Credit Cards

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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!

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7? 8? 9

• Lets look at the difference between
• what you would pay for a
• 30-year 200,000 mortgage
• with interest rates of 7, 8 and 9.

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• 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?

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Big Difference!

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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.

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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 cant 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.

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Finance Charges

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

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Finance Charges arent your biggest problem!

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

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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
  introductoryfixed 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 doesnt 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!

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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 wont 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.

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Annual Percentage Rate (APR) for
Purchases Variable APR 16.99 See explanation
1 below for Default APR and 2 for Variable-Rate
Information.
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.
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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.
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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 wont be! Read his fine print
carefully. 6. What will Michaels cash back
reward actually be?
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• Lets 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 Michaels minimum payment is 2 of his new
  balance. The credit card company
• will always tell you what your minimum payment is
• If you dont 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 0
• Purchases 290
• Balance if paid in full 290
• Finance charge _____
• Other fees _____

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The Multiple Credit Card TrapKeeping track of
one credit card successfully takes time and
effort. Dont 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.
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Minimum Payment Trap (2000 balance)
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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) HmmYou 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
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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 - rn) / (1-r) The sum of
all the finance charges is actually 2000
(0.1699/12) (1- 0.994120) / 0.006 2447.58
(keeping more accuracy than shown here) So the
arithmetic series approximation of 2540 was
pretty good!!
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Investing Early

• If you put 200 into a 401(k) account monthly
  you would have