1 Chapter 3 Credit Cards Ken Long New River Community College Dublin, VA 24084 http://www.nr.cc.va/fin 107
Dec 24, 2015
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Chapter 3Credit Cards
Ken LongNew River Community CollegeDublin, VA 24084http://www.nr.cc.va/fin107
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Should I switch to a lower rate credit card?
Maybe No Not if the new card uses the two-cycle method of interest calculation
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What are the two interest calculation methods?
Average daily balanceTwo-cycle
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What is the Average Daily Balance method?Interest at time of billing is
calculated by adding up the interest charges for each day of a 25 day cycle
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With an interest of 18% and a balance of $1,500 the interest the first day is?
$1,500 x .18 = $270 $270/360 = .75
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What is the interest the second day of the cycle?
$1,500 + .75 = $1,500.75$1,500.75 x .18 = $270.14$270.14 / 360 = .75
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What is the interest the third day of the cycle?$1,500.75 + .75 = $1,501.50$1,501.50 x .18 = $270.27$270.27 / 360 = .75
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How much interest will I owe at the end of the cycle?
$22.50
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How does the two-cycle method work?
Each billing cycle is two months instead of
one month despite monthly billing
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Suppose I owe $1,500 and pay $500, what is my
balance the second month?
With the average daily balance method
$1,000
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Suppose I owe $1,500 and pay $500, what is my
balance the second month?
With the two-cycle method
$1,500
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All else being equal, what is the difference?
You will pay about twice as much with the two-
cycle method on any balance carried over
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Which credit card company uses the two-cycle method?The Discover CardSome MasterCards
and VISA as well
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What is a time tiered interest calculation?
The interest rate is different for old purchases and new purchases
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What are new purchases?
Purchases made in the current billing cycle and previous are considered new
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What are old purchases?Purchases made more
than two billing cycles ago and carried forward are old
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What is the difference in interest rates?
Typically new purchases 9.9% and
for old prime + 9.9%
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What is the name of this credit card?
Prime Option MasterCard
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Does it make any difference when I pay my bill as long
as it is paid on time?Yes Every day the bill is
not paid you owe another day of interest
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What is a grace period?That time which you
are not charged interest on a purchase
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Do I have a grace period if I carry over a balance from month to month?
NO! A grace period applies only if you start the month with a zero balance
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Is there a credit card that always gives me a
grace period?American Express Optima
True Grace Card
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Why should I pay off my balance each month?
To take advantage of the grace period and to avoid interest and possibly other charges
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Is a low minimum payment a good thing?
NO! The lower the monthly payments you make the longer and the more interest you will pay
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Sometimes I can skip payments without penalty,
is this a good thing?NO! Interest charges
continue to be accrued each day
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How do credit cards make money?
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Charging retail store owners a percentage of every purchase made with their card
Penalty fees
Annual fee
Interest
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How do I compare different credit cards?
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Cash advance fees
Penalty fees
Fixed or variable interest rate
Billing method
Annual fee
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What are some perks that go along with credit cards?
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Insurance
Flight and hotel arrangements
Guarantees
Record keeping
Convenience
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How do I qualify for a low interest rate
credit card?
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Close any accounts not needed
Pay down high balances
Be careful not to have a high debt to income ratio
Do not mention consolidation
Apply to no more than 2 card companies in any 6 month period
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What are some tips in using credit cards?
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Beware insurance's
Switch to a lower interest rate
Avoid impulse buying
Mail payments as soon as you can
Keep track of purchases in checkbook - avoid double spending
Pay off balance in full each month
Use short term savings account
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Why should I mail my payments in promptly?If you carry over a
balance, the sooner you make a payment the more money you save
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What is double spending?
When you charge something but feel like you still have the money - you spend the money again
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How do I avoid double spending?
Subtract from your checkbook any money spent when using your credit card if you plan to pay it off with the next bill
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How can I use my short term savings account?
For any unusual or large outlays that you plan to pay off, take the money from your short term savings
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What is impulse buying?
The feeling that you are using play money
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Should I feel a loyalty to my credit
card company?NO! Never hesitate to
cancel a card if another card can give you a better deal
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Are the insurance's that come with a
card a good thing?That all depends!
Usually they are much more expensive than the same insurance coverage elsewhere
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Can I challenge a rate increase?
Yes!Some card companies will offer you a lower rate if you ask
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I have a credit card with my ex-spouse, am I liable
for all charges made?Yes! If your ex-spouse does
not pay - you must pay or be sued and suffer a bad credit report
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END