5.4.Credit Cards Concept

8/2/2019 5.4.Credit Cards Concept

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What is a Credit Card?

Pre-approvedcredit

Used for

purchase ofitems now

Payment of

items later


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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

3
http://www.fcs.iastate.edu/financialhttp://www.fcs.iastate.edu/financial


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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


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


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


at a

periodicrate is

charged

Averagedaily


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


at a

periodicrate ischarged

Averagedaily


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


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


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

Documents

5.4.Credit Cards Concept