Transcript No Slide Title

Credit Card Traps and
PowerPay Debt Reduction
Program
The Other Side of Compound
Interest

When you invest,
compound interest is
your friend :-)

When you pay interest
on credit cards and
loans, compound
interest is your enemy
:-(
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Background Statistics

More than 60% of credit card users carry balances
• Only 37.4% were “convenience users” in 03/04

In 03/04, average credit card debt (including those
with no balances!) was $8,000

Those with balance: average about $12,000

The average household pays > $1,000 in interest
and fees annually

The typical cardholder has 7-10 credit cards

Bankruptcy rate continues to soar!
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What is the Worst Credit Card
Trap of All?
• Teaser rates?
• Default rates (penalty APRs)?
• Late fees?
• Over-the-limit fees?
• Minimum payments?
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Credit Card Minimum Payments!
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Case Example

Outstanding balance: $2,000

Interest rate: 18%

Minimum monthly payment: 2% of balance,
no payment less than $15

Interest cost over loan period: $4,183

Paying off the debt will take 23 years!!!
Source: Credit Card Smarts calculator, Advantage Publications
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Credit Card Payback
$1,000 Balance ($20 Minimum Payment)
Annual Interest Credit Card
Rate
Features
19 % APR
15% APR
# Payments
4% Minimum
Monthly
Payment
60
2% Minimum
Monthly
Payment
99
Total Paid
$1,467
$1,987
55
79
$1,355
$1,584
53
73
$1,282
$1,463
# Payments
Total Paid
13% APR
# Payments
Total Paid
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Low Minimum Payments
. Total Interest Paid
Monthly
Payments
Beginning
Balance
APR
$2,000
15.04%
2%
$2,205.63
169 (14 yrs.)
$2,000
15.04%
5%
$589.74
65 (5.5 yrs.)
$2,000
15.04%
10%
$269.31
36 (3 yrs.)
Always pay more
than the minimum:
It will save you a
lot of money.
Months to Pay
Off Balance
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Factors Affecting Finance
Charges

APR (interest rate)

Grace Period

Balance calculation method
Result: significant effect on the cost of credit.
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Average Daily Balance Method

Most common computation method used

Outstanding balances added daily

Total is divided by days in cycle

New purchases may or may not be added

Interest assessed each day at daily rate
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Average Daily Balance- Example
Date
Charges Payments Balance
April 1
----
----
$200
April 12
$135
----
$335
April 25
----
$110
$225
11 days @ $200= $2,200
13 days @ $335= $4,355
6 days @ $225= $1,350
Total=
$7,905
Average daily balance=$7,905/30 days=$263.50
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The Two-Cycle Average Daily
Balance Method

ADB of current cycle is calculated

ADB of previous cycle is calculated

New balance = sum of ADBs for two cycles

May or may not include new purchases

The least consumer-friendly method
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How to Save Money

Pay bill in full to avoid finance charges

If carrying a balance, shop for a lower
interest rate

If paying in full, shop for a card with a
grace period and no annual fee

Pay bill immediately or ASAP to avoid late
fee (short turnaround time)
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Transaction Fees

Fee charged each time a credit card is used

Example: 50 cents per charge

Most common transaction fees are for
• Cash advances
• Balance transfers
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Cash Advance Fees

Cash loans from credit card account instead
of making a purchase from a merchant

Credit cards charge fees for this service
• Cash advance fee from date of an advance
• Fees range from 1% to 5% of amount
transferred
• Most cards have minimum cash advance fees
• Average minimum about $5
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Example of Cash Advance

$500 cash advance

$2.5% transaction fee ($12.50)

18% APR

Pay back after 25 days

$12.50 fee + $6.00 interest

Effective interest rate of 44%
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Balance Transfer Fees

Company B pays balance with Company A

Balance on Company B credit card

Transfer done to get a lower APR

Balance transfers may have transaction fees
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Tiered Pricing

Range of possible APRs quoted

APR determined by applicant’s credit score

Lower scores pay higher APRs

APR unknown until consumer gets card
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Skip-A-Month Offers

Often used around the holiday season

Cardholders can skip payment without
penalty

Interest continues to accrue

Increases total cost of borrowing
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“Teaser” (Introductory) Rates

Low initial interest rates

Entice people to apply for credit card

May only apply to balance transfers, not
new purchases (read the fine print!)

Check disclosure box for non-promotional
APR
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Punitive Policies

“Inactivity” fees for:
• not using credit card within specified period
• using card less than specified number of times
• charging less than a certain dollar amount

Penalty for paying less bill in full on time
• Target: “convenience users” who do not pay
interest
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Credit Card Tips

Read disclosure charts carefully

Shop around before accepting a credit card

Don’t use credit to extend your income

Pay bills in full, if possible

If not, pay as much of balance as possible

Avoid using full credit line

Protect your account numbers
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More Credit Card Tips

Match credit cards to bill-paying habits

Ask creditors to make concessions:
• drop annual fee
• reduce interest rate (APR)

Limit your debt level

Read mail from card issuers

Complain if you are unfairly penalized
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Cards With “Perks”

Examples: cash back, product discounts,
and frequent flyer miles

Best for cardholders who:
• charge a lot
• pay bills in full

“Revolving borrowers”: interest and fees
may exceed benefit gained
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Online Credit Card Resources

www.truthaboutcredit.org
• Information and balance payment calculator

www.creditalk.com
• User-friendly credit card information

www.bog.frb.fed.us/pubs/shop
• Semi-annual credit card survey results

www.consumer-action.org
• Annual credit card survey results
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PowerPay Requirements

Stop borrowing or charging until all debts in
the PowerPay calculation are repaid

Make the same dollar amount payment each
month until all debts are repaid
• The money gets reallocated to creditors
differently every time a creditor gets repaid

See www.powerpay.org for details
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Required Information For a
PowerPay Analysis

Name of each creditor
 Balance owed
 Monthly payment (minimum or above)
 APR (interest rate)
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More About PowerPay

Three repayment options:
• Highest interest rate first (in sequence)
• Lowest balance first
• Shortest payoff term first

Can add one-time or periodic additional
payments (e.g., bonus, tax refund)

Savings will vary according to length of
debt, number of creditors, APRs, etc.
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Sample PowerPay Analysis
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