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Financial Literacy Program for New Refugees and Immigrants
© IFWF 2024

Lesson 6: Credit Cards

06

What is a credit card and what is it used for?

Match the terms on the right with the correct definitions on the left

A credit card is a card given to you (it looks like a debit card) that you can use to make purchases. Credit cards are useful because instead of taking the money from your checking account (like a debit card), the bank pays for things you buy with the credit card under the agreement that you will pay them back. Every month you will have to make a minimum monthly payment, and if you don’t pay off what you owe then you will also owe interest on your charges. Making consistent payments for the full statement amount will help your credit.

Before moving on, watch the following video and answer the questions that go with it:

https://edpuzzle.com/media/5f908f4ef5072b410611454f

2. Read the following scenarios, and decide whether or not it’s a good idea to use a credit card or a debit card to make the purchase:​

A good rule of thumb is that credit cards can help you when:

  • You will have the money or do have the money for the purchase, and you want to use your credit card because you know that paying it off will help your credit

  • There’s an emergency (like flat car tires) and you need to buy something that you don’t have the money for now, but you know that you will have the money for it eventually (even if not all at once before the end of the month)

  • You have the money for the purchase already, but you want to use a credit card to get some of the benefits mentioned in the video

    • Example: Cash back, rewards

You should not use a credit card if:

  • You won’t be able to make reasonable payments towards paying off the balance

  • You have trouble staying under the credit limit

  • You’re going to spend more than you earn (remember, credit card charges are counted in your debt to income ratio!)

Comparing Credit Cards

Now that we’ve talked about what credit cards are and when to use them, let’s discuss different types of cards.

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Just like there are different kinds of checking accounts, for example some with lower fees and some with higher fees, there are different types of credit cards. The credit card that’s right for
you will depend on your income and what you’re using the credit card for. When you want a credit card, you have to apply for it from the credit issuer (they’ll use your credit score to determine if you’re approved), and different cards have different requirements for approval.

 

​Once you’ve decided you want a credit card, the process to get one is the following:

Step 1. Decide who you want a credit card from
Step 2. Apply for the credit card (the application will usually ask for your demographic information such as age and occupation, as well as your income and credit score)
Step 3. Get approved or denied for the credit card. If you’re denied, you can ask why and you might still be able to get approved for a different card with different approval requirements

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Some of the things to consider when deciding which credit card to apply for:

  • Who is the issuer? Credit cards can be issued by banks and credit unions (example: Chase Bank), non-bank financial institutions (example: American Express), or stores (example: Macy’s)

    • Cards issued by banks or non-bank financial institutions are best for most people. This will be discussed further on in this lesson.

  • What is the minimum credit score needed to be approved for this card?

  • Is there an age requirement to be approved for the credit card?

  • Do you have stable income to be able to make payments?

  • What are the ID requirements?

    • Every US bank will accept a Social Security Number as identification. Some, but not all, will accept ITIN or a Non-US passport as identification

  • What is the annual fee?

  • What is the interest rate?

  • What is the late fee?

  • What are the rewards?

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Look at the chart on the next page comparing examples of real credit cards. After looking at the chart, answer the questions about choosing a credit card. Note: Each credit card has different credit limits depending on your credit score and how long you’ve made consistent monthly payments.

Note: Most large banks and credit unions have credit cards specifically for people who need to build credit because they have low or no credit, like the SECU Student Visa Card. These credit cards may have a higher interest rate or have an annual fee because you don’t have credit yet.
If you’re interested in a card like the SECU Student Visa Card but you’re not part of a credit union, you may be able to get one through your bank. If you visit a branch and ask or search online, they can give you the information.


Note: Some banks and credit card issuers will not let you apply for a credit card without a social security number (SSN), but most will accept ITIN for the application. For example, Discover and Wells Fargo require a SSN for their credit cards. You can always call the bank or card issuer
first to check, or go into the branch in person if it’s a bank-issued card.

 

3. Flores wants to get a credit card to start building credit. Right now, Flores has no credit history and no credit score. She is a member of State Employees Credit Union of University of Maryland because she is taking online classes. She does sometimes shop at Kohl’s, but not a lot. Flores’s main worry is being approved for a card. Which card is right for Flores?


4. Mr. Abboud wants to get a credit card. His credit score is 690 because he paid off his IOM loan on time. Because he’s on a tight budget, he wants to avoid annual fees. He is not part of a credit union. He’s interested in cash back deals for groceries and everyday purchases. He plans on only using the credit card for his usual monthly purchases, so unless it’s used for an emergency he will pay it off every month to avoid late fees or interest. Which card is right for Mr. Abboud?


5. Mrs. Estevar wants to get a credit card to start building credit. She doesn’t need the credit card to make purchases she can only pay off later, she just wants a card to start building credit. Since she will be able to pay off her balance every month, interest rate doesn’t matter to her. Right now her credit score is 600. She buys most of the clothes for the family at Kohl’s every year. Which card is right for Mrs. Estevar?​​

Making Credit Card Payments

It is very important to pay your credit card bill on time each month. In addition to being charged late fees and hurting your credit score by paying late, you will also be charged interest on any outstanding balance that you owe. It is therefore best to pay off as much of your bill as you can
each month, rather than only paying the minimum amount. If you miss or are late on monthly payments, your interest rate may increase and it will hurt your credit score.


The sample statement below should help you understand what kind of information a credit card bill will contain. The information will be used to show how much you will pay with and without interest.

Credit Card Statement

Look at the sample credit card bill (above) and notice the following information:

  • Statement Date - the date that the bill was sent

  • Payment Due Date - the date that you must pay before

  • Credit Line - the maximum credit allowed for the card that you have

  • Credit Available - the amount that you have left (your credit line minus your balance)

  • Minimum Payment Due - the smallest amount that you must pay for that month

  • Periodic Rate - the rate at which you will accumulate interest for that billing period (usually 1 month)

  • Annual Percentage Rate - the rate at which you will accumulate interest during one year

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6. Based on the information in the credit card statement above, complete the following exercises:

As you can tell from the previous exercise, not paying off the balance of your credit card can really affect how much you owe in interest. The longer it takes you to pay off the balance on your credit card, the more interest you will owe. Look at the following example to see how this can add up over time.

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Situation: Flores and her friend, Mario, both bought new iPads for $500 each. They both paid for their iPads using credit cards with 13% interest rates. They both took different approaches to paying off the credit cards, and you can see the differences below:

Both Flores and Mario wound up spending more than the cost of the iPad by not paying off the credit card balance right away because they then had to pay interest. However, Mario spent about $800 more than Flores and it took him over two years total to pay off the iPad because he made low monthly payments. This illustrates how important it is to pay off as much of your credit
card balance as you can and try not to make purchases that you can’t pay off each month.

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Closing Lines of Credit

When you are finished paying off the balance on a credit card that you have and you no longer want to use the card, there are a few things that you should consider before closing the line of credit completely. Closing a line of credit will hurt your credit score, so you want to avoid this when you can. If a card that you no longer wish to use has no annual fee, it is better to leave it open and let the balance remain at zero each month. This will be better for your debt to income ratio. Plus, you will have the ability to use the card if you need it in the event of an emergency.


If you are using a card that does have fees, consider opening a new line of credit before closing the first one. That way, you will obtain the new card while your credit report is at a stronger point. Try to find a card with better benefits or lower fees. You should then close the line of credit for the card with annual fees. In addition, if you find that you are spending too much and will not be able to put a card away without being tempted to use it, it may be better to close the credit line so that your debt does not get out of control.

Answers

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