Credit Card Traps and PowerPay Debt Reduction Program

2 The Other Side of Compound Interest w When you invest, compound interest is your friend :-) w When you pay interest on credit cards and loans, compound interest is your enemy :-(

3 Background Statistics w More than 60% of credit card users carry balances Only 37.4% were convenience users in 03/04 w In 03/04, average credit card debt (including those with no balances!) was $8,000 w Those with balance: average about $12,000 w The average household pays > $1,000 in interest and fees annually w The typical cardholder has 7-10 credit cards w Bankruptcy rate continues to soar!

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!

6 Case Example w Outstanding balance: $2,000 w Interest rate: 18% w Minimum monthly payment: 2% of balance, no payment less than $15 w Interest cost over loan period: $4,183 w Paying off the debt will take 23 years!!! Source: Credit Card Smarts calculator, Advantage Publications

7 Credit Card Payback $1,000 Balance ($20 Minimum Payment)

8 Low Minimum Payments.

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

10 Average Daily Balance Method w Most common computation method used w Outstanding balances added daily w Total is divided by days in cycle w New purchases may or may not be added w Interest assessed each day at daily rate

11 Average Daily Balance- Example

12 The Two-Cycle Average Daily Balance Method w ADB of current cycle is calculated w ADB of previous cycle is calculated w New balance = sum of ADBs for two cycles w May or may not include new purchases w The least consumer-friendly method

13 How to Save Money w Pay bill in full to avoid finance charges w If carrying a balance, shop for a lower interest rate w If paying in full, shop for a card with a grace period and no annual fee w Pay bill immediately or ASAP to avoid late fee (short turnaround time)

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

15 Cash Advance Fees w Cash loans from credit card account instead of making a purchase from a merchant w 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

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

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

18 Tiered Pricing w Range of possible APRs quoted w APR determined by applicants credit score w Lower scores pay higher APRs w APR unknown until consumer gets card

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

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

21 Punitive Policies w Inactivity fees for: not using credit card within specified period using card less than specified number of times charging less than a certain dollar amount w Penalty for paying less bill in full on time Target: convenience users who do not pay interest

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

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

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

25 Online Credit Card Resources w Information and balance payment calculator w User-friendly credit card information w Semi-annual credit card survey results w Annual credit card survey results

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27 PowerPay Requirements w Stop borrowing or charging until all debts in the PowerPay calculation are repaid w 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 w See for details

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

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

30 Sample PowerPay Analysis