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 What is the Worst Credit Card Trap of All? Teaser rates? Default rates (penalty APRs)? Late fees? Over-the-limit fees? Minimum payments?

4 Credit Card Minimum Payments!

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

6 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

7 Average Daily Balance- Example

8 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

9 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

10 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%

11 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

12 Tiered Pricing w Range of possible APRs quoted w APR determined by applicant’s credit score w Lower scores pay higher APRs w APR unknown until consumer gets card

13 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

14 “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

15 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

16 Credit Card Tips w Read disclosure charts carefully w Shop around before accepting a credit card w Don’t 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

17 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

18 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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20 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

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

22 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.

23 Sample PowerPay Analysis