Transcript Slide 1

Credit Cards 101
Shopping for A Credit Card
• Comparison shop
credit cards
• Don’t take the first
offer that comes to
you:
– Pre-approval
• Means nothing
• No special rates
Card Holder Agreement
• Written statement that
gives the terms and
conditions of a credit
card account.
– Look here for all info
before signing up
– Required by Federal
Reserve
– Card issuers can
change terms at any
time with 15 days
notice
Billing Statement
• The monthly bill sent by a
credit card issuer to the
customer.
• It gives a summary of
activity on an account.
• Important changes to a
credit card account are
included in small-print
fliers that are sent with
the statement.
– Schumer box: Important to
look here once you’ve
selected a card.
Annual Percentage Rate (APR)
• Annual Percentage Rate
(APR)
• Interest
• F (Fixed) rate
• V (variable) rate
– Prime + ___
– Libor + ___
– Won’t go below floor
• Introductory rate
– How long?
– What will the rate
“go to” afterwards?
Grace Period
• Interest-free time
between:
– Transaction date
– Billing date
• Usually 20 – 30 days
• No grace period if:
– Carry a balance
– No stated grace period
Billing Methods: Average Daily Balance
• Determined by:
– Adding each day’s
balance
– Dividing by total
number of days in the
billing cycle.
– Multiplying by monthly
periodic rate (APR/12)
• Example
– Day 1: Charge $100
– Day 2: Charge $200
– Avg. Daily Bal $150
– 30 days in billing cycle =
– $5 average daily balance
– Card with 15% APR has a
1.25% monthly periodic
rate (15% / 12 months)
– $5 daily balance =
$6.25 finance charge
Billing Methods: Two-cycle Billing
• If you don’t pay your
balance off it:
– Charges you interest
based off of the
current and previous
month
– Interest starts the day
you make the
purchase.
Credit Limit
• The maximum amount
you can charge on a
credit account.
• You're approved up to
$25,000!
– “Up to” is the key phrase
– Enticement offer
– Actual credit limit based on
credit score
• Recommended limit
– 20% of net income
Default and Universal Default
• Default
– A designation that
indicates a person has
not paid a debt that
was owed.
• Universal default
– If you are more than
30 days late on a
payment to anyone,
your credit card
company can raise
your interest rate.
Payment Allocation
• How your payments will
be applied when you
have differing rates
• Matters when you:
– Use card during and after
promotional period
– Purchases and cash
advances
• Payments will pay off
lower rate first
– Costs you money. Makes
the bank money.
Annual Fees on Reward Cards
• Paying for the
privilege of using a
credit card
• Many cards offer
rewards without an
annual fee
• Weigh cost of annual
fee to value of reward
– Mileage
• Avoid annual fees
Late-Payment Fee
• Charge imposed for not
paying on time
• Know your payment due
date & time
–
–
–
–
9 a.m.
12 noon
5 p.m.
11:59 p.m.?
• Pay via U.S. mail, phone,
online, automatic bill pay,
etc.
Over-the-Credit-Limit Fee
• You can exceed your
credit limit but it will
cost you
– Fee
– Higher interest rate
Currency-Exchange Fee
• Credit Cards have
replaced traveler's
checks.
• Fee will be
– Flat amount
– Percentage of
withdrawal
• Important only if you
travel internationally
frequently
Cash-Advance Fee & Interest
• Don’t take cash advances
• Fee
– Flat amount
– Percentage of withdrawal
• Cash advance interest
rate is always higher and
has no grace period
• Payments are applied to
lower-interest balance
first
Balance-Transfer Fee
• Balance Transfer
– The process of moving
an unpaid credit card
debt from one issuer
to another
• Cards charge to
transfer balance to or
from one card to
another.
Minimum Finance Charge
• Also called “No
Balance Fee”
• Fee charged for using
the credit card even
when you pay off the
balance in full every
month.
• Don’t select this card
– $1.50 * 12 = $18
– Similar to an annual
fee
What You Don’t Need in a
Credit Card Offer
No on Credit Card Insurance
• Life and disability
insurance policies will
cover credit cards.
• Any type of credit
card insurance is not
as flexible as
traditional policies.
• You will have to take
a policy out on each
credit card.
Theft Insurance
• If your card is stolen
– Federal law limits your
liability to $50
• Don’t need theft
insurance because
you’re already
protected
• Report missing cards
within 24 hours or
ASAP
Life & Disability Insurance
• Credit life insurance
– pays off the debt you
owe if you die.
• Credit disability
insurance
– Pays minimum
monthly payments, but
not for new purchases
Unemployment & Property
Insurance
• Involuntary
unemployment credit
insurance
– Pays minimum monthly
payments, but not for new
purchases
• Credit property insurance
– Cancel debt on items that
are destroyed by specific
incidents not covered in
other policies.
Find a Consumer-Friendly Card
• Consumer Reports
Top 10 cards have
– No universal default
– No two-cycle billing
– No balance transfer
fees
• Grace period of at
least 25 days
• No annual Fees
– Based on Cardweb’s analysis of
10,200 card offers in August,
2005.
Selecting and
Using a Credit Card
Selecting and Using a Credit Card
• Shop for a credit card. Study all the details of the
application before signing. Note fees charged
including annual fee.
• Understand the details of the introductory offers
and how long they last.
• Know what constitutes a late payment and the
amount of penalties charged.
• Credit card bills are not considered paid until the
company receives and credits payment to your
account.
Credit Card Wrap
• Make a credit card wrap by cutting a recipe card
to wrap around your credit card.
• Record each purchase or cash advance to the
credit card, just as you would a check in a
check register.
• Keep a running balance of what is charged on
your credit card each month. Do not over spend
your limit/budget.
• Check your record against your statement.
Selecting and
Using a Credit Card
• Shop for a credit card. Study all the details of the
application before signing. Note fees charged
including annual fee.
• Understand the details of the introductory offers
and how long they last.
• Know what constitutes a late payment and the
amount of penalties charged.
• Credit card bills are not considered paid until the
company receives and credits payment to your
account.
Jones’ Credit Card Bill
• What Stan and Alice expected . . .
– Un-paid balance on prescription
$280.00
– Cash Advance
– Interest on balance due
$ 50.00
$ 0.00
• (at introductory 0% APR)
• November Balance Due$330.00
Jones’ Credit Card Bill
• What Stan and Alice were billed!
– Balance carried over from September
–
–
–
–
–
–
$280.00
October late fee
$ 19.00
Interest on un-paid balance
$ 3.98
Cash Advance
$ 50.00
Cash Advance fee (minimum $5.00)
$ 5.00
Cash Advance interest
$ 1.40
(15.99% based on 12 days)
– November Balance Due $359.38