Credit Basics Consumers Math

Three Cs of Credit Character-the way you handle your money and have repaid debt in the past. Capacity-your ability to pay the debt after monthly expense Capital-the value of your assets

Things to Consider when Shopping for a Credit Card Annual Fee APR Grace Period Transaction Fees ATM access Credit Limit Credit Advance Penalties

Annual Fee Flat dollar amount issuer charges each year for the use of the credit card Do not want to have this fee but cards with no annual fee have higher interest rates Not the same thing as APR

Finance Charge Interest Rate your card issuer charges Main cost of using credit Bad credit or no credit results in higher interest rates because it reduces card issuers risk-higher the debt the faster it will grow and the harder it will be to pay it off

Minimum Payments Minimum amount of money you have to pay each month Credit card issuers make payments low, not as a favor to you, but to maximize profit Usually it is 2% of the balance including interest

Minimum Payments Continued $2500 debt (.02) = $50 minimum payment. It will take you 28 years to pay off debt if you only pay the minimum each month 18% finance charge/12 months=1.5% $2500(.015)=$37.50 in interest each month *Pay $5896 in interest in 28 years so an item costing $2500 will item will actually cost $8396 $50-37.50=$12.50 only that much is going to pay off your debt each month

Grace Period The time between the date you are billed and the date your payment is due Usually 25 days If you pay your entire balance within the grace period no interest charges If you carry a balance and do not have a grace period, interest incurs right away

Cash Advance Receive cash against your credit line and are paid in addition to the interest rate. There is usually no grace period on cash advances. Pay interest from the day you get the cash Transaction fee of 2%-3% of cash advance total Used for emergencies only. $100 billion a year comes from cash advances generating $3 billion a year to Visa

Late Fee Penalty assessed if your monthly payment is made after the due date or Grace Period. Depends on the credit issuer. Usually between $20- $40

Over-the-Limit-Fee Penalty assessed if you exceed your maximum credit limit. Finance charges can sometimes put you over your limit without you even realizing it. Depends on credit issuer Usually is between $20-$40

Types of Credit Open Retail Service Closed Installment

Attributes of Revolving or Open Credit Flexible payment Minimum payment APR can be adjusted by creditor Credit limit Finance charge Transaction fees

Attributes of Installment or Closed Credit Contract Down payment Finance charge Fixed monthly payment Acceleration clause Balloon payment

Retail Credit Open Flexible Payment Finance charge or perhaps no finance charge if paid during grace period Fees APR can change Examples: Universal Bank Cards, JC Penny

Installment Credit Closed Fixed Payment Finance Charge APR cannot change Examples: Car payment or mortgage

Service Credit Open Flexible payment Finance charge or no finance charge if paid during grace period APR fixed or no APR Examples: Dentist, doctor, car repair at service station

Advantages of Using Credit Limited liability Convenience Rebates or special programs Increased purchasing power Free use of someone’s money for grace period Emergencies

Disadvantages of Using Credit Overspending Finance charges = increased cost Opportunity cost Obligates future income