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Revolving Credit

Revolving Credit. Personal finance Iverson. 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

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Revolving Credit

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  1. Revolving Credit Personal finance Iverson

  2. 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

  3. 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

  4. 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

  5. Pros and Cons 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

  6. 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

  7. The Wise Credit Card User  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 $50.00 Groceries $100.00 Meal $20.00 Night out $150.00 Shopping $200.00 Total charged: $520.00 Payment: $520.00

  8. The “Revolving” 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

  9. The NEXT Statement (MAY) • Outstanding Balance: $499.20 • Interest Charged (19.99%) $99.79 • May Charges: • Gas $50.00 • Groceries $100.00 • Meal $50.00 • Night out $150.00 • Total $350.00 • Total Due: $948.99 • Min Due: $37.95

  10. The NEXT Statement (JUNE) • Outstanding Balance: $911.04 • Interest Charged (19.99%): $182.12 • June 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

  11. 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

  12. 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! 

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