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Credit Cards 101

Credit Cards 101. Shopping for A Credit Card. Comparison shop credit cards Don’t take the first offer that comes to you: Pre-approval Means nothing No special rates. Card Holder Agreement. Written statement that gives the terms and conditions of a credit card account.

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Credit Cards 101

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  1. Credit Cards 101

  2. Shopping for A Credit Card • Comparison shop credit cards • Don’t take the first offer that comes to you: • Pre-approval • Means nothing • No special rates

  3. Card Holder Agreement • Written statement that gives the terms and conditions of a credit card account. • Look here for all info before signing up • Required by Federal Reserve • Card issuers can change terms at any time with 15 days notice

  4. Billing Statement • The monthly bill sent by a credit card issuer to the customer. • It gives a summary of activity on an account. • Important changes to a credit card account are included in small-print fliers that are sent with the statement. • Schumer box: Important to look here once you’ve selected a card.

  5. Annual Percentage Rate (APR) • Annual Percentage Rate (APR) • Interest • F (Fixed) rate • V (variable) rate • Prime + ___ • Libor + ___ • Won’t go below floor • Introductory rate • How long? • What will the rate “go to” afterwards?

  6. Grace Period • Interest-free time between: • Transaction date • Billing date • Usually 20 – 30 days • No grace period if: • Carry a balance • No stated grace period

  7. Determined by: Adding each day’s balance Dividing by total number of days in the billing cycle. Multiplying by monthly periodic rate (APR/12) Example Day 1: Charge $100 Day 2: Charge $200 Avg. Daily Bal $150 30 days in billing cycle = $5 average daily balance Card with 15% APR has a 1.25% monthly periodic rate (15% / 12 months) $5 daily balance = $6.25 finance charge Billing Methods: Average Daily Balance

  8. Billing Methods: Two-cycle Billing • If you don’t pay your balance off it: • Charges you interest based off of the current and previous month • Interest starts the day you make the purchase.

  9. Credit Limit • The maximum amount you can charge on a credit account. • You're approved up to $25,000! • “Up to” is the key phrase • Enticement offer • Actual credit limit based on credit score • Recommended limit • 20% of net income

  10. Default and Universal Default • Default • A designation that indicates a person has not paid a debt that was owed. • Universal default • If you are more than 30 days late on a payment to anyone, your credit card company can raise your interest rate.

  11. Payment Allocation • How your payments will be applied when you have differing rates • Matters when you: • Use card during and after promotional period • Purchases and cash advances • Payments will pay off lower rate first • Costs you money. Makes the bank money.

  12. Annual Fees on Reward Cards • Paying for the privilege of using a credit card • Many cards offer rewards without an annual fee • Weigh cost of annual fee to value of reward • Mileage • Avoid annual fees

  13. Late-Payment Fee • Charge imposed for not paying on time • Know your payment due date & time • 9 a.m. • 12 noon • 5 p.m. • 11:59 p.m.? • Pay via U.S. mail, phone, online, automatic bill pay, etc.

  14. Over-the-Credit-Limit Fee • You can exceed your credit limit but it will cost you • Fee • Higher interest rate

  15. Currency-Exchange Fee • Credit Cards have replaced traveler's checks. • Fee will be • Flat amount • Percentage of withdrawal • Important only if you travel internationally frequently

  16. Cash-Advance Fee & Interest • Don’t take cash advances • Fee • Flat amount • Percentage of withdrawal • Cash advance interest rate is always higher and has no grace period • Payments are applied to lower-interest balance first

  17. Balance-Transfer Fee • Balance Transfer • The process of moving an unpaid credit card debt from one issuer to another • Cards charge to transfer balance to or from one card to another.

  18. Minimum Finance Charge • Also called “No Balance Fee” • Fee charged for using the credit card even when you pay off the balance in full every month. • Don’t select this card • $1.50 * 12 = $18 • Similar to an annual fee

  19. What You Don’t Need in a Credit Card Offer

  20. No on Credit Card Insurance • Life and disability insurance policies will cover credit cards. • Any type of credit card insurance is not as flexible as traditional policies. • You will have to take a policy out on each credit card.

  21. Theft Insurance • If your card is stolen • Federal law limits your liability to $50 • Don’t need theft insurance because you’re already protected • Report missing cards within 24 hours or ASAP

  22. Life & Disability Insurance • Credit life insurance • pays off the debt you owe if you die. • Credit disability insurance • Pays minimum monthly payments, but not for new purchases

  23. Unemployment & Property Insurance • Involuntary unemployment credit insurance • Pays minimum monthly payments, but not for new purchases • Credit property insurance • Cancel debt on items that are destroyed by specific incidents not covered in other policies.

  24. Find a Consumer-Friendly Card • Consumer Reports Top 10 cards have • No universal default • No two-cycle billing • No balance transfer fees • Grace period of at least 25 days • No annual Fees • Based on Cardweb’s analysis of 10,200 card offers in August, 2005.

  25. Selecting and Using a Credit Card

  26. Selecting and Using a Credit Card • Shop for a credit card. Study all the details of the application before signing. Note fees charged including annual fee. • Understand the details of the introductory offers and how long they last. • Know what constitutes a late payment and the amount of penalties charged. • Credit card bills are not considered paid until the company receives and credits payment to your account.

  27. Credit Card Wrap • Make a credit card wrap by cutting a recipe card to wrap around your credit card. • Record each purchase or cash advance to the credit card, just as you would a check in a check register. • Keep a running balance of what is charged on your credit card each month. Do not over spend your limit/budget. • Check your record against your statement.

  28. Selecting and Using a Credit Card • Shop for a credit card. Study all the details of the application before signing. Note fees charged including annual fee. • Understand the details of the introductory offers and how long they last. • Know what constitutes a late payment and the amount of penalties charged. • Credit card bills are not considered paid until the company receives and credits payment to your account.

  29. Jones’ Credit Card Bill • What Stan and Alice expected . . . • Un-paid balance on prescription $280.00 • Cash Advance $ 50.00 • Interest on balance due $ 0.00 • (at introductory 0% APR) • November Balance Due $330.00

  30. Jones’ Credit Card Bill • What Stan and Alice were billed! • Balance carried over from September $280.00 • October late fee $ 19.00 • Interest on un-paid balance $ 3.98 • Cash Advance $ 50.00 • Cash Advance fee (minimum $5.00) $ 5.00 • Cash Advance interest $ 1.40 • (15.99% based on 12 days) • November Balance Due $359.38

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