Selecting the Best Credit Card: Your Guide to Understanding Terms and Rates

1. Selecting a Credit Card MontGuide 199802 Revised April 2004

2. Marsha A. Goetting Ph.D., CFP®, CFCS Professor & Extension Family Economics Specialist Department of Agricultural Economics & Economics

3. Purposes • Compare credit card terms already accepted with offers received in mail and/or over phone.

4. Purpose • Find credit cards with terms best suited for your spending & repayment habits

5. Know Credit Card Terms

6. Federal Truth in Lending Law

7. Grace Period Finance Charges Annual Fees Schumer Box APR Not less than 25 days .50 $20 per year 19.9%

8. Schumer Box • Annual Percentage Rate • Grace Period • Minimum Finance Charges • Balance Calculation Method • Annual Fees • Fees for Cash Advances • Late Payment Fees

9. Schumer Box • Annual Percentage Rate • Grace Period • Minimum Finance Charges • Balance Calculation Method • Annual Fees • Fees for Cash Advances • Late Payment Fees

10. Annual Percentage Rate • Measure of the cost of credit • 21.3% APR • 22.9% APR • 6.9% APR

11. Annual Percentage Rate • Fixed • Variable

12. Fixed Rate • Constant until issuer gives written notice of change • 15 days notice to cardholder

13. Variable Rate • Subject to change • Based on index

14. Common Indexes • Prime rate • Treasury bill rate • Federal Reserve discount rate

15. Variable Rate • Percentage added to index listed for the week specified • Example: Index rate + 9.9 % = Variable rate

16. Variable Rate • Is there a minimum & maximum APR? • How often rate change? • How much rate change?

17. Best Choice??? • Prime rate decreasing • Variable Rate

18. Best Choice??? • Prime rate increasing • Fixed rate

19. Pay Balance each month • APR not as important as other factors

20. Periodic Rate • Interest rate applied to outstanding balance to figure finance charge for billing period

21. Periodic Rate • Divide yearly interest rate by 12 18% ¸ 12 = 1.50% (.015)

22. Use Periodic Rate to Estimate Monthly Interest Charges

23. Multiply loan balance times monthly interest rate • $1,825 x .015 = $27.38

24. Calculating Finance Charge • If consumer makes $28 payment, only 62 cents is applied to principal

25. Example: You do • $3,000 balance • 22.89% APR • What is the monthly finance charge?

26. Example • . 2289 ¸ 12 = .0 191 • $3,000 x .0191 = $57.22 • $60.00 Payment $2.78 Principal

27. Tiered Rates • APR for charges up to $10,000 18.9% • APR for charges $10,000 & above 13.4%

28. Caution • A lower rate on a higher balance can cost as much as a higher rate on a lower balance

29. High Interest Rate Card ??? • Call bank to request lower rate • If bank refuses, option of changing to one offering lower rate

30. Credit Card Resources on the Internet See page 5 of MontGuide

31. Princeton Survey Results • 1/5 called bank to ask for lower rate • Nearly half (43%) got lower rate by asking

32. Schumer Box • Annual Percentage Rate • Grace Period • Minimum Finance Charges • Balance Calculation Method • Annual Fees • Fees for Cash Advances • Late Payment Fees

33. Grace Period • Period of time between date credit card used & date interest will be charged

34. Conditions for new purchases to escape finance charges • No unpaid balance • New balance paid by due date

35. If do not pay balance due • Any new purchases made in current month will start accruing interest immediately

36. Goal: Avoid finance charges • Pay off credit card balance in full each month

37. Schumer Box • Annual Percentage Rate • Grace Period • Minimum Finance Charges • Balance Calculation Method • Annual Fees • Fees for Cash Advances • Late Payment Fees

38. What method does the card issuer use to calculate the balance?

39. Average Daily Balance • Including new purchases • Excluding new purchases

40. Two-cycle Average Daily Balance • Including new purchases • Excluding new purchases

41. Average Daily Balance • Issuer totals beginning balance for each day in billing period • Payments deducted on day received

42. Average Daily Balance • Daily balances summed • Total divided by number of days in billing period • Most common method used

43. Two-Cycle Average Daily Balance • Including new purchases • Excluding new purchases

44. Two-Cycle Average Daily Balance • Is the sum of average daily balances for two billing cycles • Current & Preceding billing cycles

45. Average Daily Balance Including new purchases $132.00 Excluding new purchases $ 66.00 Two-Cycle Average Daily Balance Including new purchases $196.20 Excluding new purchases $131.20

46. Schumer Box • Annual Percentage Rate • Grace Period • Minimum Finance Charges • Balance Calculation Method • Annual Fees • Fees for Cash Advances • Late Payment Fees

47. Annual Fees • Membership or Participation Fees • $15 to $50 • No fees • Use Fee

48. Best Deal • No Fee Card • Some will reduce or eliminate annual fee if cardholders indicate they plan to switch

49. Schumer Box • Annual Percentage Rate • Grace Period • Minimum Finance Charges • Balance Calculation Method • Annual Fees • Fees for Cash Advances • Late Payment Fees

50. Cash Advance Fees • 2% to 3% • $2 to $10 • Assessed for each cash advance taken