money management in an interactive game format. Check out Episode #1: Credit Cards for more information on this topic.

New credit card rules went into effect on February 22, 2010. What does this mean for you? Check out the federal reserve for more information.

Credit Cards: Dangerous or Beneficial?

(Or a little of both?)

There is an ongoing debate on the benefits and drawbacks of using credit cards. Some view credit cards as money-swallowing, debt-causing pieces of plastic. Others believe they are a necessary financial instrument which teaches one the importance of responsible spending, as well as helping one to establish a good credit history.

To help you decide whether credit cards are right for you, here is a chart describing some pros and cons of credit cards:

Pros	Cons
Convenient to carry and use. (Paying bills online, shopping, buying plane tickets, booking a hotel room,etc.)	Perhaps too convenient to use! (charging too much may make it easy to get into debt)
Safer than carrying around a lot of cash.	May be stolen and used fraudulently.
An extra source of money in emergency situations.	A good target for scam artists, be careful about who you release your credit card info to!
A good way to build up your credit record, which may eventually help you in purchasing a home, car, etc.	Personal misuse may lead to excessive debt. Not paying on time and/or using too much of your available credit may result in a poor credit score.
Accepted at most U.S. businesses and in many other countries worldwide.	Not accepted at all (100%) stores, restaurants, etc. locations nationwide or worldwide.
May be used as a short term (25-30 day) interest-free loan, depending on the specific credit card and whether or not you pay your balance in full each month.	Penalties for late payments may reach 25% (or more!).
Benefits such as frequent flier mileage, cash rebates, free gifts, etc. may be provided depending on specific credit card.	Benefits offered may expire before you have a chance to use them.
A way to purchase items you may not have the cash for.	Finance charges appear when you do not pay your monthly bill in full or on time.

Determining which credit card is right for you

Before you sign up for any credit card, you should really determine what you will be using the card for. Shopping around for the right card is always a good idea. Here are some tips when comparing credit cards:

• Compare credit card features and costs; look at the APR and any annual fees assessed
• Read the fine print
• Know your rights when using your credit card
• Notify the creditor if you have a problem with your credit card

Before choosing a credit card you want to think about how you will use it.

• If you don’t expect to pay your monthly bill in full each month, you may want to consider a card that has a lower interest rate.

• If you do expect to pay your monthly bill in full each month, it might be more important to find a card with no annual fee.

• Every card comes with different features and incentives. If you travel often, you may want to look into a card that gives you discounts on hotels and air fare. Or perhaps a card that offers frequent flier miles.

• If you’re a college student, you may want to look into finding a card aimed towards college students, which may offer fewer fees and lower interest rates.

• If you plan to use your card for cash advances, you may want to find a card that has lower APR and lower fees for that specific feature.

Annual Percentage Rates (APRs)

The APR is the yearly amount you will pay in interest charges.

Multiple APRs Credit cards typically have several APRs for different situations:

• Cash Advances, balance transfer and purchases each have their own APR.
• Tiered APRs ~ different levels of the outstanding balance have different rates applies to them. For example, the interest rate may be 18.99% for balances between $1 and $500, then any charges above that amount have a 19.99% APR.
• Penalty APR ~ if you are late in making payments, the APR may increase. The penalty APR can even apply if you are late on another credit card!
• Introductory APR ~ after the introductory rate expires, a different rate will apply. Typically, the introductory APR will be low, but it will go much higher after a set amount of time.
• Delayed APR ~ in the future a different rate will apply

Fixed Rate vs. Variable Rate APR

• If your credit cards have a “fixed rate” the APR usually doesn’t change from month to month.
• The fixed rate APR could change on your credit over time, however. If so, your creditor is required to notify you.
• If your credit cards have a “variable rate”, the APR will change from time to time.
• This rate usually is tied to another interest rate such as the prime rate.
• The rate on your credit card may change if the prime rate changes.

Grace Period

The grace period is the length of time the credit card company gives you before interest fees are applied to the purchases you've made. If you pay your balance off by the due date, new purchases will not be charged interest. Most credit card companies have a 25-30 day grace period provided you paid your previous balance by the due date.

Credit Limit

The credit limit is the maximum amount you can charge on your card. The credit limit includes cash advances, purchases, balance transfers, finance charges and, fees. An “over-the-credit-limit fee” will be applied if you go over this limit. This fee is typically $29 to $39 each month your balance is over the credit limit, but can be even higher. For example if you have a $1,000.00 credit limit, you cannot make purchases for even $0.01 over the limit or you will be charged a fee.

It is important to be careful not to go over the limit on your card. We advise that you leave at least a $200 "cushion". If your credit limit is $1,000, stop spending before you reach about $800. This will give you some space so if you get any finance charges or if your annual fee is assessed, you won't be pushed over your credit limit.

Finance Charges and How They are Calculated

The finance charge is the amount you pay to the creditor for the privilege of using a credit card. The amount is based on your outstanding balance (the total amount you owe) and the APR on your card. There are several methods used by the credit card companies to calculate your outstanding balance. The method used can have a major effect on the finance charge you pay. A few ways your outstanding balance can be calculated:

• Over one or two billing cycles
• Using the previous balance, the average daily balance or the adjusted balance
• New purchases (charged after the billing cycle) are either included or excluded in the balance.

Minimum Finance Charge: Often creditors use a minimum finance charge. No matter what your outstanding balance may be, you could still be charged a finance charge. Some companies will have a set minimum finance charge.

Fees

Fees vary greatly by company. We cannot say this enough: read the fine print! Most credit cards charge fees under certain circumstances:

• Annual fee (sometimes billed monthly): yearly fee issuers may charge to manage the credit card account
• Cash advance fee: per transaction fee charged to an account as a result of obtaining cash via the credit card account. Calculated as a percentage of the cash advance amount
• Balance-transfer fee: charged if you transfer a balance from another credit card
• Late-payment fee: A penalty fee for not making a payment by the payment due date. You can be charged this fee if you are even one minute late!
• Over-the-credit-limit fee: If you go over your credit limit, a fee will be charged
• Credit-limit-increase fee: You could be charged if you ask for an increase in your credit limit
• Set-up fee: You could be charged when a new credit card account is opened

It is good to know all the fees that come with your card. Try to avoid any “unnecessary” fees such as over limit fee and late payment fee. This will keep your balance down on your card and ultimately lower the overall amount you will have to pay.

Cash advance features

Most credit cards have a feature called Cash Advance. This allows you to withdraw money against your credit limit from a bank or ATM. There is usually a fee charged and the APR on any cash advances can be much higher than your standard APR. We urge you to be very cautious about using a cash advance, due to the fees, higher APR, and the ease of abusing this feature to spend money you can't afford.If you are still interested in using this feature on your credit card you may want to be informed about the following:

• Know where you can get a cash advance. Most credit cards allow the use of an ATM for the cash advance. Some credit card companies will send you checks to fill out for the cash advance.
• Often the APR is much higher for making cash advances as opposed to purchases. For example, your purchase APR may be 18.99%, but your cash advance APR may be 23.99%.
• The credit company may charge fees to use this feature.
• Most credit card companies will have a dollar limit in which you can use to make an advance. Depending on the company, they may have a daily limit or weekly limit.

Incentives and other features

Incentives may be offered by many credit card companies for using their card. Some of these incentives are listed below:

• Rebates on purchases you make
• Frequent flier miles
• Additional warranty coverage for purchased items
• Vehicle rental insurance
• "Free" gifts, like T-Shirts, athletic event tickets, etc.

You should carefully weigh the relative benefits of these incentives in comparison to any fees and finance charges you will incur. Is it really worth getting a "free" t-shirt when the card you get has an annual fee of $75? Will you be charged a higher interest rate for a card that offers frequent flier miles than you would be if you chose a card without this benefit?

Other features may be offered at a cost such as:

• Insurance to cover the balance on your credit card incase you become disabled, unemployed or die. If this happens, the credit card company will pay off your card.
• Theft Insurance, to cover the first $50 in charges if your card is misplaced or stolen. If there is more than $50.00 in charges under federal law you are not responsible for the payment of these charges.

Before you agree to pay for these features, be sure the benefit will outweigh the cost.

Debit or Credit

So what is the big difference between debit and credit cards? Credit cards are made available by a bank or financial institution of your choice and a debit card is made available to you by your bank.

A debit card is issued by your bank and is linked to your checking account. You can use your debit card two ways: either like a credit card (as long as the card has a MasterCard or Visa logo on the front) or as a debit card. Either way the money will come directly from your checking account. Some banks charge you a fee if you use it as a credit card, so you should check with your bank before deciding how to use a debit card. If you choose to use it as a debit card, the money is withdrawn from your checking account within minutes of your transaction. If you choose to use it as a credit card it may take up to 3 days for the money to be withdrawn from your checking account. Debit cards also have personal identification numbers (PIN) linked to the card by your bank. You would use your PIN to withdraw cash from an ATM or if you chose to make your purchase as a debit card at any store. You can be charged a fee for using your debit card at an ATM to withdraw cash if it is not an ATM from your bank.

Debit cards can be a good financial tool because the money comes directly from your checking account and you won't need to worry about any future payments that will need to be made. Also, no future payments means no additional fees or interest charges.

Using a credit card is safer then carrying around cash. Instead of using funds that are already in your bank account, though, credit cards are basically a loan that you are borrowing from the creditor. You can use them to make purchases without having the cash available at the time. This means that it can be easy to spend more than you should, though. Ideally, you should not charge more on a credit card than you can pay every month.

How long will it take to pay for a purchase?

Remember, it is crucial to try and pay more than the minimum payment each month. If you can’t afford to pay more than then the minimum payment, it is possible that the "true cost" of the product will be more than double what you spent in the store (taking into account interest and fees over time). Below is an example if you were to pay only the minimum payment each month with an 18% interest rate:

Item	Purchase Amount	# of Months to Pay it off	True Cost
TV	$ 500.00	7 years 2 months	$ 879.12
Computer	$ 1000.00	12 years 9 months	$ 2143.70
Desk	$ 815.00	11 years 2 months	$ 1675.00

How to resolve billing errors

Each month, you should look at your credit card statement to make sure it is accurate. If you think your credit card bill has an error, take the following steps:

1. Using the address listed on the bill, write to the credit card company within 60 days about any errors you find. You should include in your letter the following:

• Your name and account number
• The last 4 digits of your social security number
• Indicate what the error is
• The date and amount of the error
• Home telephone number and address

2. Make sure you pay all other parts the bill, excluding the questioned error amount, and any charges that apply to it such as a finance charge.

If there is an error, you will not be responsible to pay any finance charges or the disputed amount on your credit card. The credit card company must fix your account.

If there is no error, the credit card company will send you an explanation as to why there is no error and the amount you owe. The new balance will include any charges/purchases made while you were waiting for an answer from the credit card company.

For information about The Fair Credit Billing Act, which protects consumers from unfair credit practices, please visit: The Federal Trade Commission

Tips for Avoiding Credit Card Debt

"Credit buying is much like being drunk. The buzz happens immediately, and it gives you a lift. The hangover comes the day after. Living in retirement with credit card debt is a sure way to feel hung-over.” ~ Dr. Joyce Brothers

The easiest way to stay out of trouble with credit cards is to avoid it in the first place. Here are some tips to follow when using a credit card:

• Manage your Finances
• Shop for the Right Card
• Read the Fine Print
• Know your Interest Rate
• Pay the Balance in Full
• Pay on Time
• Use it like cash, not a credit card

For more information about these tips please visit : http://www.cardratings.com/

Instead of...	Try this...
Choosing a card based on an ad from TV/Internet	Shop around for the lowest interest card If you have a good credit history, you may be able to negotiate a lower rate Compare lenders on the internet before applying for a card.
Forgetting to read the fine print before choosing a card	Investigate and compare the fees that you will incur Avoid the “annual fee” – If you have good credit, you can usually find a card without one
Getting a credit card for each and every one of your favorite stores	Limit your cards to two or three active accounts maximum. Having too many credit cards may hurt your credit score.
Using high-interest cash advances or credit card checks to pay your bills	Make a Personal Financial Plan to address your financial needs and plan for expenses
Being surprised each month by your credit card bill	Immediately subtract credit card purchases from your checking account balance so you will have money to pay your bill
Paying bills past the due date with added fees	Always pay bills on time Lateness affects your credit score and late fees add up!
Never checking the charges on your bill	Review bills carefully and investigate any discrepancies

Other Resources

• Credit Card Calculator
• National Foundation for Credit Counseling
• Mastercard Learning Center
• Celebrity Calamity Financial Literacy Game by Doorways to Dreams

APR: The Annual Percentage Rate allows you to evaluate the cost of the loan in terms of a percentage. If your loan has a 10% rate, you’ll pay $10 per $100 you borrow annually.Interest: This is the additional amount you will pay to a lending institution to borrow money. In terms of savings, interest is the additional amount you will earn for having your money in a bank account or other savings vehicle.Minimum Payment: The minimum monthly payment required on a credit card or loan. For credit cards, this is typically 2% of your balance (changes month to month).