Lesson 7 How Credit Cards Work

9-Week Course

5.2 How Credit Cards Work

www.ngpf.org

Approximate Time: 45 minutes

5.2 How Credit

Cards Work

LEARNING OBJECTIVES

Students will be able to:
● Explain how a credit card works in terms of making

purchases and managing payments

● Read a Schumer box and identify how terms of the

card impact total cost of purchases

● Understand how interest is charged and how to

avoid or minimize it

Open Ended

What do you already know about credit cards?

How does this shape your view of them?

RESOURCE 2: CREDIT CARD DEBT EXPLAINED

Before you decide if opening and using a credit card
is the right move for you, you need to understand
exactly how they work. Otherwise, you can end up in
some serious debt that is hard to dig out of. On the
next slide, watch the EdPuzzle video Credit Card Debt
Explained by KQED and answer the embedded
quesitons.

Multiple Choice

Which best describes how a credit card works?

• The credit card company extends you a line of credit. You then pay a small percentage of the cost of those purchases in one annual payment.

• The credit card company extends you a line of credit. You purchase "stuff"  and the purchase gets directly paid with funds in your checking account.

• The credit card company extends you a line of credit. This is free money that you can use to purchase the "stuff" that you need.

• The credit card company extends you a line of credit. You purchase "stuff" and then have the choice to pay the balance in full or a minimum payment each month.

Multiple Choice

What is the advantage of paying your credit card balance in full each month?

• You will incur only a small "paid in full" fee on your next credit card statement.

• You pay only a small amount of interest.

• You have less of your credit limit available, therefore, less temptation to spend.

• You avoid paying any interest and fees.

Multiple Choice

What is an outstanding balance?

• The amount you paid in your minimum payment

• The amount you spent in total

• The amount you still owe after you have made your most recent payment

• The amount you still have in your life of credit

Multiple Choice

Why is it more difficult to get out of debt when only paying the minimum payment?

• Your entire minimum payment goes toward principal and the interest continues to compound.

• The majority of your minimum payment is going toward interest and finance charges and only a small amount toward the principal.

• Your credit limit always resets, so you have a lot of spending power each month.

Multiple Choice

The video advises you to "be a deadbeat". What does that mean?

• Pay your credit card bill in full and on time every single month, thus paying no interest or fees.

• Make the minimum payment on your credit card on time each month.

• Never open a line of credit so the credit card companies do not make any money.

RESOURCE 3: CAT INSANITY

The previous video illustrated some of the math
behind credit card interest and payments and warned
about going into debt. But what does it FEEL like to
be swimming in overwhelming debt? On the next
slide, play the game, Cat Insanity, to experience a
lighthearted version of compounding debt, and then
answer the questions.

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Open Ended

In your own words, explain how Cat Insanity is an analogy for debt repayment.

RESOURCE 4: DECIPHER CREDIT CARDS

WITH SCHUMER BOX

Because it can be easy to fall into a cycle of debt if
you don’t understand the terms of your credit card
agreement, Congress passed the Truth in Lending Act
(1988) to standardize how credit card information
must be presented. On the next slide, skim the
introductory article, and briefly review the Schumer
Box provided so you can answer the question.

i

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Open Ended

While ALL the information in a Schumer Box is important, which items do you think matter most on a day-to-day basis?

RESOURCE 5: FINE PRINT: SCHUMER BOX

In this activity, you will explore a credit card
agreement, called a Schumer Box, in more detail
to understand various components. On the next
slide, follow the directions on the worksheet to
complete the activity.

In this activity, you will explore a credit card agreement, called a Schumer Box, in more detail to understand various components.

Use the handout to answer the next 11 questions. 

Multiple Choice

What is the APR (interest rate) on this card for Purchases made during the first six months that a cardholder has this card?

• 0%

• 15.24%

• 23.24%

• 25.24%

Multiple Choice

Jordan gets confused and uses his credit card to get $40 in cash from an ATM instead of using his debit card. Based on this agreement, what is the impact of this decision?

• There is no impact since credit card and debit card terms tend to be the same.

• A $10 cash advance fee will be charged ONLY.

• An A.P.R. of 25.24% will be applied on the $40 until it is paid back ONLY.

• A $10 cash advance fee will be charged AND an A.P.R. of 25.24% will be applied on the $40 until it is paid back.

Multiple Choice

Assume that Louisa carried an average balance of $1,000 from her credit card purchases over the past year. The A.P.R. on her credit card for the past year was 19.99%. Approximately how much interest would Louisa have paid over the course of the year?

• She would have paid interest charges of $2,000.

• She would have paid interest charges of $20.

• The credit card company would have paid Louisa $20.

• She would have paid interest charges of $200.

Multiple Choice

After the introductory period, all consumers who have this Platinum Card will...

• Pay the same A.P.R.

• Qualify for an A.P.R. based on their creditworthiness

• Pay the Penalty A.P.R. of 30.24%

• Be charged an Annual Fee

Multiple Choice

As you will see from this agreement, there are different A.P.R.s applied based on how the credit card is used. Which transaction type has the highest A.P.R.?

• A.P.R. triggered by a late payment

• A.P.R. applied on Purchases made during the Introductory Period

• A.P.R. applied to a Balance Transfer

• A.P.R. applied to a Cash Advance

Multiple Choice

Devon forgets to pay his credit card bill for three months. Which of the following statements is TRUE?

• A Late Payment fee will not be charged to his account.

• A Balance Transfer fee will be charged to his account.

• His A.P.R. (interest rate) will rise to 30.24% until he pays back the amount he owes.

• His A.P.R. (interest rate) will rise to 30.24% and stay there until he makes six consecutive minimum payments.

Multiple Choice

Tamara goes on a spring break trip with her school to visit historical sites in Italy. She purchases $200 of souvenirs while on the trip. She gets back to the U.S. and opens her credit card statement. What will be the balance in her account, assuming she had a zero balance prior to making these purchases and didn't make any other purchases?

• $0.00

• $200.00o

• $206.00

• $6.00

Multiple Choice

All of the following actions lead to the payment of a credit card fee EXCEPT...

• Using your credit card to get cash from an ATM.

• Using your credit card to purchase items in a foreign country.

• Paying your credit card bill ten days after the Due Date.

• Paying your credit card bill in full and on time every month.

Multiple Choice

Josephine decided to get this Platinum card since she saw the ads touting the "0% A.P.R. Platinum. Sign Up Now." After reading this agreement, which of the following statements is TRUE?

• Her A.P.R will change after six months and be between 15.24% to 23.24% assuming that she has been making on-time payments during those first six months.

• She will not pay interest on any of the purchases she makes on this credit card for the first year.

• All her purchases on this credit card are FREE for the first six months.

• All her purchases on this card are FREE.

Multiple Choice

Which of the following statements is TRUE?

• Assume that Josie has had this credit card for a year. The A.P.R. on her card will remain the same as long as she has the card.

• If Josie misses a payment during the Introductory Period, her late payment fee will be waived for this period since she is a new customer.

• Assume that Josie only uses her credit card to make purchases. She pays the balance on her credit card  in full and on time every month. As a result, she pays no interest to the credit card company.

• Josie pays an annual fee to use this credit card.

Open Ended

List three pieces of information listed in a Schumer Box that you believe are important to review before signing up for a credit card.

Explain why you chose these three areas/fees.

RESOURCE 6: EXIT TICKET

Take the three question Exit Ticket to
assess what you have learned about
how credit cards work!

Multiple Choice

If you buy a $1000 bicycle, which credit card payoff strategy will result in your paying the LEAST?

• Pay the minimum monthly payment

• Pay $100 per month for 10 months

• Pay $250 per month until it’s paid off

• Pay the required amount on your monthly statement until it’s paid off

Multiple Choice

Which statement best describes a Schumer box?

• The final calculation of how much you owe on your credit card bill each month

• A standardized way of presenting the key terms of your credit card agreement

• A legal document stating that you’re behind on your credit card payments

• The outstanding balance on your credit card once you’ve made your recent payment

Multiple Choice

If your credit card limit is $800 and your outstanding balance is $725, what is the largest amount you can charge on that card in the upcoming month?

• $0

• $75

• $725

• $800