Dr. Debra Sherrill Central Piedmont Community College

Describe types of credit cards. Know how to compare credit cards. Identify interest calculation methods. Understand how to use a credit card responsibly. 3

I. Introduction to Financial Terms II. What is a credit card? III. Credit Card Basics IV. Interest Calculation Methods V. How to Compare Credit Cards VI. How to use Credit Cards Responsibly 4

Introduction to Financial Terms 5

Credit accounts with a set amount of available credit. When payments are made and the balance is decreased, the amount of credit available will increase, up to the available credit line. When the balance is increased, the amount of credit available decreases, up to the available credit line. 6

Are typically harder to obtain than most revolving accounts. Typically require membership or annual fees. Tend to have open credit limits but balances must be paid in full each month. Interest and charges accrue for late payments, cash advances, or transfer fees. 7

Provisions address the following: rate increase requirements (45-day notice required and prohibits rate increases due to universal default) prohibits penalizing borrowers who pay on time. due date and payment protections (5 PM on date due). protections from misleading or deceptive terms. credit limit protections. payment protections. requires detailed explanations on debt (repayment terms of debt- 3 years repayment and minimum amount term). protections on credit card promotions. requirements for credit card agreements. requirements on gift cards (5 years after purchase). 8

What is a credit card? 9

A. are a convenient form of borrowing. B. are a revolving line of credit. C. are a means to pay for emergencies. D. may cause debt and financial problems. E. all of the above. 10

A credit card is a revolving line of credit. Accounts will have an approved high credit limit. Minimum payments are based on the balance at the time of the statement and are typically a specific percentage of the outstanding balance (2%-5% are common). Interest may be calculated using several different methods and this will be explained on the credit card agreement. Credit cards may charge annual fees. Additional fees may be charged for various reasons. 11

Credit Cards Debit Cards Payments Buy now, pay later. Buy now, pay now. Interest Charges Yes, if you carry a balance on your card and no grace period. No Other Potential Benefits Possible freebies such as cash rebates and bonus points for goods and travel deals. Some purchase protections. Easier and faster than writing a check. Avoid debt problems. Limited purchase protections. Other Potential Concerns Fees and penalties. Typically no grace period for interest or payments. May have card and/or transaction fees. May overdraw the account if records are not accurate. 12

Secured: A line of credit that is secured by a depository account. Consumer can access the available credit, but should default occur, the credit card issuer has the option to receive the funds from the depository account securing the account. Pre-paid: A line of credit that is secured by a prior cash deposit made by the consumer. Credit line is capped at the amount of the pre-paid deposit, so no credit is actually extended. Unsecured: A line of credit given to the consumer that is unsecured and not prepaid in any manner. The credit line is based solely on the credit worthiness determination of the card-issuer. 13

Pre-Approval Offer (final approval is not guaranteed): The creditor has reviewed your credit history (credit report) and determined that you might be qualified for the card. Approval will depend on income, employment, and final credit history check. Pre-Solicitation Offer (final approval is NOT guaranteed): Creditor is merely mailing an application to apply for a credit card. Upon receipt of completed application, the creditor will review your credit report, income, and employment information. 14

You may request that consumer credit reporting companies exclude your name from lists for pre-approved, unsolicited credit and insurance offers. 1 888 5OPTOUT (1 888 567 8688) www.optoutprescreen.com 15

Credit Card Basics 16

Cardholder: The consumer. Credit-issuer (creditor): The company that issued the credit card and bills the consumer for payment. Merchant: The business accepting the card as payment for goods or services, who agrees to pay a fee for the privilege of accepting the card (typically 1% - 3% of the transaction total). Transaction authorization: An approval obtained by the merchant for the transaction, which then allows the card issuer to put a hold on that amount of the available credit line on the account. 17

Annual Percentage Rate (APR):The cost of the credit expressed as a yearly rate (APR / 12 = monthly periodic rate). Daily Accrual Rate: The annual rate is divided by 365 to give a daily rate. Grace period: A period of time, in which no interest is charged on an ending statement balance, as long as the balance is paid in full by the due date. Promotional interest rate: A very low interest, often 0%, for a specific time on purchases or balance transfers. Rewards programs: A common program by which card-issuers allow consumers to earn points through transactions and other programs, which can be redeemed by the consumer for specified rewards such as cash back or merchandise. 18

Will vary based on numerous factors. Can be fixed but typically adjustable. Adjustable rates have an index plus a margin: Index: Published financial data (such as prime rate, LIBOR, COFI). Margin: The card-issuer s profit level added to the index. There is no federal cap on credit card interest rates. Credit card companies may only have to abide by laws in the state where they are headquartered, not where the borrower is located. Some states have no interest rate caps (NC is 18%). Note: National banks are exempt from state usury laws! 19

Cash advance: Allows card holder to obtain cash from the credit line. Limited to the amount of the credit limit or cash advance limit. Extra fees may be charged. Balance transfers: May allow card holder to move an unpaid credit card debt to another credit card debt. Subject to the credit limit or balance transfer limit. May be charged extra fees. 20

Interest Calculation Methods 21

Interest may be calculated by several methods. There are four (4) commonly used methods: 1) Average daily balance method 2) Two-cycle average daily balance 3) Adjusted balance 4) Previous balance The credit card agreement and statement will specify which method is used. Do you know which method is used on your card? 22

The Average Daily Balance Method: The sum of the daily outstanding balances is divided by the number of days covered in the cycle to give an average balance for that period. This amount is multiplied by the periodic rate to get the finance (interest) charge. The result is a finance charge that is the same as if interest charges were calculated at the close of each day and then totaled, but the finance charge is added to the principal only once per month. 23

Two-Cycle Average Daily Balance Method: The sum of the daily balances of the previous two cycles is used, but interest is charged on that amount only during the current billing cycle. The average daily balance for the current billing cycle and the average daily balance for the previous billing cycle are calculated. The finance charge would be the sum of both average daily balances multiplied by the periodic rate. This may result in a higher finance charge to the borrower, depending on the two months balances. 24

Adjusted Balance Method: The balance after payments and credits are applied during the current billing cycle (but no purchases). This balance is multiplied by the periodic rate to get the finance charge. Since new purchases were not added, which would increase the balance, typically this results in a lower finance charge to the borrower. 25

Previous Balance Method: Interest is calculated by using the balance at the start (opening) of the billing cycle, which is then multiplied by the periodic rate. Payments and credits received during this cycle are not subtracted from the balance and additional charges are not added. This results in higher finance charges than the adjusted balance method (because no current payments / credits were subtracted) but results in lower finance charges than either of the average daily balance methods. 26

How to Compare Credit Cards 27

Name of issuer? What is the APR? - Introductory APR? - Penalty APR? Finance Charges? Annual Fee? Other possible fees? Grace period? Other benefits? Credit limit? Other important issues? Credit Card 1 Credit Card 2 Credit Card 3 28

Customer service: - Access to information - Online / electronic bill payment - Problem resolution Additional protection: - Credit Life insurance - Unemployment /disability insurance - Identity theft insurance 29

Decide how you will use the card. Start small. Do not charge too much until you get comfortable with the bill. Beware of introductory rates. Rates can change with proper notification. Beware of credit card issuers who require application fees. Most do not charge to open accounts. Make sure you understand the implications for fixed and variable rates, as well as penalty APRs. 30

Retail stores Banks Credit Unions Mail or Internet offers Gas companies 31

Do I need this? Do I need this now? Can I wait until I have cash to pay for it? Can I get credit? How much more will I pay if I buy on credit? Can I afford the monthly payments? What is the total cost of the credit? Are there any fees? What is the annual percentage rate? 32

Decision is based on income, assets, and credit history. Joint credit will require another person to qualify and be held liable. Creditors also review other existing credit, debt ratio, and credit score. Creditors may require photo identification. 33

Creditor must provide a denial notice with all reasons for the adverse action. Applicants have a right to request a free credit report from the credit reporting agency listed on the adverse action within 60 days of receiving the denial. Individuals have the right to dispute any inaccuracy on the credit report and from the creditor reporting the information. Individuals have a right to request a free copy of a corrected credit report, if corrections are made. 34

How to Use Credit Cards Responsibly 35

Protect your credit card and account numbers to prevent unauthorized transactions. Keep a record of account numbers, expiration dates, and the phone numbers of each credit card issuer in a safe place, separate from your credit cards, to quickly report a loss. Carry only the credit cards that you will use. Read the fine print of any credit card offer and monthly statement. Pay off the total balance each month, if possible. If not, at least make the minimum payment. 36

If applicable, request the credit card company to waive or lower interest rate or fees after a history of satisfactory payment. Do not keep more credit cards than needed. Do not become financial irresponsible with credit cards. 37

Review your monthly statement carefully and report any unauthorized statement immediately. If card is lost or stolen, contact the credit card issuer immediately. You are only liable for $50 if a thief uses your card-only if you immediately notify the card issuer. 38

Item Price APR Interest Paid How much you really pay for the item Total years to pay off TV $500 18% $216 $716 5 Computer $1,000 18% $516 $1,516 7 Furniture $2,500 18% $1,415 $3,915 10 39

New Balance Credit Line Minimum Payment Due Credit Available Payment Due Date Previous Balance Finance Charge 40

Describe types of credit cards. Know how to compare credit cards. Identify interest calculation methods. Understand how to use a credit card responsibly. 41

Revolving accounts 30-day accounts Secured Pre-paid Unsecured 42

What is the APR? - Introductory APR? - Penalty APR? Finance Charges? Annual Fee? Other possible fees? Grace period? Other benefits? Credit Limit? Customer service Access to information Online / electronic bill payment Problem resolution Additional protection: Credit Life insurance Unemployment /disability insurance Identity theft insurance Account Questions Other Services 43

Pay off the total balance each month, if possible. If not, at least make the minimum payment. If applicable, request the credit card company to waive or lower interest rate or fees after a history of satisfactory payment. Do not keep more credit cards than needed. Do not become financial irresponsible with credit cards. Review your monthly statement carefully and report any unauthorized statement immediately. If card is lost or stolen, contact the credit card issuer immediately. 46

Any questions