PERSONAL FINANCE

IVERSON

Revolving Credit

Credit Cards

Credit Cards allow you to borrow money from a bank each time you use your card so that you can make purchases without cash

Credit Cards allow you to use UNSECURED debt, or in other words borrow money without putting anything up as collateral

Thus, in exchange for the use of the card, you may have to pay HIGH interest rates if you don’t pay in full each month

Types of Credit Cards

Bank Cards Issued by a bank, i.e. Citizens Bank Visa, Associated

Bank Mastercard, Chase Visa, etc. Can be used pretty much anywhere Allows you to carry a balance but will charge you

interest if you don’t pay in full each month If you make a late payment, your interest rate will go

up significantly Interest rates can vary from promotional rates of 0%

to as high as 35% if you’re a “poor” customer who pays late

May offer rewards like coupons or cash back

Store Cards

Store Cards Issued by a store where you shop Kohls, Home Depot, Gap, Gander Mountain, Target,

etc. etc. Can only be used at that store Allows you to carry a balance but will charge you

interest if you don’t pay in full each month If you make a late payment, your interest rate will go

up significantly Interest rates can vary from promotional rates of 0%

to as high as 35% if you’re a “poor” customer who pays late

May offer rewards like coupons or cash back

Pros of Credit Cards Cons of Credit Cards

Buy now, pay later! Convenient, fast, easy Accepted most places Great for travel Allows you to pay a

number of bills at once (consolidates bills)

Pay bills at end of month Helps build credit

history/score if used wisely

Pay high interest if you don’t pay in full

Pay late fees if you don’t pay on time

Rack up more debt than you can afford

Likely to buy more than you need (impulse shopping)

May be stolen, used without your consent

Pros and Cons

Terminology

Minimum Payment How much you are required to pay to avoid late fees Usually 4% of the total balance in a given period

Grace period How long you have to make a payment before you get

charged interest or late fees (usually 25-30 days)Statement

Shows all your purchases, how much each was, the date the purchase was posted, and where

Credit line (credit limit) the maximum amount the bank will lend you; in other

words, how much you can have charged at one time

Called “deadbeats” by credit card companies

Example:

A wise credit card user is one who pays off their entire bill at the end of each month – THIS IS GOOD!

Credit card companies don’t like this because they don’t make much money off you

Month of April:Gas $50.00Groceries $100.00Meal $20.00Night out $150.00Shopping $200.00

Total charged: $520.00Payment: $520.00

The Wise Credit Card User

Not Good! Example: APRIL

A revolving user pays off only the minimum payment (typically 4% of their balance) or any percentage but less than the total each month

These users pay high interest fees

Gas $50.00 Groceries $100.00 Meal $20.00 Night out $150.00 Shopping $200.00

Total: $520.00

Payment: $20.80

The “Revolving” Credit Card User

The NEXT Statement (MAY)

Outstanding Balance: $499.20Interest Charged (19.99%) $99.79May Charges:

Gas $50.00 Groceries $100.00 Meal $50.00 Night out $150.00 Total $350.00

Total Due: $948.99Min Due: $37.95

The NEXT Statement (JUNE)

Outstanding Balance: $911.04Interest Charged (19.99%): $182.12June Charges:

Gas $200.00 Groceries $200.00 Meal $50.00 Night out $50.00 Total $500.00

Total Due: $1593.16 Min Due: $63.72

April, May, June

Just those three months of minimum payments resulted in your charges of $1370 to actually cost you an extra $281.91 in interest

Just think of what you could have spent that $281.91 on. Instead, you’re paying it to the bank and they are making money off you

So, the lesson? Always pay your credit card bill IN FULL and NEVER carry a balance

Conclusion

You will be asked to open credit card accounts - OFTEN

You need to realize each card you open affects your credit history and your credit score

You need to realize how much you change, how much you can afford to charge, and how much you can afford to pay.

You need to realize how much things actually will cost you if you continue to make minimum payments

You need to realize that if you can help it, it’s best to NEVER CARRY A BALANCE – why pay interest if you don’t have to?! Pay in full each month and avoid all interest charges!