What is Credit Card?

Background Statistics
More than 60% of credit card users carry balances
Only 37.4% were “convenience users” in 03/04

In 03/04, average credit card debt (including those

with no balances!) was $8,000
Those with balance: average about $12,000
The average household pays > $1,000 in interest
and fees annually
The typical cardholder has 7-10 credit cards
Bankruptcy rate continues to soar!
Top 10 Credit Card Traps
1. Universal default The utility bill you sent in a little late may be the reason for your card’s
skyrocketing interest rate.

2. Change of terms Credit card terms are always in flux--those long notices in tiny print may
mean you lose.

3. Teaser rates The low rate you signed up for expires you pay more.

4. Minimum payment If you pay the minimum payment every month you may be on the hook
for a very long time.

5. On time payment You mail the bill before the due date, but it still might be counted as late.
Top 10 Credit Card Traps (Contd..)
6. Double cycle billing If you alternate between paying off and carrying a balance, you’re
paying more interest.

7. Cash advances/convenience checks The interest rates on these are higher than for your
credit card.

8. Penalty interest rates Late payments can raise your interest rate from 7% to 27%!

9. Fees, fees, and more fees As if the penalties weren't enough, there are oftentimes more
fees for pay-by-phone and charging in a foreign country.

10. Balance transfer switcheroos A seemingly lower APR increases your debt!
What is the Worst Credit Card Trap of All?

• Teaser rates?
• Default rates (penalty APRs)?
• Late fees?
• Over-the-limit fees?
• Minimum payments?

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 Case Example
Outstanding balance: $2,000
Interest rate: 18%
Minimum monthly payment: 2% of balance, no
payment less than $15
Interest cost over loan period: $4,183
Paying off the debt will take 23 years!!!

Source: Credit Card Smarts calculator, Advantage Publications

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Factors Affecting Finance Charges
 APR (interest rate)

Grace Period

Balance calculation method

Result: significant effect on the cost of credit.

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Average Daily Balance Method
 Most common computation method used

Outstanding balances added daily

Total is divided by days in cycle

New purchases may or may not be added

Interest assessed each day at daily rate

Transaction Fees
Fee charged each time a credit card is used
Example: 50 cents per charge
Most common transaction fees are for
Cash advances
Balance transfers

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Tiered Pricing

Range of possible APRs quoted

APR determined by applicant’s credit score

Lower scores pay higher APRs

APR unknown until consumer gets card

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Skip-A-Month Offers
Often used around the holiday season
Cardholders can skip payment without penalty
Interest continues to accrue
Increases total cost of borrowing

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“Teaser” (Introductory) Rates
Low initial interest rates
Entice people to apply for credit card
May only apply to balance transfers, not new
purchases (read the fine print!)
Check disclosure box for non-promotional APR

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Punitive Policies
“Inactivity” fees for:
not using credit card within specified period
using card less than specified number of times
charging less than a certain dollar amount

Penalty for paying less bill in full on time

Target: “convenience users” who do not pay interest

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Credit Card Tips
Read disclosure charts carefully
Shop around before accepting a credit card
Don’t use credit to extend your income
Pay bills in full, if possible
If not, pay as much of balance as possible
Avoid using full credit line
Protect your account numbers

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More Credit Card Tips
Match credit cards to bill-paying habits
Ask creditors to make concessions:
drop annual fee
reduce interest rate (APR)

Limit your debt level

Read mail from card issuers
Complain if you are unfairly penalized

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 How to Save Money
Pay bill in full to avoid finance charges

If carrying a balance, shop for a lower interest rate

If paying in full, shop for a card with a grace period

and no annual fee
 Pay bill immediately or ASAP to avoid late fee
(short turnaround time)

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THANK YOU