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INTRODUCTION

credit cardsCredit Cards are a risky business these days, especially for students or those holding multiple cards. Interest rates on credit card balances have always been high relative to other rates, for several reasons. Despite this, there is still a demand for the “plastic money” that many people see as convenient and ideal for use in our increasingly technological world economy. This lesson explores many issues surrounding credit cards- from what to look for when selecting a card to what the government is doing to aid consumers.

TASK

In this lesson you will: explain the criteria that people use when they make comparisons among credit cards; describe the extra (hidden) fees and payments that go with using a credit card; identify the ways in which credit card identity theft occurs; and define the Red Flag Rules, explaining their costs and benefits.

PROCESS

Read the Checklist for Comparing Credit Cards . This checklist provides a useful summary of the complex that come with using credit cards, including some fees and features that new card holders do not always consider.

Now that you have learned about the many factors to consider before getting a credit card, let's look at the some of the issues involved with having and using a card.

You may think that once you have your new credit card, all you have to worry about is how much you spend and making your minimum monthly payments, right? Wrong! Here are several examples of additional issues which a card holder must be aware of and constantly monitor.

Credit card holders often have to close their accounts earlier than they could have imagined, for several reasons. Sometimes it is because an individual has opened a credit card account with no income, little income or inconsistent income. In such a case it may be difficult for the card holder to make the required minimum payments on the balance. Then late fees will begin to pile up, perhaps creating an overwhelming burden.

For credit cardsthis reason, many high school or college students open co-accounts in which a parent or legal guardian is designated as the primary account holder.

Even then, however, there may be serious difficulties. Interest rates may go up unexpectedly, for example. And card holders may receive offers from other credit card companies- offers tempting them to take on more obligations than they can handle. Also, card holders may receive statements of outstanding balances with due dates that allow only a short time for payment, making it difficult for them to pay on time. This problem can prompt some cardholders to pay over the Internet or by telephone. Some companies charge for payments made via the Internet or telephone, which adds to the cardholders' obligations. 

While these are just a few examples of additional payments that card holders might be required to pay, they underscore the point that people do not always know what they are getting themselves into.

To learn more, read "What the Credit Card Bill of Rights Means to Consumers ." This site provides information about the Credit Cardholders' Bill of Rights Act of 2009. Then look at "Don't Jump at that Credit-Card Offer " to read about things people should consider when they receive a new credit card offer.

With your class, you will discuss the Credit Cardholders' Bill of Rights. Your discussion should clarify what this act implies for the economy. After the discussion, define "effective APR" and review the "Tony" case to get a better understanding of the rates and fees that apply when opening a new credit card account.

Your next topic is credit card identity theft. Read "Deter. Detect. Defend. Avoid ID Theft " and read about credit card identity theft- what it is and how it occurs. Answer the following questions:


1.  What are the ways in which credit card account information is fraudulently obtained?

2.  What risks do creditors take when they issue unsecured credit cards?

3.  What incentive exists to compensate creditors for taking the risk of extending credit?

4.  What would happen if government imposed limits to the amount of interest these providers could charge?

So what is being done to prevent identity theft? One answer has to do with something called the  "Red Flag Rules". These rules stem from a 2003 law enacted by Congress in an effort to help people "detect, prevent and mitigate identity theft in connection with the opening of certain accounts or existing accounts," according to a Federal Trade Commission report. Read this introductory article "Red Flag Rules to Stem ID Theft Delayed " and answer the questions below.


1.  What are the Red Flag Rules?

2.  Whom do the Red Flag Rules apply to?

3.  Who opposes the Red Flag Rules? Why?

4.  What are the benefits of the Red Flag Rules?

5.  What are the costs of the Red Flag Rules?

CONCLUSION

Credit cards can be convenient and beneficial, but many people do not understand the issues that go with using credit cards. Consumers must compare many different cards to find those that are best for them; they must also deal with the extra fees and payments that go along with the cards that they choose. Many cardholders close their accounts when they find themselves unable to pay off their balances due. Those who continue to hold an account, must be aware of other issues such as identity fraud. The Red Flag Rules are being implemented in order to identify suspicious activity associated with identity fraud.

EXTENSION ACTIVITY

interestratesFirst, visit Federal Reserve’s Credit Card Repayment Calculator to gain an understanding of how long it can take to pay off a credit card balance. Enter a random total balance (anything between $500 and $2000) and the highest annual percentage rate (APR) (between 7% and 25%). The site will provide an estimated initial payment, the amount of time needed to pay off the balance and the amount of interest charges the cardholder would have to pay in that amount of time. Click on the question marks to learn about how these numbers are generated. After you have done this, scroll down to the bottom and enter the number of years in which you want to have the card payed off. Once again, the site will provide information about how  the numbers are generated. (You may click on another question mark for more information.) Do the same for a hypothetical amount you would be able to pay each month on the right. With your class, you will discuss some of the different scenarios you and your classmates encountered.

Next, visit "Teens: Are You Ready for a Credit Card? " to take a short quiz and find out how much you really know about credit cards.

Finally, go to the "Q&A Credit Card Reform " to see what President Obama and others have planned in order to reform the credit card industry and to learn how these reforms might affect consumers. This Q&A will be discussed in class.