Credit Cards 101

Shopping for A Credit Card Comparison shop credit cards Dont take the first offer that comes to you: –Pre-approval Means nothing No special rates

Card Holder Agreement Written statement that gives the terms and conditions of a credit card account. –Look here for all info before signing up –Required by Federal Reserve –Card issuers can change terms at any time with 15 days notice

Billing Statement The monthly bill sent by a credit card issuer to the customer. It gives a summary of activity on an account. Important changes to a credit card account are included in small-print fliers that are sent with the statement. –Schumer box: Important to look here once youve selected a card.

Annual Percentage Rate (APR) Interest F (Fixed) rate V (variable) rate –Prime + ___ –Libor + ___ –Wont go below floor Introductory rate –How long? –What will the rate go to afterwards?

Grace Period Interest-free time between: –Transaction date –Billing date Usually 20 – 30 days No grace period if: –Carry a balance –No stated grace period

Billing Methods: Average Daily Balance Determined by: – Adding each days balance –Dividing by total number of days in the billing cycle. –Multiplying by monthly periodic rate (APR/12) Example –Day 1: Charge $100 –Day 2: Charge $200 –Avg. Daily Bal $150 –30 days in billing cycle = –$5 average daily balance –Card with 15% APR has a 1.25% monthly periodic rate (15% / 12 months) –$5 daily balance = $6.25 finance charge

Billing Methods: Two-cycle Billing If you dont pay your balance off it: –Charges you interest based off of the current and previous month –Interest starts the day you make the purchase.

Credit Limit The maximum amount you can charge on a credit account. You're approved up to $25,000! –Up to is the key phrase –Enticement offer –Actual credit limit based on credit score Recommended limit –20% of net income

Default and Universal Default Default –A designation that indicates a person has not paid a debt that was owed. Universal default –If you are more than 30 days late on a payment to anyone, your credit card company can raise your interest rate.

Payment Allocation How your payments will be applied when you have differing rates Matters when you: –Use card during and after promotional period –Purchases and cash advances Payments will pay off lower rate first –Costs you money. Makes the bank money.

Annual Fees on Reward Cards Paying for the privilege of using a credit card Many cards offer rewards without an annual fee Weigh cost of annual fee to value of reward –Mileage Avoid annual fees

Late-Payment Fee Charge imposed for not paying on time Know your payment due date & time –9 a.m. –12 noon –5 p.m. –11:59 p.m.? Pay via U.S. mail, phone, online, automatic bill pay, etc.

Over-the-Credit-Limit Fee You can exceed your credit limit but it will cost you –Fee –Higher interest rate

Currency-Exchange Fee Credit Cards have replaced traveler's checks. Fee will be –Flat amount –Percentage of withdrawal Important only if you travel internationally frequently

Cash-Advance Fee & Interest Dont take cash advances Fee –Flat amount –Percentage of withdrawal Cash advance interest rate is always higher and has no grace period Payments are applied to lower-interest balance first

Balance-Transfer Fee Balance Transfer –The process of moving an unpaid credit card debt from one issuer to another Cards charge to transfer balance to or from one card to another.

Minimum Finance Charge Also called No Balance Fee Fee charged for using the credit card even when you pay off the balance in full every month. Dont select this card –$1.50 * 12 = $18 –Similar to an annual fee

What You Dont Need in a Credit Card Offer

No on Credit Card Insurance Life and disability insurance policies will cover credit cards. Any type of credit card insurance is not as flexible as traditional policies. You will have to take a policy out on each credit card.

Theft Insurance If your card is stolen –Federal law limits your liability to $50 Dont need theft insurance because youre already protected Report missing cards within 24 hours or ASAP

Life & Disability Insurance Credit life insurance –pays off the debt you owe if you die. Credit disability insurance –Pays minimum monthly payments, but not for new purchases

Unemployment & Property Insurance Involuntary unemployment credit insurance –Pays minimum monthly payments, but not for new purchases Credit property insurance –Cancel debt on items that are destroyed by specific incidents not covered in other policies.

Find a Consumer-Friendly Card Consumer Reports Top 10 cards have –No universal default –No two-cycle billing –No balance transfer fees Grace period of at least 25 days No annual Fees –Based on Cardwebs analysis of 10,200 card offers in August, 2005.

Selecting and Using a Credit Card

Shop for a credit card. Study all the details of the application before signing. Note fees charged including annual fee. Understand the details of the introductory offers and how long they last. Know what constitutes a late payment and the amount of penalties charged. Credit card bills are not considered paid until the company receives and credits payment to your account.

Credit Card Wrap Make a credit card wrap by cutting a recipe card to wrap around your credit card. Record each purchase or cash advance to the credit card, just as you would a check in a check register. Keep a running balance of what is charged on your credit card each month. Do not over spend your limit/budget. Check your record against your statement.

Selecting and Using a Credit Card Shop for a credit card. Study all the details of the application before signing. Note fees charged including annual fee. Understand the details of the introductory offers and how long they last. Know what constitutes a late payment and the amount of penalties charged. Credit card bills are not considered paid until the company receives and credits payment to your account.

Jones Credit Card Bill What Stan and Alice expected... –Un-paid balance on prescription $ –Cash Advance$ –Interest on balance due$ 0.00 (at introductory 0% APR) November Balance Due$330.00

Jones Credit Card Bill What Stan and Alice were billed! –Balance carried over from September $ –October late fee$ –Interest on un-paid balance$ 3.98 –Cash Advance$ –Cash Advance fee (minimum $5.00)$ 5.00 –Cash Advance interest$ 1.40 – (15.99% based on 12 days) –November Balance Due $359.38