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					Credit Cards
Why get a credit card? The main reason is to establish a good credit rating which will enable you to borrow money for a car or a house at a lower rate. Having a lower rate on a mortgage can save big bucks!

7%?

8%?

9%

Let’s look at the difference between what you would pay for a 30-year $200,000 mortgage with interest rates of 7%, 8% and 9%.

Use Excel to find the monthly payment for a $200,000 30-year mortgage with a 7% annual interest rate. $1330.60

The total amount paid by you for this mortgage over 30 years is $479,016. How was this amount determined?

Big Difference!
Interest Rate 7% Total Cost of $200,000 Mortgage $479,016

8%

$531,551

9%

$579,330

Credit Cards
However, do not get a credit card if you are not mature enough to handle it wisely. If you do not handle your credit card wisely you will foolishly pay lots of unnecessary finance charges and late charges and other charges as well. You will also create a bad credit rating for yourself which will make you pay lots of extra interest on mortgages, as we saw above, and car loans also.

Finance Charges
Assume that you have carried over a $2000 balance from the Previous month. Never get in this situation! If you make no new purchases but can’t send in a check for the whole $2000 to reach them by the payment due date, how much interest will you be charged for this month? Suppose the card issuer charges a 15.99% APR, annual percentage rate, 0.1599/12 = .013325 = 1.3325 % is the monthly interest rate. The finance charge is the monthly interest rate times the balance 0.013325($2000) = $26.65 Of course if you make additional charges during the month, you will pay finance charges, interest, on that money as well.

Finance Charges

What would the monthly finance charge be for a balance of $850 with an APR of 22.99%?

Finance Charges aren’t your biggest problem!

Late Charges and Over-Credit Limit charges are likely to be more costly than finance charges.

A single late payment can doom you.
Late Payments So what happens if you are late with a payment? Nothing good! • You will pay a late fee of $35 or more. • Your APR can increase sharply even if it is a “fixed” APR. For many credit cards, your low introductory“fixed” APR will be replaced by an APR of 30% or more due to a single late payment. Payments are “late” if they are received by the lender later than the due date. It doesn’t matter if you got it in the mail on a day that you thought should have been early enough. Better to make your payments on line. If using the mail, allow lots of time! Read the fine print on your credit card agreement!

Over-Credit Limit fee?!?
The Credit-limit trap If you exceed your credit limit you will pay an over-the-limit fee and your APR will increase as well. Some issuers will intentionally give user a relatively low credit limit, say, $300. Users can interpret this “limit” as meaning that when their credit-card purchases exceed $300, they won’t be able to use the card. Not so! The issuer is hoping that you will, in fact, exceed the $300 in order to impose both Over-Limit fees and a higher APR.

Annual Percentage Rate (APR) for Purchases Variable APR: See explanation 1 below for Default APR and 2 for Variable-Rate Information.

16.99%

Default APR: Up to 29.99% for all Purchase, Balance Transfer, and Cash Advance balances if late or overlimit. This is not a variable rate. See 1 below for explanation.

Transaction fee for Balance Transfers, non-online Direct Deposits and Check Cash Advances: 4% of each such cash advance (minimum $10, maximum $90). Transaction fee for Bank and ATM Cash Advances and online Direct Deposits: 4% of each such cash advance (minimum $5). Transaction fee for Overdraft Protection Bank Cash Advances (if enrolled): 4% of each such cash advance (minimum $5). Transaction fee for Cash Equivalents: 5% of each such cash advance (minimum $25). Late Fee: $35.

Overlimit Fee: $35.

“We reserve the right to change the APRs in our discretion, including, for example, the margins.”

?!?

1 Each time your minimum payment is late (i.e., not received by 5 p.m., ET, on its Payment Due Date), or the account balance is over the credit limit, we may increase each of your account's Variable APRs up to the Default APR. The Default APR will be applied to all new and outstanding balances with Variable APRs then below the Default APR. If a Default APR is applied to your account, then all APRs, including APRs then at or above the Default APR, will no longer vary. 2 The U.S. Prime Rate used to determine your APRs for each billing cycle is the highest rate appearing in The Wall Street Journal on the last publication date of the calendar month that ends within that billing cycle. On January 31, 2008, the U.S. Prime Rate was 6.00%. We reserve the right to change the APRs in our discretion, including, for example, the margins.

Cash Back Rewards

Rewards: Earn a full 1% on all purchases after your total annual purchases exceed $3,000. Purchases that are part of your first $1500 earn 0.25% and purchases that are part of your second $1500 earn 0.50%

Month 1. Michael gets the credit card with the above cash back rule. He charges $290 in books, knowing there is some “cash back” reward for using this credit card. He has only glanced at the fine print on his agreement and thinks his “cash back” reward will be 1% of the purchase price, but it won’t be! Read his fine print carefully. 6. What will Michael’s “cash back” reward actually be?

Let’s assume that Michael charges the books on the first day of his account period, so the finance charge is monthly interest for a complete month. When calculating the finance charge, be sure to divide the annual percentage rate (APR) by 12 to get the monthly rate. Assume Michael’s minimum payment is 2% of his new balance. The credit card company will always tell you what your minimum payment is If you don’t send in at least this minimum payment reaching them by the due date, you will incur a late fee and your APR can also rise dramatically leading to higher finance charges. Try to send in much more than the minimum payment since you want to pay off your balance as quickly as possible to save money on finance charges. Month 1 Beginning balance Purchases Balance if paid in full Finance charge Other fees New Balance Minimum payment 0 290 290 _____ _____ _____ _____

7. 8.

Determine Michael’s finance charge, new balance and minimum payment. If Michael is short of money and sends in the minimum payment, what will his beginning balance be in Month 2?

The Multiple Credit Card Trap
Keeping track of one credit card successfully takes time and effort. Don’t tempt fate. A late payment on one credit card can automatically cause your other credit card APRs to skyrocket. Wow!! It truly is a credit card conspiracy.

Minimum Payment Trap ($2000 balance)
Monthly Finance charge (APR 16.99%) New Balance Minimum Payment (2%) Next Month’s Balance

$28.32 $28.14 $27.97

$2028.32 $40.57 $2015.89 $40.32 $2003.54 $40.07

$1987.75 $1975.57 $1963.47

Minimum Payment Trap
You are decreasing your balance by 2% each month, but at the same time the balance is increasing by the monthly finance charge, say, 0.1699/12 = 0.014. So, overall, the balance is decreasing by 0.02 - 0.014 = 0.006 (about) How much will the balance be after 10 years if you keep making the minimum payment? $2000 (1 - 0.006)^120 = $990 (using more exact figures) Hmm…You have paid off about half of your balance. What have you paid in finance charges over this 10 year period? Initially the finance charge was $2000 (0.1699/12) = $28.32 After 10 years it will be $990 (0.1699/12) = $14.02 We can get estimate the total finance charges by imagining that we were summing an arithmetic sequence $28.32 + … + $14.02 The sum would be the average value [($28.32 + 14.02)/2] times 120 (the number of terms) = $2540 in finance charges

QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture.

Actually we are summing a geometric series, with first term $2000 (0.1699/12) = $28.32 The next term will be $2000 (1 - 0.02 + 0.1699/12) (0.1699/12) So the constant ratio, r = 1 - 0.02 + 0.1699/12 (r is about 0.994) a ( 1 - r^n) / (1-r) The sum of all the finance charges is actually $2000 (0.1699/12) (1- 0.994^120) / 0.006 = $2447.58 (keeping more accuracy than shown here) So the arithmetic series approximation of $2540 was pretty good!!

Investing Early
If you put $200 into a 401(k) account monthly you would have 20 years
6% 10%

40 years

$ 92,408.18 $ 398,298.15 $151,873.77 $1,264,815.92


				
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