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Credit Card Traps and PowerPay Debt Reduction Program

Credit Card Traps and PowerPay Debt Reduction Program. What Did You Learn From the Credit Card Comparison Assignment?. When you invest, compound interest is your friend :-). When you pay interest on credit cards and loans, compound interest is your enemy :-(.

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Credit Card Traps and PowerPay Debt Reduction Program

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  1. Credit Card Traps and PowerPay Debt Reduction Program

  2. What Did You Learn From the Credit Card Comparison Assignment?

  3. When you invest, compound interest is your friend :-) When you pay interest on credit cards and loans, compound interest is your enemy :-( The Two Sides of Compound Interest

  4. What is the Worst Credit Card Trap of All? • Teaser rates? • Default rates (penalty APRs)? • Late fees? • Over-the-limit fees? • Minimum payments?

  5. Credit Card Minimum Payments! https://www.youtube.com/watch?v=X-0w2i46flg

  6. Credit Card Minimum Payment Calculator • http://www.bankrate.com/calculators/managing-debt/minimum-payment-calculator.aspx

  7. Reading A Credit Card Statement http://www.federalreserve.gov/creditcard/default.htm

  8. Sample Credit Card Statement

  9. Factors Affecting Finance Charges • APR (interest rate) • Grace Period • Balance calculation method Result: significant effect on the cost of credit.

  10. Transaction Fees • Fee charged each time a credit card is used • Example: 50 cents per charge • Most common transaction fees are for • Cash advances • Balance transfers

  11. Cash Advance Fees • Cash loans from credit card account instead of making a purchase from a merchant • Credit cards charge fees for this service • Cash advance fee from date of an advance • Fees range from 1% to 5% of amount transferred • Most cards have minimum cash advance fees • Average minimum about $5

  12. Example of Cash Advance • $500 cash advance • $2.5% transaction fee ($12.50) • 18% APR • Pay back after 25 days • $12.50 fee + $6.00 interest • Effective interest rate of 44%

  13. Cash Advance Checks Video: https://www.youtube.com/watch?v=SrnO1s8Jcbw

  14. Balance Transfer Fees • Company B pays balance with Company A • Balance on Company B credit card • Transfer done to get a lower APR • Balance transfers may have transaction fees

  15. Tiered Pricing • Range of possible APRs quoted • APR determined by applicant’s credit score • Lower scores pay higher APRs • APR unknown until consumer gets card

  16. Skip-A-Month Offers • Often used around the holiday season • Cardholders can skip payment without penalty • Interest continues to accrue • Increases total cost of borrowing

  17. “Teaser” (Introductory) Rates • Low initial interest rates • Entice people to apply for credit card • May only apply to balance transfers, not new purchases (read the fine print!) • Check disclosure box for non-promotional APR

  18. Cards With “Perks” • Examples: cash back, product discounts, and frequent flyer miles • Best for cardholders who: • charge a lot • pay bills in full • “Revolving borrowers”: interest and fees may exceed benefit gained

  19. Credit Card Tips • Read disclosure charts carefully • Shop around before accepting a credit card • Don’t use credit to extend your income • Pay bills in full, if possible • If not, pay as much of balance as possible • Avoid using full credit line • Protect your account numbers

  20. More Credit Card Tips • Match credit cards to bill-paying habits • Ask creditors to make concessions: • drop annual fee • reduce interest rate (APR) • Limit your debt level • Read mail from card issuers • Complain if you are unfairly penalized

  21. PowerPay Requirements • Stop borrowing or charging until all debts in the PowerPay calculation are repaid • Make the same dollar amount payment each month until all debts are repaid • The money gets reallocated to creditors differently every time a creditor gets repaid • See www.powerpay.org for details

  22. PowerPay Home Page

  23. Required Information For a PowerPay Analysis • Name of each creditor • Balance owed • Monthly payment (minimum or above) • APR (interest rate)

  24. More About PowerPay • Three repayment options: • Highest interest rate first (in sequence) • Lowest balance first • Shortest payoff term first • Can add one-time or periodic additional payments (e.g., bonus, tax refund) • Savings will vary according to length of debt, number of creditors, APRs, etc.

  25. Sample PowerPay Analysis

  26. Any Remaining Credit Questions?

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