Financial Literacy


MODULE GOAL(S): To learn about personal finances and money management skills

OBJECTIVE(S):

  1. To explain why the management of personal finances is important.
  2. To identify the differences between 'needs' and 'wants'.
  3. To develop a budget for college.
  4. To explain how to choose a bank and open an account.
  5. To be able to open the best type of savings account for you.
  6. To be able to open a checking account and write checks.
  7. To explain why it is important to balance your check register with your bank statement.
  8. To describe the use of ATM and debit cards.
  9. To describe the use and credit and credit cards.
  10. To identify the differences between ATM/debit cards and credit cards.
  11. To discuss the dangers of too much credit.
  12. To explain the uses of your credit record and how to get a copy of a report of your record.
  13. To discuss the importance paying taxes.
  14. To explain how to avoid identity theft.
 

INTRODUCTION:

Money management is important. When you go to college, especially if you live in a dorm or an apartment, you will need to manage or take control of how you budget and spend your money. Spending 90% of the amount of money budgeted for the month on a party during the first weekend of that month probably won't leave you with funds for the necessities (and any fun) later in the month. There will probably be only so many times that your parents will respond to your phone call (or e-mail) requesting that they, "Send money… again." Therefore, to avoid any confusion with your parents, be clear about which college expenses they will cover and which expenses you will pay. Also set up a schedule with your parents for how these funds will be given to you. Monthly payments typically work best. If your parents give you a large lump sum at the beginning of the semester, you may be tempted to use the entire amount in the first few months. When the money runs out, unless it's an emergency, you won't be able to cover additional expenses (Adapted from 360 Degrees of Financial Literacy - http://www.360financialliteracy.org/).

Don't wait until you're headed off to school to learn how to manage money. Start by sitting down with your parents to discuss monetary issues openly. Have a plan or budget in place!

KEY QUESTIONS:

Several questions are important as you think about strategies for money management. These are:

  1. What is the difference between "needs" and "wants"?
  2. How do I balance my spending between what I need and what I want?
  3. How do I choose a bank?
  4. How do I open a bank account?
  5. What do I need to know about savings accounts?
  6. Are there different types of savings accounts?
  7. How safe is my money in a savings account?
  8. What do I need to know about checking accounts?
  9. How do I write checks and pay my bills?
  10. Why do I need to balance my checkbook?
  11. How do I use ATM and debit cards
  12. What is credit?
  13. What should I know about credit cards?
  14. What happens if I miss a payment?
  15. What else do I need to know about credit cards?
  16. What are the differences between a credit card and an ATM/Debit card?
  17. Are there other forms of credit?
  18. What is a credit report?
  19. What do I need to know about paying taxes?
  20. What is identity theft and how do I avoid being a victim of it?

What is the difference between "needs" and "wants"?

It is important to know the difference between needs and wants and responsible money use. You need food, water, housing, and clothes. As a dependent, your parent or guardians probably buy these things for you. A want, on the other hand, is something that would make you happy to have, but that you could still live without. You'd like to go to the movies, eat at an expensive restaurant, and buy a new CD. These are all wants, but if you couldn't do any of those things, you could still get by.

How do I balance my spending between what I need and what I want?

Begin by developing a budget, particularly related to college expenses, based on your expected income and costs. College life is full of opportunities to spend money. You can maintain control of your money and limit spending with a budget. Many college students discover too late that they need to learn how to budget their money. Therefore, knowing how to create a budget will be helpful in developing good money spending habits. The reason why people create a budget is to better plan on how to use limited available funds. A college budget needs to be focused on sources of income and anticipated expenses that are common for a college student (www.moneyinstructor.com).

Your budget should be flexible so that it can be revised at anytime. Such revisions should be based on changes to your actual income rather than spending on your wants.

A budget allows you to:

  • Understand where your money goes.
  • Ensure you don't spend more than you have.

To develop a budget, you need to:

  • Total your monthly income.
  • Track your daily expenses.Add how much you spend on monthly bills.
  • Compare total income with total expenses and make changes in your spending, if necessary (Adapted from Federal Reserve Bank of Dallas, 2007).

First, list all sources of income (job earnings, savings, parental support, etc.). Then develop a list of your expenses each month. You may have difficulty identifying your living expenses in advance. You need to think about the cost of such things as books and school supplies, meals not covered by a meal plan, entertainment, personal care items, laundry, telephone and Internet service, cab rides or car expenses, and clothes. The next step is to total income and expenses. If expenses are higher than your income, you'll need to find ways to increase the income, perhaps by taking on a part-time job, or by reducing spending (http://www.360financialliteracy.org/).

The cost of college attendance varies by school and location, so the best place to start is by contacting the registrar at those schools where you plan to apply. Ask for information on average tuition, room and board, books, and other fees. Other steps for developing a budget include:

Estimate costs for off-campus housing, transportation, and incidentals such as laundry, personal care products, and entertainment.

  • Conduct an honest self-assessment of current spending habits and lifestyle. Don't forget to take into account expenses such as music (CDs, concerts, etc.), other entertainment (movies, theater, sporting events), food (coffee, pizza), clothing, and car-related expenses (gas, insurance).

  • Determine whether you have sufficient income or savings to cover estimated expenses. If not, you will need to determine how you'll get that money, possibly by finding a job or taking out loans. Sacrifices may be necessary and could include forgoing unnecessary expenses like cell phones, new clothing, and entertainment.

  • Consider your health, especially if you have a disability that requires on-going medical care. Most colleges require students to carry health insurance, and some institutions may require students to buy on-campus care even if the student is already covered. If you have several options-such as a campus plan versus a private plan-evaluate your health needs and the cost. It is important you know the policy so that you are not paying twice.

  • Be book-savvy. Campus bookstores generally buy and sell used textbooks. Because they can be considerably cheaper, used books are generally in shorter supply than new ones, so do not wait until the last minute to make your purchase. As long as you find the correct edition of the required book, you should be able to purchase it from another, cheaper source such as an off-campus store or the Internet.

Keep your spending under control by looking for low-cost entertainment on campus. Universities and college towns are known for having excellent entertainment at lower prices. Also, joining clubs and organizations means that you will have something to do and someone to do it with, and the expenses are far less than a weekend shopping spree (http://www.360financialliteracy.org/,http://www.salliemae.com/)

The following is a monthly budget Joan created using the following estimate of expenses (Music CDs $31, electricity bill $44, new coat $43, going to the movies $26, bank student loan $154, tuition $91, rent for an apartment $72, insurance $62, automobile expenses $62, scholarships $120, interest from a bank $28, other expenses $29, food shopping $55, cash from parents $160, books $19, income from working at the pizza store $48).

Joan's Budget

Category

Monthly Budget Amount

Reconciliation

INCOME:

   

Wages/Salary Income

$48

 

Money from Parents

$160

 

Student Loans

$154

 

Scholarships, Grants, etc.

$120

 

Other Income

$28

 
 

INCOME SUBTOTAL

$510

     

EXPENSES:

   

Rent/Room and Board

$72

 

Utilities

$44

 

Groceries/Food

$55

 

Clothing

$43

 

Shopping

$31

 

Entertainment

$26

 

Car/Transportation

$62

 

Tuition

$91

 

Books and Supplies

$19

 

Insurance and Health Care

$62

 

Miscellaneous/Other

$29

 
 

EXPENSES SUBTOTAL

$534

     
 

NET INCOME

(Income - Expenses)

($24)

Joan's expenses are greater than her income by $24. Where can her expenses be reduced?

How do I choose a bank?

If you don't have your own bank account, going to college is a perfect opportunity to open an account. Think about it; if you call home for money, your parents will probably send you a check. A bank is a perfect place to cash it since they will have your signature on file. As you look for the right bank, think about what's important to you. It may be customer service, convenience, good interest rates, low fees, or special accounts for students.

Having a bank account is like a partnership between you and the bank. They're responsible for keeping your money safe and giving you written records of your account activity on a regular basis, but you're responsible, too. By keeping a close eye on what's happening with your accounts, you'll make sure that your records and the bank's always agree. All banks charge different kinds of fees for their services, and some of these fees may be automatically deducted from your account. Find out what these charges are and when your bank will charge them. That way you can try to keep these fees to a minimum.

How do I open a bank account?

Different banks have different requirements for opening accounts, including a minimum age requirement for having accounts of your own. If you're under 18, a parent or adult guardian must accompany you. Your parent or guardian may be required to co-sign your account, which means that they will be sharing and responsibility for the account.

To open an account, you must bring the following:

  • If you're under 18, a parent or guardian must accompany you. He/she must usually bring two forms of current identification (with photo), such as:
    • Driver's license or state ID
    • Passport
    • U.S. military ID
    • Alien Registration card
    • Matricula Consular card
  • Or one item from the above list and a major credit card or gas card.
  • Plus a Social Security number or individual tax ID number (ITIN)
  • In addition, you should bring one of the following current forms of photo identification:
    • Driver's license or state ID
    • Student ID
    • Passport
    • Alien registration
    • Matricula Consular card
  • Plus
    • Social security number or individual tax ID number (ITIN)
    • Money to deposit - ask if there's a minimum.

If you're 18 or over, two forms of current identification with photo are usually required, such as those described above.

Always check with the bank to know exactly what they require (Wells Fargo Bank, 2005).

What do I need to know about savings accounts?

It is not too early to consider the bigger goals in your future, such as paying for college, a big purchase, or an emergency. Therefore, consider opening a savings account. This way the bank will pay you interest on your money. Most savings accounts will want you to keep a minimum balance to keep it open. You may want to put in or deposit an established amount every set period of time; let's say $10.00 a month. You can take your money out whenever you would like, but savings accounts are most useful if you leave your money in for many years to accumulate interest. It's your decision when to withdraw these funds and whether buying a pizza is truly an emergency. However, if your balance goes below the minimum, the bank may close the account and you will have to go through the hassle of opening a new one (www.moneyinstructor.com; Wells Fargo Bank, 2005).

You want to ask about the interest rate and you want to get the highest rate possible. Interest rates may vary from month to month. Find out how the bank figures for interest earned based on the balance on your account. Some firm stake your lowest balance for the period. Other ways of figuring interest might be on the highest balance, the daily balance, or the average balance. These will allow your account more interest than if it was figured on the lowest balance. The more often interest is compounded, meaning added to your account, the more you will make on the account. The best accounts are compounded daily, which means the interest is added on each day. Other accounts are compounded monthly, quarterly, or yearly.

Are there different types of savings accounts?

Yes, here is a list of the different types of savings accounts:

  • Bank Savings Accounts are good when you beginning to save because you need only a small minimum balance to earn interest and you have access your money at any time. The rate of interest will not change much over time.

  • Money Market Accounts are accounts offered by most banks and usually pays you a higher rate of interest than a savings account. When placing your money in a money market account, you will earn interest depending on general rates of interest. This rate of interest may be higher than savings accounts but more likely to change almost daily.

  • CD or Certificate of Deposit requires that the bank holds your money for a set period of time, usually one to six months, one year, or longer. The longer you agree to have the bank hold your money, the higher the interest rate will be. Unlike a normal savings account, you may not withdraw your money at any time. If you do, you will have to pay withdrawal fees (www.moneyinstructor.com).

How safe is my money in a savings account?

The Federal government backs these accounts up to $100,000 with what is known as Federal Deposit Insurance Corporation (FDIC) insurance.

What do I need to know about checking accounts?

When you open a bank checking account, you're given several starter checks and a check register to record your deposits and checks you write. Whenever you put money into the account at the bank, you are making a deposit. Whenever you write a check, you are making a payment. You must accurately record, add, or subtract each and every payment and deposit in a check register in order to balance your account and know how much is in it.

How do I write checks and pay my bills?

A check is a note giving someone permission to take a certain amount of money out of your checking account. When you fill out a check you specify the amount of money you want to have withdrawn from your account. You also need to specify who the check is paid to. For this example, you might fill in the name of a person or other organization. This means that only the person or organization which you designate on the check will be allowed to use the check.

Fill out the sample check below using the following information:

Payee: Arjay Moran

Date: Today's Date

Check #: 1637

Amount: $175

Memo: Audio equipment

check.gif

To fill out a check:

  1. Your name and address go in the space marked "A." These are preprinted on the check for your convenience and tell the person or company to whom you're writing the check - known as the payee - that you're the one who wrote it.
  2. Enter today's date in the space marked "B."
  3. In the space marked "C," write the name of the person or company to whom you're writing the check. If you're making a withdrawal for yourself, you can either enter "Cash" or your name.
  4. Write the amount of the check in the space marked "D" - $175.00.
  5. Write out the amount in words on the line marked "E" - One hundred seventy-five and 00/100. Start at the left edge of the line and when you're finished, draw a line through the remaining empty space as far as the word "Dollars."
  6. The name of the bank that holds your account appears at letter "F."
  7. You can write a brief description of your payment in the space marked "G."
  8. Your signature goes in the space marked "H." It gives the bank permission to release the money to the payee.
  9. At letter "I," you'll see the check number. All checks are numbered in order. You use these numbers to keep track of your checks in a check register.
  10. At letter "J," you'll see your account number. This tells the bank which account the money comes from.
  11. The routing number is at letter "K." This number belongs to your individual bank.

Here is some useful information about using checks:

  • When you pay things by writing a check, save your receipts and keep a record of each check you write in the small notepad or the register that the bank gives you. Keep in mind that with today's technology, your money may be withdrawn from your account the same day you pay by check. So be sure to write down every check right away. That way you'll know your balance, and you'll avoid writing checks when you don't have enough money to cover them.
  • Writing a check for more than you have is known as writing a bad check, bouncing a check, or overdrawing your account. This is something you definitely want to avoid! First, your check is sent back to the payee, stamped "insufficient funds," meaning there is not enough money in your account to cover it. Your bank will then charge you a rather large fee each time you bounce a check. Whatever business you wrote the check to will usually charge you a fee, too. The fees can really add up!
  • Other than a government check, it may take several days, and even up to a week for a check you deposit to clear. So even after you deposit a check and added the amount to your account balance, you most likely cannot write a check for most of the balance because it will bounce! Ask your bank how long it will take for checks to clear. This is explained by the picture below.

timeline.jpg

From http://www.addsup.org/frameset1.html

  • In addition, there are other penalties for writing bad checks. Banks will see you as a risky money manager. It may hurt your ability to get a credit card, a car loan, an apartment, or even a job. Worst of all, writing a check when you know you don't have enough money to cover it is against the law!
  • Many banks offer what's called overdraft protection. With this service, your bank will loan you money to pay your checks when your account is overdrawn up to a set amount. Your bank charges you fees and interest for this service. Ask your bank about how to apply for overdraft protection if you feel you may write checks for more than your account balance.
  • If you receive a check from someone else, you will either want to cash it or deposit it. To deposit a paper check, you sign or endorse the back of the check with your signature, the words "For deposit only" and your account number. Your endorsement prevents anyone else from trying to cash your check, and ensures that your bank deposits the check in the right account (Wells Fargo Bank, 2005).

Why do I need to balance my checkbook?

Nobody is thrilled when they get their monthly bank statement because it takes time to compare or reconcile their records with this statement. Every month you will get a statement of your account. Many times, it is easy not to compare or reconcile your account and over time, there may be many differences or discrepancies between your records and the bank statement (www.moneyinstructor.com). This can lead to an overdrawn account. Reconciling your account isn't that difficult, you simply check your records against those of the bank, enter any service charges, and correct any addition or subtraction errors in your register.

If there is still a large discrepancy between your records and the bank statement, you need to make sure that you entered each check amount in your check register correctly. Common mistakes are reversing figures when entering the amount or not entering the amount at all. If you believe that the bank made a mistake, you will have to prove it to them by having good records. If you don't have good records but still believe that the bank made a mistake, they will charge you a fee for an accountant to go through your records. Therefore, it pays to keep good records!

How do I use ATM and debit cards?

An ATM, or Automated Teller Machine, allows you to do simple banking, usually 24 hours a day. Banking done by an ATM includes depositing money, withdrawing money (getting cash), or checking your balance from either your savings or checking accounts. Benefits of using an ATM include easy access to banking services, and easy access to cash. This reduces the need to carry large amounts of cash.

Access to an ATM requires that you have a bank account and an ATM card. An ATM card is also called a debit card because the money is immediately taken out or debited from your account. With this card you will get a personal identification number, also known as a PIN. It is important that you keep the pin secret otherwise someone else could potentially access your account. To use the ATM, you will first place your card into the machine, and enter your PIN. Then you will be able to do the banking activity you want. 

Safety is important when using the ATM. Here is some useful information about using ATM cards:

  • Know where your ATM card is at all times.
  • Keep your PIN number a secret, and do not disclose it to anyone. Don't use any or all of your birth date, Social Security number, phone number or other easily obtained numbers as part of your PIN.
  • Do not write your PIN number on your ATM card. Do not keep your PIN on a piece of paper in the same location as your ATM card. Do not keep this number in your wallet. Try to remember it. To be extra safe, change your PIN number often. If your ATM card is ever lost or stolen, report it immediately to your bank.
  • If you are going to do a deposit, try to have all the paperwork ready. In fact, try to keep some deposit envelopes with you so that way you spend only a short amount of time at the ATM.
  • Make sure the ATM location is well lit. Try to use ATMs that have cameras or other security devices nearby. Do not approach or use the ATM if the area looks unsafe. Beware of strange people around the ATM. If possible, bring a friend along to stand nearby when using an ATM or use an ATM located inside a bank or a supermarket where many people are around. Avoid talking to strangers when using it.
  • When entering your PIN, be sure no one is looking over your shoulder, and position yourself to block anyone from seeing your PIN code. Likewise, give the person using the ATM privacy while you wait your turn to use it.
  • Complete your transaction as quickly as possible.
  • When your transaction is complete, be sure to take your money and place it immediately in your wallet or purse. Don't leave your bank receipt or personal information at the machine. Also, don't forget to take your ATM card before leaving.
  • Do not stand around and count your money at the ATM. If there is a difference between the amount withdrawn and the cash received, notify your bank immediately (be sure to identify the machine that you used).
  • Keep your ATM card away from things with magnets, which can erase the information stored on the card.

Be aware of the banking fees for using an ATM, as different amounts are charged by individual banks and machines. Using an ATM owned by your bank will often result in lower (or no) fees compared to using an ATM from another bank.

Also try to avoid making small but frequent withdrawals, for example $20.00. If the fee per withdrawal is $1.50, then you will be paying a lot of unnecessary fees. In this case, it is better to make a single withdrawal of $100. You'll be saving $6.00 (www.moneyinstructor.com; Federal Reserve Bank of Dallas, 2007; Wells Fargo Bank.2005).

What is credit?

Credit is the ability to borrow money. Car loans, credit cards, student loans, and home mortgages are all examples of credit. You're borrowing money from a bank or a lender with a promise to pay it back. When you borrow money, you can buy something today and pay the money back over time, rather than having to wait. You can get things that may require more money than you have on hand right now, like buying a computer or paying for college.

Credit means someone is willing to loan you money- called principal- in exchange for your promise to pay it back, usually with interest. Interest is the amount you pay to use someone else's money. The higher the interest rate, the greater the costs of using credit. You can pay for a good or service on credit. This means that you are able to receive the product without paying any money immediately, but you agree to pay back the credit company at a later time.

Banks will lend you money or give you credit only if they trust that you're able to pay it back. The money you borrow is yours to spend, but remember: you always have to pay the money back, on time, and in full with interest and perhaps other fees.

One risk of using credit is that you'll overdo it. Borrowing too much money and being unable to pay it back is a serious problem in our country. In fact, the fastest growing group declaring bankruptcy is age twenty to twenty-four. It's important to use credit responsibly and avoid having too much debt. So be careful about how much credit you take on.

Good credit means that you make your payments in full and ontime. Bad credit is just the opposite. It means you're paying your creditors too little, too late, fail to make payments, go above your credit limit, have too much debt, or all of the above. You should never charge more than the amount you can comfortably to pay each month (http://www.360financialliteracy.org/; Wells Fargo Bank, 2005).

What should I know about credit cards?

Credit cards are billed monthly. Every month you'll receive a bill indicating the amount you owe for all the purchases made on your credit card for the previous month. Usually if you do not pay the full balance on the bill, you will owe for all your purchases that month plus interest, which is a percentage of the total amount owed for unpaid amounts from previous months.

Credit cards have a credit limit, that is, a maximum amount which you cannot exceed when charging goods and services to your card. If you spend over this limit, the card issuer may fail to approve the charge, meaning you cannot use the card for that purchase. Or, the issuer may approve the purchase, but then charge you a fee for spending too much. Over time, credit card holders with a history of not exceeding their limit paying on time will get higher credit limits.

You can also use a credit card to withdraw cash. This is called a cash advance. Usually, withdrawing cash is not a good idea. Cash advances carry charges that normal credit charges do not. For example, a cash advance may be subject to special fees and a higher interest rate than standard charges.

If you haven't established a good credit history yet, some banks offer secured credit cards. These are ideal for people who are starting out on their own. To qualify, you will be required to open a savings account with a balance equal to the credit limit of the card. For example, if you want a credit card with a five hundred dollar limit, you must have five hundred dollars in your account. This gives the bank assurance that you can pay them back. They will also pay you interest on this balance on your savings account. By having a good payment history with your secured credit card, you can improve your ability to get credit in the future.

You may want to start out by getting a store credit card. By using the store card over time, let's say a year, and making your payments on-time, you build-up a good credit record, making it easier to get a major credit card later on.

Read your credit card statement carefully. It will tell you how many days you have before they begin to charge interest and fees. This is called the grace period. Nowadays, most credit card companies give their customers 20 to 25 days to make their payments. But be careful: your statement may arrive in the mail just a few days before your payment is due (Wells Fargo Bank, 2005).

What happens if I miss a payment?

If you don't pay your credit card bill on time, most major credit card companies will charge you a late fee, which may be a percentage of the amount you owe, or could be a flat fee as high as $35. In addition, you will probably have to pay a charge on the amount you still owe. These companies may also increase your interest rate after a late payment, meaning you'll have to pay even more money on every monthly bill in the future. Lastly, a lot of unpaid credit card bills will look bad on your credit report.

It's a lot easier and smarter to pay your bill as you go along, never letting your balance carry over from month to month. If you pay it off on time, you'll avoid a lot of additional charges. Remember that if you pay off each month's statement in full, you'll pay no interest, plus you'll have your full credit limit available to use again. If you miss a payment, the credit card company will charge you late fees. These fees can add up over time and be a very expensive way to purchase goods. You will be charged interest on the unpaid balance each month - in other words, on the amount you still owe. So even though your monthly payments may be low, the total amount you end up spending is quite a bit higher! It definitely pays to get a credit card with a low interest rate, and to pay off your bill as quickly as you can.

What else do I need to know about credit cards?

  • Used responsibly, credit cards can be helpful in an emergency and for establishing a credit history. But you should talk to your parents about whether the card will be used for routine purchases or emergencies only and who will be responsible for paying the bill. Here are some tips:
  • Manage your credit card account like you manage your checking account. Be sure you have enough money to pay your credit card balance before making a purchase.
  • Stick with one credit card. There is no reason you need more than one card. It's easier to manage paying one bill at the end of the month, and using one credit card to pay off another is a dangerous practice that should be avoided.
  • Pay in full every month. It's a good idea to get in the habit of paying the balance in full each month and avoid charging more than you can pay off at the end of the month.
  • If you can't pay in full, pay as much as you can. This is better than missing a payment, paying late, or making the minimum payment; all of these options will be more costly.
  • Pay on time. Be sure to send the credit card payment several days in advance of the due date to allow for mailing time. Late penalties are costly and some companies will increase the interest rate after one or two payments are overdue.
  • Don't skip payments, even if your bank says you can. You will be charged full interest during this period and will end up owing more the following month.
  • Review statements carefully. Immediately inform the credit card company of any errors on the monthly statement.
  • Report a lost or stolen card immediately. Keep a copy of your credit card account number and the financial institution's name and customer service telephone number in a safe place. It is important to call the credit card company immediately if the card is lost or stolen.
  • Protect personal information. Never give out your credit card number unless making a telephone, mail order, or online purchase. Do not let anyone else use your credit card and do not charge purchases for other people.
  • Be aware of cards with teaser interest rates. Credit card companies sometimes offer low introductory rates to attract new customers. These rates typically last for only a few months and then jump as high as 20%. Carefully compare offers from several different issuers before selecting a card.
  • Don't spend more just because your bank gives you an increased credit limit. Keep within your budget.
  • Keep your credit card receipts to compare the accuracy of charges listed on your monthly statement. This is critical for detecting fraud or bank errors. Once you have compared the charges, destroy your receipts so others cannot gain access to them.
  • Immediately notify your bank if you move. More than one person has paid late fees because they failed to tell their credit card issuer they moved and did not receive their bill promptly.

Immediately notify your bank if your credit card is lost or stolen. If you report the loss before your card is used, you're not responsible for unauthorized charges. If you report the loss after the card has been used, you may be responsible for up to $50 (Adapted from The ABCs of Credit Card Finance: Essential Facts forStudents).

What are the differences between a credit card and an ATM/Debit card?

Want to be on the safe side? Use a debit card for everyday expenses and reserve the credit card for true emergencies. Debit cards are easy to use and limited to the amount of money in your bank account.

  • With a credit card, you don't need to have the money in your account to make a purchase while with a debit card you do.
  • When you buy something with a credit card and it turns out to be damaged, you have a right not to pay until it is fixed or you get a refund. This is your right under the Fair Credit Billing Act. With a debit card, however, you are on your own to deal with problem purchases. The bank will not refund the money in your account for undelivered items, poor quality or faulty products. While debit cards may be a great way to pay for gasoline or groceries, you have more protection using a credit card to pay for big-ticket items.
  • If someone uses your credit card without your permission, your maximum responsibility is $50. With a debit card, your maximum is based on how quickly you report your missing card. Once you report a lost debit card, you cannot be held responsible for any additional misuse of your card. For example, if you report the loss within two business days, you will not be responsible for more than $50 of unauthorized purchases. This increases to $500 if you report the lost or stolen debit card within 60 days. If not reported within 60 days, you must pay for all purchases. That means, you could lose all the money in your bank account and also pay for any overdraft charges. While some debit card issuers provide more protection than the law allows, these are voluntary measures and can change at any time.

Are there other forms of credit?

While you are in college, you will most likely have to take one or more student loans to pay the center of attending. Be sure that you apply to a known lender with a good reputation for these loans. The same advice is true if you need to borrow money for other expenses. Avoid lenders that appear to offer an easy cheap way of borrowing money. They usually charge very high double-digit interest rates. If you really need to borrow, use only reliable lending institutions (i.e. banks), shop around for a low interest rate, always read the fine print on the loan application, and don't borrow more than you need. This is especially true if you are still in school or just out of school.

What is a credit report?

One of the most important reasons for using a credit card responsibly is creating and maintaining a good credit report. Credit bureaus are companies that keep track of everybody's credit history information. Your credit history includes things like how many credit cards you have and how much you owe; whether you pay your bills on time; where you work and how long you've worked there.

Lenders request your credit report when you apply for credit or a loan. For example, if you want to take out a loan to buy a new car. The dealer will probably request your credit report from one of the major credit bureaus. Then they decide whether or not to give you a loan based on your previous history.

You give others permission to look at your credit report when you do things like fill out a credit card application or apply to rent an apartment. Many landlords do a credit check before deciding whether to rent to you. They look at your past credit history to decide if they can count on you to pay your rent.

You might not be very concerned about credit reports now, but they become very important later in life. A good credit report is essential if you want to do things like purchase a car or buy a house. That's why it's necessary to make sure you manage your credit card responsibly or you could find yourself out of luck when you need a loan.

The three largest credit bureaus in the United States are Equifax, Experian, and TransUnion. A federal law called the Fair Credit Reporting Act allows you to receive one free copy of your credit report from each of these three bureaus once a year. If you request more reports after that, they may charge you. All you need to do is provide them with some basic information including your name, address, place of employment, and social security number. To get a free report online, go to www.annualcreditreport.com and follow the instructions. You can also call toll free or request your report by mail (Wells Fargo Bank, 2005):

Equifax Information Services

PO BOX 740241

Atlanta, GA 30374

1-800-685-1111

http://www.equifax.com/home/en_us

Experian Consumer Assistance

(Call for mailing address for your state)

1-888-397-3742

www.experian.com

TransUnion

PO BOX 1000

Chester, PA 19022

1-800-888-4213

www.transunion.com

What do I need to know about paying taxes?

On April 15th, there are three taxes due, depending on the state you live in. These include federal, state, and city taxes. If as a student, you only made a small amount of money on which you paid taxes, it is important for you to file your tax return because chances are the money withheld will be refunded to you. You can probably do this by filing a 1040 E-Z form (www.moneyinstructor.com).

What is identity theft and how do I avoid being a victim of it?

Identity theft is when someone uses your name, social security number, credit card number, or some other personal information for their own gain without your knowledge.

Some Tips to Protect Your Identity:

  • Shred or destroy your bank and credit card statements and all other private records before tossing them in the trash.
  • Give out your Social Security number only when absolutely necessary, and never carry both your Social Security card and driver's license in your wallet.
  • Pick up mail promptly from your mailbox, and never leave outgoing mail with paid bills in an unsecured mailbox.
  • Don't give out personal information on the phone, through the mail or on the Internet unless you're sure you know whom you're dealing with.
  • Purchase only from well-known online stores, and never give out your personal information (Federal Reserve Bank of Dallas, 2007).

ONLINE MATERIALS/ RESOURCES:

There is helpful information on these websites:

  • Hands on Banking is a free, fun education program that presents the basics of smart money management in an easy-to-use format. Topics include budgeting, the importance of saving, bank accounts and services, borrowing money and establishing credit, investing, and more. http://www.handsonbanking.org/en/
  • It All Adds Up is a Web-based, interactive program designed to help high school teachers and students understand responsible personal finance management skills and the proper care and use of credit. http://www.italladdsup.org/
  • Sense and Dollars gives students in middle and high school a leg up on acquiring knowledge about managing money effectively. On this website, they can practice many effective ways of earning, spending, saving, and investing money in a safe interactive environment. http://senseanddollars.thinkport.org/home.html

ASSESSMENT/EVAULATION:

Using the information gained from reading this module, you will be able to do the following activities related to your money:

  • Better able to make good decisions about spending your money and balancing needs and wants.
  • Develop a budget using expected income and expenses.
  • Choose a bank and open a saving and/or checking account.
  • Balance your bank statement and avoid overdrawing your account.
  • Use an ATM machine and debit card.
  • Apply for a credit card.
  • Know the dangers of too much credit.
  • Get a copy of your credit report.
  • Pay your taxes.
  • Avoid identity theft.

WRAP-UP:

Money is important for anything you do whether or not you go to college. Your parents and other adults will probably tell you tos pend your money wisely. It is all too easy to ignore this advice, until you don't have money for rent or food. Emergencies happen, the check gets lost in the mail, you forgot to enter a withdrawal and you have less money in your account than you thought, or Mom and Dad said, "Not again!" Keep money in a savings account just for these emergencies and if you need to take money out, don't forget to replace it for the next time you really need it. It's your lifeline; protect it.

Dr. Michael Ward coordinates the Transition Special Education Distance Education Certificate and Master's Programs at George Washington University. Prior to this, he was a Research Associate with the HEATH Resource Center on Postsecondary Education for Individuals with Disabilities, the Executive Director of the Arizona Council on Developmental Disabilities and the Director of the National Center for Self-Determination and 21st Century Leadership at the Oregon Health and Sciences University. He administered the Secondary Education and Transitional Services Branch in the U.S. Office of Special Education Programs. Dr. Ward also worked as a vocational rehabilitation counselor for New York State Developmental Disabilities Services and an education specialist for the Council for Exceptional Children. He received a Ph.D. in special education from the University of Maryland.


This document made possible in part by the support of The HSC Foundation, a Washington, D.C.-based foundation dedicated to expanding access andsuccess in education beyond high school. HEATH is affiliated with The George Washington University Graduate School of Education and Human Development. The opinions expressed do not necessarily reflect the views or policies of The HSC Foundation. No official endorsement by the Foundation or of any product, commodity, service or enterprise mentioned in this publication is intended or should be inferred. Permission to use, copy, and distribute this document for non-commercial use and without fee, is hereby granted if appropriate credit to the HEATH Resource Center at the National Youth Transitions Center is included in all copies.