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					                                    Chapter 6
                                     Part 1

Definitions and Examples of Credit
Credit -- receiving cash, goods, or services with an obligation to pay later.
Open credit -- credit that you can use and repay at your pace so long as you pay
the required minimum monthly payment.
   Examples -- Credit cards or department store credit cards
   Examples -- auto loans or personal loans

Determining the Costs of Open Credit
The balance owed
Interest rates
Balance calculation method
Cash advance costs
The grace period
The annual fee
Additional or penalty fees

Interest Rates
Annual percentage rate (APR) B true simple interest rate paid over the life of the
Teaser rates B introductory rates used to attract new customers, some as low as
Most credit cards compound interest

Balance Calculation Methods
Average daily balance, most common
   Including new purchases
   Excluding new purchases
Previous balance B most expensive
Adjusted balance B least expensive

Buying Money: The Cash Advance
An extremely expensive way to borrow
Interest begins immediately and may be at a higher rate than for purchases
      Usually there is a Acash advance fee@ of 2% to 4% of the amount advanced
Some cards require payment of the purchase balance before payment of the cash
advance balance

The Grace Period
Normally 20 to 25 days, excluding cash advances
Doesn=t apply if you carry a balance
With no balance, you could avoid paying for a purchase for nearly 2 months
Not all credit cards offer a grace period

The Annual Fee
Range from $0 to $100 (American Express charges $300 for their Platinum card.)
70%of the 25 biggest card issuers don=t charge an annual fee.
Merchant=s discount fee -- charged to merchants, typically 1.5% to 5.0% of the
purchase amount

Additional Fees
Cash advance fee
Late fee
Over-the-limit fee
Penalty rates
Be alert-- AImportant Notice of Change of Terms@

The Pros of Credit Cards
Convenience or ease of shopping
Emergency use
Consume and use before the purchase is fully paid for
Bill consolidation
Can be used in anticipation of price increases
The Pros of Credit Cards (cont=d)
Interest-free credit
Make reservations
Use as identification
A source of free benefits

The Cons of Credit Cards
It=s too easy to lose control of spending.
It=s, in general, an expensive way to borrow money.
It=s an obligation of future income--you=ll have less to spend in the future.

Choosing a Source of Open Credit
Bank credit cards
   Bank card variations
Travel and entertainment (T&E) cards
Single-purpose cards
Traditional charge account

Bank Credit Cards
Issued by banks, may charge annual fees
Visa and MasterCard franchise credit authorization systems
Offer a variety of benefits
May be Aco-branded@ or Arebate cards@
Discover card is different

Bank Card Variations
Premium or prestige cards
Affinity cards
Secured credit cards

Other Sources of Open Credit
Travel and entertainment cards require full payment monthly.
Single-purpose cards may or may not offer revolving credit, but usually have no annual
Traditional charge accounts offer convenience of payment and service before billing.

Know Your Credit Card Philosophy
Credit user
   Low APR
Convenience user
   Low annual fee
   Long, interest-free grace period
   Free benefits
Convenience and credit user
   Balance interest rate and annual fee for the lowest total cost

Getting a Credit Card: The Five Cs of Credit

Credit Evaluation: The Credit Bureau
The credit bureau: collects and reports information from creditors, public court records,
and the consumer.
Determining your creditworthiness -- credit scoring determines if you qualify for credit
and the interest rate offered.

National Credit Reporting Bureaus
Equifax Credit Information Services
    Trans Union

Information on Your Credit Report
Personal demographics
   Social Security number
Employment history
Credit history

Information on Your Credit Report (cont=d)
Criminal convictions and judgments
Previous two years of inquiries
Factors That Determine Creditworthiness
Annual income
Length of time at current residence
Length of time at current job
Type of residence

Factors That Determine Creditworthiness (cont=d)
Number of bank accounts
Number of credit cards
If you have a telephone
Credit history
Note: All the factors provide information historically linked with individuals that
are good credit risks.