Credit Cards 101 Shopping for A Credit Card

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. – Look here for all info before signing up – Required by Federal Reserve – Card issuers can change terms at any time with 15 days notice

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.

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?

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

Billing Methods: Average Daily Balance • 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: 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.

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

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.

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.

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

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.

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

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

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

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.

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

What You Don’t Need in a Credit Card Offer

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.

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

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

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.

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.

Selecting and Using a Credit Card

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.

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.

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.

Jones’ Credit Card Bill • What Stan and Alice expected. . . – Un-paid balance on prescription $280. 00 – Cash Advance – Interest on balance due $ 50. 00 $ 0. 00 • (at introductory 0% APR) • November Balance Due$330. 00

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