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8/2/2019 5.4.Credit Cards Concept
1/23
8/2/2019 5.4.Credit Cards Concept
2/23
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What is a Credit Card?
Pre-approvedcredit
Used for
purchase ofitems now
Payment of
items later
8/2/2019 5.4.Credit Cards Concept
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Statistics
92% of college students have acredit card by their sophomore year
1 out of every 5 college studentsowes between $3,000 and $7,000 incredit card debt
Almost half (47%) of all collegestudents carry four or more creditcards
(Source: http://www.fcs.iastate.edu/financ
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http://www.fcs.iastate.edu/financialhttp://www.fcs.iastate.edu/financial8/2/2019 5.4.Credit Cards Concept
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Advantages
Convenient
Useful for emergencies
Often required to hold a
reservation Purchase big ticket items earlier
Easy form of debt consolidation
Protection against rip-offs andfraud
Establish a good credit rating
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Disadvantages
Interest is costly Additional fees are common
Tempting to overspend
Privacy is an increasing concern Personally responsible forlost/stolen cards
Identity theft easier Can lose financial freedom fromoverspending
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Types
1. Bank Credit Cards Flexible account Accepted anywhere
Available from a financial institution
(commercial bank, credit union) with aservice provider (Visa, MasterCard) Electronic network
2. Retail Credit Cards Purchases allowed at a particular retailer
i.e. The Buckle or Old Navy
Can work with bank to offer a bank creditcard with the retailers logo
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3. Travel andEntertainment Cards
Similar to bank credit cardsCan make purchases at a number
of businesses
Entire balance must be repaid in30 days
4. Prestige Cards High status accounts Higher credit qualifications
Special benefitsi.e. Free travelers checks, higher 7
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5. Affinity Cards
Accounts through financial institutions Logo of sponsoring organization
Example: Mothers Against Drunk Driving
Financial institution donates
percentage of charges to organization
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Schumer Box Fair Truth in Lending Act
Information required by law to informconsumer of all costs associated with useof a credit cardAnnual
Percenta
ge RateforPurchase
s
GracePeriod
forPurchases
MinimumFinance
Charges
Balance
Calculati
onMethodfor
Purchases
AnnualFees
Transaction Fees
for CashAdvances
Late
Payment
Fees
19.9%
Not lessthan
25 days
$.50 when
a financecharge ata periodic
rate ischarged
Average
dailybalancemethod
(includingnew
purchases)
$20 peryear
2% with aminimumfee of $3
$29
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Annual Percentage Rate
Annual Percentage Rate (APR) Interest ratecharged for amount borrowed in terms of per
dollar per year
Annual
Percenta
ge Ratefor
Purchases
GracePeriod
forPurchas
es
Minimum
FinanceCharges
Balance
Calculati
onMethod
forPurchas
es
AnnualFees
Transaction Fees
for CashAdvance
s
Late
Payment
Fees
19.9%
Not lessthan
25 days
$.50when afinance
charge ata periodic
rate is
charged
Averagedaily
balancemethod
(includingnew
purchases)
$20 peryear
2% with a
minimumfee of $3
$29
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Grace PeriodAnnual
Percenta
ge RateforPurchase
s
GracePeriod
forPurchases
Minimum
FinanceCharges
Balance
Calculati
onMethodfor
Purchases
AnnualFees
Transaction Fees
for CashAdvances
Late
Payment
Fees
19.9%
Not lessthan
25 days
$.50 whena financecharge ata periodic
rate ischarged
Averagedailybalancemethod
(includingnew
purchases)
$20 peryear
2% with a
minimumfee of $3
$29
Grace Period Amount of timeallowed before finance charges area lied
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Minimum Finance Charges
Minimum Finance Charge
Minimum amount charged for card
Annual
PercentageRate forPurchas
es
Grace
PeriodforPurchas
es
Minimu
mFinanceCharges
Balance
CalculationMethod
forPurchas
es
Annual
Fees
Transac
tionFees forCash
Advances
Late
Payment Fees
19.9%
Not lessthan
25 days
$.50when afinancecharge
at a
periodicrate is
charged
Averagedaily
balancemethod(includin
g newpurchase
s)
$20 peryear
2% with
aminimum fee of
$3
$29
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Balance Calculation Method
Balance Calculation Method Method
used to determine balance for finance
Annual
Percentage
Rate forPurchas
es
GracePeriod
forPurchas
es
Minimum
FinanceCharges
Balance
Calculation
Methodfor
Purchases
AnnualFees
Transaction
Fees forCash
Advances
Late
Payment Fees
19.9%
Not lessthan
25 days
$.50when afinancecharge
at a
periodicrate is
charged
Average dailybalancemethod(includi
ng newpurchas
es)
$20 peryear
2% with
aminimum fee of
$3
$29
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Balance Calculation Method cont.
1. Average daily balance
excluding new purchases Interest is only paid on theprevious balance, not on purchases
made since the last payment2. Average daily balance
including new purchases with agrace period If the balance isnot zero, interest is applied to newpurchases when they are made, ifthe balance is zero, a grace period
is allowed before interest is 14
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3. Average daily balanceincluding new purchases with no
grace period Regardless of theprevious months balance, interest isapplied to new purchases as they aremade
4. Two-cycle average dailybalance including new purchases This method should be avoided by
consumers, as it is the least-beneficial. The average dailybalance is determined on 60 days,
rather than 30 days, so finance 15
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Annual Fees
Annual Fees Yearly charge for
credit card ownership
Annual
PercentageRate forPurchas
es
Grace
PeriodforPurchas
es
Minimu
mFinanceCharges
Balance
CalculationMethod
forPurchas
es
Annual
Fees
Transac
tionFees forCash
Advances
Late
Payment Fees
19.9%
Not lessthan
25 days
$.50when afinancecharge
at a
periodicrate is
charged
Averagedaily
balancemethod(includin
g newpurchase
s)
$20 peryear
2% with
aminimum fee of
$3
$29
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Cash Advances
Cash Advance Transaction Fees Cashwithdrawal fees
Annual
Percent
ageRate forPurchas
es
GracePeriod
forPurchas
es
Minimum
FinanceCharges
Balance
Calcula
tionMethod
forPurcha
ses
AnnualFees
Transaction
Fees forCash
Advances
Late
Paymen
t Fees
19.9%
Not lessthan
25 days
$.50when afinancecharge
at a
periodicrate ischarged
Averagedaily
balancemethod(includin
g newpurchases)
$20 peryear
2% with
aminimum fee
of $3
$29
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Late Payment Fees
Late Payment Fees Penalty feefor payments not made by the duedate
Annual
PercentageRate forPurchas
es
Grace
PeriodforPurchas
es
Minimu
mFinanceCharges
Balance
CalculationMethod
forPurcha
ses
Annual
Fees
Transac
tionFees forCash
Advances
Late
Payment Fees
19.9%
Not lessthan
25 days
$.50when afinancecharge
at aperiodicrate is
charged
Averagedaily
balancemethod(including new
purchases)
$20 peryear
2% with
aminimum fee of
$3
$29
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Opening a Credit Account
1. Applicant completes a creditapplication
2. Lender conducts a creditinvestigation
3. Applicant is given a credit rating
4. Lender accepts or denies the creditrequest
5. If accepted, applicant evaluates the
credit card details 19
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Understanding the Bill
Minimum Payment Due The minimumamount to be paid If this amount is paid and a balance is left on
the account, additional finance charges will be
included in the following months balance Past Due Amount The required amount
not paid before the due date
Due Date The day by which the
company requires a payment to be made New Balance The total amount owed on
a credit card
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Credit Line The maximum amountof charges allowed to an account
Closing Date Last day fortransactions to be reported on thestatement
Charges, Payments, and Credits The transactions which occur with
the use of a credit card
Finance Charge Charges assessedfor credit card use
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Using a Credit Card Properly
Only use a card when there is nodoubt about ability to pay off thecharges at the end of the billing
cycle
Record all expenses and keepreceipts
Check credit statement for errors
Always pay off balance completelyand timely
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Safety Tips
Sign card with signature andPlease See ID
Do not leave cards lying around
Close unused accounts in writingand by phone, then cut up thecard
Do not give out account numberunless making purchases
Keep a list of all cards, accountnumbers, and phone numbers
separate from cards
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