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Chapter 3Credit Cards

Ken LongNew River Community CollegeDublin, VA 24084http://www.nr.cc.va/fin107

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Should I switch to a lower rate credit card?

Maybe No Not if the new card uses the two-cycle method of interest calculation

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What are the two interest calculation methods?

Average daily balanceTwo-cycle

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What is the Average Daily Balance method?Interest at time of billing is

calculated by adding up the interest charges for each day of a 25 day cycle

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With an interest of 18% and a balance of $1,500 the interest the first day is?

$1,500 x .18 = $270 $270/360 = .75

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What is the interest the second day of the cycle?

$1,500 + .75 = $1,500.75$1,500.75 x .18 = $270.14$270.14 / 360 = .75

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What is the interest the third day of the cycle?$1,500.75 + .75 = $1,501.50$1,501.50 x .18 = $270.27$270.27 / 360 = .75

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How much interest will I owe at the end of the cycle?

$22.50

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How does the two-cycle method work?

Each billing cycle is two months instead of

one month despite monthly billing

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Suppose I owe $1,500 and pay $500, what is my

balance the second month?

With the average daily balance method

$1,000

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Suppose I owe $1,500 and pay $500, what is my

balance the second month?

With the two-cycle method

$1,500

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All else being equal, what is the difference?

You will pay about twice as much with the two-

cycle method on any balance carried over

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Which credit card company uses the two-cycle method?The Discover CardSome MasterCards

and VISA as well

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What is a time tiered interest calculation?

The interest rate is different for old purchases and new purchases

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What are new purchases?

Purchases made in the current billing cycle and previous are considered new

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What are old purchases?Purchases made more

than two billing cycles ago and carried forward are old

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What is the difference in interest rates?

Typically new purchases 9.9% and

for old prime + 9.9%

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What is the name of this credit card?

Prime Option MasterCard

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Does it make any difference when I pay my bill as long

as it is paid on time?Yes Every day the bill is

not paid you owe another day of interest

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What is a grace period?That time which you

are not charged interest on a purchase

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Do I have a grace period if I carry over a balance from month to month?

NO! A grace period applies only if you start the month with a zero balance

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Is there a credit card that always gives me a

grace period?American Express Optima

True Grace Card

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Why should I pay off my balance each month?

To take advantage of the grace period and to avoid interest and possibly other charges

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Is a low minimum payment a good thing?

NO! The lower the monthly payments you make the longer and the more interest you will pay

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Sometimes I can skip payments without penalty,

is this a good thing?NO! Interest charges

continue to be accrued each day

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How do credit cards make money?

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Charging retail store owners a percentage of every purchase made with their card

Penalty fees

Annual fee

Interest

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How do I compare different credit cards?

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Cash advance fees

Penalty fees

Fixed or variable interest rate

Billing method

Annual fee

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What are some perks that go along with credit cards?

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Insurance

Flight and hotel arrangements

Guarantees

Record keeping

Convenience

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How do I qualify for a low interest rate

credit card?

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Close any accounts not needed

Pay down high balances

Be careful not to have a high debt to income ratio

Do not mention consolidation

Apply to no more than 2 card companies in any 6 month period

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What are some tips in using credit cards?

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Beware insurance's

Switch to a lower interest rate

Avoid impulse buying

Mail payments as soon as you can

Keep track of purchases in checkbook - avoid double spending

Pay off balance in full each month

Use short term savings account

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Why should I mail my payments in promptly?If you carry over a

balance, the sooner you make a payment the more money you save

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What is double spending?

When you charge something but feel like you still have the money - you spend the money again

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How do I avoid double spending?

Subtract from your checkbook any money spent when using your credit card if you plan to pay it off with the next bill

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How can I use my short term savings account?

For any unusual or large outlays that you plan to pay off, take the money from your short term savings

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What is impulse buying?

The feeling that you are using play money

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Should I feel a loyalty to my credit

card company?NO! Never hesitate to

cancel a card if another card can give you a better deal

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Are the insurance's that come with a

card a good thing?That all depends!

Usually they are much more expensive than the same insurance coverage elsewhere

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Can I challenge a rate increase?

Yes!Some card companies will offer you a lower rate if you ask

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I have a credit card with my ex-spouse, am I liable

for all charges made?Yes! If your ex-spouse does

not pay - you must pay or be sued and suffer a bad credit report

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END