Credit Cards and Charge Accounts

1
Credit Cards and Charge Accounts
2
Topics covered

• Credit Cards
• Charge Accounts
• Finance Charges
• Unpaid Balance method
• Average Daily Balance method
• Account Statement

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Credit Card v. Charge Account

• Credit Cards allow you to carry a balance and
  interest is charged. (Visa, MasterCard, Discover)
• Charge accounts must be paid IN FULL at the end
  of a period. (American Express)

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Who Makes Money?

• Credit cards allow consumers to purchase goods
  now and pay for them later.
• Merchants/Stores make money by accepting
  different kinds of payments.
• Credit Card underwriters (Visa, MC) charge a fee
  to banks to allow them to use their services
• Banks who loan the money to consumers make money
  by charging interest

5
Who Pays?

• Consumers pay interest to banks
• Merchants pay a service charge to credit card
  companies (Visa, MC) to use that service

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Monthly Statements

• Both Credit and Charge companies send monthly
  statements. They can be on paper or electronic.
• Previous Balance New Purchases Finance
  Charges Credits Payments New Balance

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Assignment

• problems 5 20 on p. 260

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Finance Charge Unpaid Balance Method p. 261

• The finance charge is computed based on the
  portion of the previous balance that has not been
  paid.

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Formula

• Unpaid Balance Prev. Bal (Payments and
• 
  Credits)
• Finance Charge Unpaid Bal. X periodic rate
• New Bal Unpaid Bal Fin Chg New Purch

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Assignment

• Prob 1-26, pp. 262 - 263

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Finance Charge Average Daily Balance

• AVG Daily Balance sum of daily balance / number
  of days
• Finance Charge Avg Daily Bal x periodic rate

12

• New Balance Unpaid balance finance Charges
  new purchases

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Assignment

• Problems 1 20 p. 264 - 267

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What is Credit?

• Borrowing someone elses money for a period of
  time to purchase goods that you need or desire
• Benefits
• No need to carry large amounts of Cash
• Achieve lifestyle goals more quickly
• Both Businesses and Government agencies use
  credit to finance operations

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Advantages of Credit

• Use of products while you pay for them (car loan,
  mortgage)
• Can be used as a money management tool
• Credit may afford advance notice of sales
• Ability to shop over phone, online or mail
• Receipts help keep accurate records

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Disadvantages of Credit

• Pay more for items because of interest
• It is always less expensive to pay cash
• TEMPTATION TO OVERBUY
• PROMOTES LAZY SHOPPING HABITS
• IMPULSE BUYING Would I pay cash for this item?

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The Effect of Credit Card Debt
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Credit Card Debt

• 500 on a credit card
• 18 interest rate
• Minimum monthly payment of 12.50
• What is the total amount paid
• How long to pay it off?

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Answer

• It will take you 84 months to be rid of your
  debt. In that time, you will pay 365.40 in
  interest.

20
Credit Card Debt

• 500 on a credit card
• 12 interest rate
• Minimum monthly payment of 12.50
• What is the total amount paid
• How long to pay it off?

21
Answer

• It will take you 67 months to be rid of your
  debt. In that time, you will pay 180.03 in
  interest.
• A difference of 6 saved you 185.37 and 17
  payments

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Credit Card Debt

• Paying over the minimum amount will significantly
  reduce the total amount paid and the repayment
  period!!

23

• 500 on a credit card
• 12 interest rate
• Minimum monthly payment of 25.00
• What is the total amount paid
• How long to pay it off?

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Answer

• It will take you 23 months to be rid of your
  debt. In that time, you will pay 60.67 in
  interest.
• Paying 12.50 more than the minimum balance saved
  119.36 in interest and 44 months of payments.