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 $ 50.00– Interest on balance due $ 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