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Learning Objectives
1. Know how credit cards work. 2. Understand the costs of credit. 3. Describe the different types of credit cards. 4. Know what determines your credit card worthiness and how to secure a credit card. 5. Manage your credit cards and open credit.
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Introduction
Convenient, but if youre not careful, credit cards will cost you. Some charge over 20% interest on unpaid balances. Most people dont consider interest charges on purchases they have to have. Manage credit wisely to avoid high interest.
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Unpaid balance plus interest carries over to next month. Higher balances on credit lines, higher costs.
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Interest Rates
Annual Percentage Rate (APR)the true simple interest rate paid over the life of the
loan.
APR for all consumer loans must be disclosed. Fixed APR vs. variable APR
Teaser Rates
Compound interest
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Average daily balance method Previous balance method Adjusted balance method Variationsinclude new purchases or exclude
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Figure 6.1
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a loan.
cash advances
Up-front fee of 2-4% of the amount advanced. Pay down the balances for purchases before paying down the higher interest rate cash balance.
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Grace Period
Grace periodthe length of time given to make a payment before interest is charged against the outstanding balance on a credit card.
20-25 days from date of bill. Some credit cards have no grace period
No grace period with cash advances. On most cards, the grace period is canceled if there is unpaid balance from previous month.
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Annual Fee
A fixed annual charge imposed by a credit card. Over 70% of biggest credit card issuers do not charge an annual fee. Many dont charge the fee if the card is used at least once a year.
Merchants discount feethe percentage of the sale that the merchant pays to the credit card issuer.
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Additional Fees
Cash Advance Fee Late Fee
Over-the-Limit Fee
Penalty Rate
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Figure 6.2
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do not offer revolving credit and require full payment of balance each month.
Interest-free grace period. Issuers receive annual fee and merchants discount fee. American Express, Diners Club, and Carte Blanche are the primary issuers.
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Figure 6.3
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Figure 6.4
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Determining Creditworthiness
Credit scoringnumerical evaluation of
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Corporation.
Scores range from 300-850. Visit www.myfico.com/ScoreEstimator.html to get an estimate of your score.
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Figure 6.5
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Table 6.1
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Inquiries
Public Record and Collection Items
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Figure 6.6
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at www.annualcreditreport.com
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Table 6.2
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creditor.
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your credit report from national bureaus and contact them for inaccuracies.
Bureau must investigate and correct. File a statement to explain negative information that is accurate, not corrected. FCRAnegative information remains on report for 7 to 10 years.
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Table 6.3
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date. Use billing inquiry or billing error address on credit card bill.
Should receive notification within 30 days. Card issuer investigates within 90 days account is credited or not with explanation.
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Table 6.4
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Identity Theft
Use of your name, address, Social Security number, bank or credit card account number, or other identifying information by someone other than you without your knowledge to commit fraud and other crimes.
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Table 6.5
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Table 6.6
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Checklist 6.1
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Summary
Main form of open credit is the credit card which you can use to make charges up to a
certain point as long as you pay off the minimum amount of your debt each month.
Costs of open credit include interest rate, cost of cash advances, annual fee, penalty fees.
Choices of open credit lines include different types of credit cards and charge accounts.
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Summary
Lenders determine creditworthiness using the five Cs of creditcharacter, capacity, collateral, and condition.
Different credit cards charge different APR and calculate finance charges differently. Focus on controlling credit card spending and look for signs of trouble.
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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.
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