Selecting a Credit Card

Selecting a Credit Card MontGuide 199802 Revised April 2004 Marsha A. Goetting ®, CFCS Ph.D., CFP Professor & Extension Family Economics Specialist Department of Agricultural Economics & Economics Purposes 1. Compare credit card terms already accepted with offers received in mail and/or over phone. Purpose 2. Find credit cards with terms best suited for your spending & repayment habits Know Credit Card Terms Federal Truth in Lending Law Schumer Box APR Grace Finance Annual Period Charges Fees .50 $20 per year Not less than 25 19.9% days Schumer Box • Annual Percentage Rate • • • • • • Grace Period Minimum Finance Charges Balance Calculation Method Annual Fees Fees for Cash Advances Late Payment Fees Schumer Box • Annual Percentage Rate • • • • • • Grace Period Minimum Finance Charges Balance Calculation Method Annual Fees Fees for Cash Advances Late Payment Fees Annual Percentage Rate • Measure of the cost of credit • 21.3% APR • 22.9% APR • 6.9% APR Annual Percentage Rate • Fixed • Variable Fixed Rate • Constant until issuer gives written notice of change • 15 days notice to cardholder Variable Rate • Subject to change • Based on index Common Indexes • Prime rate • Treasury bill rate • Federal Reserve discount rate Variable Rate • Percentage added to index listed for the week specified • Example: Index rate + 9.9 % = Variable rate Variable Rate • Is there a minimum & maximum APR? • How often rate change? • How much rate change? Best Choice??? • Prime rate decreasing • Variable Rate Best Choice??? • Prime rate increasing • Fixed rate Pay Balance each month •APR not as important as other factors Periodic Rate • Interest rate applied to outstanding balance to figure finance charge for billing period Periodic Rate • Divide yearly interest rate by 12 18%  12 = 1.50% (.015) Use Periodic Rate to Estimate Monthly Interest Charges Multiply loan balance times monthly interest rate • $1,825 x .015 = $27.38 Calculating Finance Charge • If consumer makes $28 payment, only 62 cents is applied to principal Example: You do • $3,000 balance • 22.89% APR • What is the monthly finance charge? Example • . 2289  12 = .0 191 • $3,000 x .0191 = $57.22 • $60.00 Payment $2.78 Principal Tiered Rates • APR for charges up to $10,000 18.9% • APR for charges $10,000 & above 13.4% Caution • A lower rate on a higher balance can cost as much as a higher rate on a lower balance High Interest Rate Card ??? • Call bank to request lower rate • If bank refuses, option of changing to one offering lower rate Credit Card Resources on the Internet See page 5 of MontGuide Princeton Survey Results • 1/5 called bank to ask for lower rate • Nearly half (43%) got lower rate by asking Schumer Box • Annual Percentage Rate • • • • • • Grace Period Minimum Finance Charges Balance Calculation Method Annual Fees Fees for Cash Advances Late Payment Fees Grace Period • Period of time between date credit card used & date interest will be charged Conditions for new purchases to escape finance charges • No unpaid balance • New balance paid by due date If do not pay balance due • Any new purchases made in current month will start accruing interest immediately Goal: Avoid finance charges •Pay off credit card balance in full each month Schumer Box • Annual Percentage Rate • • • • • • Grace Period Minimum Finance Charges Balance Calculation Method Annual Fees Fees for Cash Advances Late Payment Fees What method does the card issuer use to calculate the balance? Average Daily Balance • Including new purchases • Excluding new purchases Two-cycle Average Daily Balance • Including new purchases • Excluding new purchases Average Daily Balance • Issuer totals beginning balance for each day in billing period • Payments deducted on day received Average Daily Balance • Daily balances summed • Total divided by number of days in billing period • Most common method used Two-Cycle Average Daily Balance • Including new purchases • Excluding new purchases Two-Cycle Average Daily Balance • Is the sum of average daily balances for two billing cycles • Current & Preceding billing cycles 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 Schumer Box • Annual Percentage Rate • • • • • • Grace Period Minimum Finance Charges Balance Calculation Method Annual Fees Fees for Cash Advances Late Payment Fees Annual Fees • Membership or Participation Fees • $15 to $50 • No fees • Use Fee Best Deal • No Fee Card • Some will reduce or eliminate annual fee if cardholders indicate they plan to switch Schumer Box • Annual Percentage Rate • • • • • • Grace Period Minimum Finance Charges Balance Calculation Method Annual Fees Fees for Cash Advances Late Payment Fees Cash Advance Fees • 2% to 3% • $2 to $10 • Assessed for each cash advance taken Cash Advance Rates • 7.9% on credit card purchases • 21.65% on credit card cash advances Cash Advance Example: $200 • Fee = $4 • Interest one month = $3 • Total cost: $7 • If charge item & pay off in full =$0 Schumer Box • Annual Percentage Rate • • • • • • Grace Period Minimum Finance Charges Balance Calculation Method Annual Fees Fees for Cash Advances Late Payment Fees Late Payment Fees • Charged when cardholder does not make minimum monthly payment by due date Late Payment Fees • Flat fee--$10 • 2% to 5% of minimum payment due Other Fees • • • • • Close out fee $25 Inactivity fee $15 Application fee $100 Over limit fees $10 Surcharge fees 5.1% Other Fees • Debt consolidation fees • Transfer fees Caution: • Bank A = 18% • Bank B = 21% • Bank A offers 5.9% to transfer Bank B’s balance Caution: • One consolidated account at Bank A • Two lines of debt • 18% • 5.9% Caution: • Payment goes to “consolidated” debt at 5.9% • Better off paying the 18% first Caution: • Ask institution for procedure • For applying payments to higher APR Other Considerations • Line of credit • Amount credit card issuer will allow cardholder to charge Line of credit desirable • Large enough for emergencies & large purchases but not so high as to encourage overuse of credit Hours • 24-hour • 7-day customer service • If can’t make calls during working hours Billing cycle • Allow you to change • Time with your pay day Incentive offers • Rewards for use Other Considerations •Minimum monthly payment Minimum Payments • Generally: • 2% of new balance • $10 • Whichever is greater Minimum Payments • Average balance of $1,825 on your bank credit card • 18% APR Balance $1,825 • Pay $28 per month • 21 Years to pay off • $5,231 interest • Pay $36.50 per month • 8 years to pay off • $1573.52 interest Other Considerations • Rebates • Computed as percentage of total charges Other Considerations • Toll free 800 numbers Selecting a Credit Card MontGuide 199802 Revised April 2004