Chapter+6-+Credit+Cards+-+posted (1) - Chapter 6 Credit Cards Open Credit What is Credit Credit = buying something today with the obligation to pay

Chapter+6-+Credit+Cards+-+posted (1) - Chapter 6 Credit...

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Chapter 6 Credit Cards & Open Credit
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Credit = buying something today with the obligation to pay later Consumer Credit Any non-mortgage credit purchases Auto loan, credit cards, vacation loans, student loans, etc. Open or Revolving Credit Borrow up to your credit limit Variable payback – minimum payment to full amount Interest charges build on the outstanding balance What is Credit?
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Examples: Credit cards VISA, MasterCard, store credit cards, etc. Open accounts at stores Drug stores, hardware stores, feed/supply stores Operating lines of credit (ag & business) For purchasing operating inputs Home Equity Line of Credit More on these later All work about the same as credit cards Open or Revolving Credit
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Schumer Box – Read It!!!
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Interest rate (APR) Measured by Annual Percentage Rate (APR) APR = estimate of actual annual cost of the account Includes most fees as well as interest charges Allows comparison of different accounts Several different rates Purchases rate Balance transfer rate Cash advances rate - Ouch! Default rate – Doh! Main Factors
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Interest Rates may be fixed or variable Fixed rates on credit cards may change over time Need 45 days notice from company Variable rate Variable rates usually tied to an index (prime, LIBOR) Example: Variable rate = prime rate + 2.99% Variable rate may change each month Main Factors
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Interest rates (cont.) Teaser rates Short-term low rates – as low as 0% APR After stated term, rate increases National average credit card APR = 17% - 19% Main Factors
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Calculating the balance owed Several methods & variations Average Daily Balance Method Most common method Add up each day’s balance, divide by number of days Previous Balance Method Uses the previous statement’s ending balance Higher interest charges Adjusted Balance Method Subtracts any payments from previous balance Lower interest charges than Previous Balance method Main Factors
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Cash Advance Bad way to get cash (IMO) Borrow cash against your credit limit
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