Chapter 7 Credit Cards

Credit Card A credit card is a payment card issued to users as a system of payment. Allows cardholder to pay for goods/services based on the holder’s promise to pay for them.

Credit Cards The issuer creates a revolving account and grants line of credit to the consumer. The user can borrow money for payment to a merchant or as a cash advance. Line of credit is how much money you are allowed to borrow

Credit Card VS Debit Card ◦Borrow money from a bank. You pay back this money at a later date. ◦Money you have in your bank account. This money comes out of your account at the time of purchase. ◦ Interest is charged when balance is not paid off in full ◦No interest (unless you overdraft your account!)

What’s Important When Choosing a Card? Low Interest Rate (APR) Some cards offer a 0% intro APR (balance transfers) for a fixed time. Fixed or Variable? No Annual Fee Credit Limit Rewards Program Cash Back

Section 7.1 – Account Statements With a credit card, you receive a monthly account statement Lists all items purchased during a one-month period If your previous bill was not paid in full, the credit card company adds on a finance charge

Account Statements A finance charge is interest that is charged for delaying payment New Balance = Previous Balance + Finance Charge + New Purchases - (Payments + Credits)

Example 1 – Account Statements Billing Date 04/22/12 Previous Balance $157.42 Finance Charge $5.21 Payments & Credits $60.00 New Purchases $39.99 New Balance What is the new balance for the credit statement shown? $142.62

7.2 – Finance Charge: Unpaid-Balance Method Some companies use the unpaid-balance method to compute finance charges The finance charge is computed based on the portion of the previous balance you have not paid

Finance Charge: Unpaid-Balance Method Unpaid Balance = Previous Balance - (Payments + Credits) Finance Charge = Unpaid Balance x Periodic Rate New Balance = Unpaid Balance + Finance Charge + New Purchases

Example Emily Walsh’s account statement: Previous Balance of $1,351.00 Payment of $300.00 New Purchases: $65.00 and $38.00 Periodic rate is 1.95 percent FIND THE NEW BALANCE Step 1(unpaid balance): $1,351.00 – 300.00 = $1,051.00 Step 2(finance charge): $1,051.00(0.0195) = $20.49 Step 3(new balance): $1,051 + $20.49 + $65 + $38 = $1,174.49

Pg. 260 #5-14 Pg. 263 #5-12

Finance Charge: Average-Daily-Balance Method Average of the account balance at the end of each day of the billing period Used to calculate finance charge

Average-Daily-Balance Method = Sum of Daily Balances Number of Days Finance Charge = ADB x APR x (days in billing period/365) New Balance = Unpaid Balance + Finance Charge

Example 6/01-6/15 $300 15 *$ 6/16 $100 200 1 6/17-7/2 16 TOTAL 4,500 Billing Periods Payment End-of-day Balance # of Days Sum of Balance 6/01-6/15 $300 15 *$ 6/16 $100 200 1 6/17-7/2 16 TOTAL 4,500 200 3,200 200 32 $7,900 What is the average daily balance? 7,900 ÷ 32 = $246.88

Example (cont.) Mario Mario checks the finance charge and the new balance. The finance charge APR is 18%. What is the finance charge? What is the new balance? $246.88(.18)(32/365) = $3.90 $200 + 3.90 = $203.90

Calculating Number of Days 6/01 to 6/10 is 10 days Be careful. 10-1=9. You subtracted the 1st day away, so add it back in. 10-1+1=10 days EX: 7/04-7/09 9-4+1=6 days.