Credit = buying something today with the obligation to pay laterConsumer 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 balanceWhat is Credit?
Examples:◦Credit cards VISA, MasterCard, store credit cards, etc.◦Open accounts at storesDrug stores, hardware stores, feed/supply stores◦Operating lines of credit (ag & business)For purchasing operating inputs◦Home Equity Line of CreditMore on these laterAll work about the same as credit cardsOpen or Revolving Credit
Schumer Box – Read It!!!
Interest rate (APR)◦Measured by Annual Percentage Rate (APR)◦APR = estimate of actual annual cost of the accountIncludes most fees as well as interest charges◦Allows comparison of different accounts◦Several different ratesPurchases rateBalance transfer rateCash advances rate - Ouch!Default rate – Doh!Main Factors
Interest Rates may be fixed or variable◦Fixed rates on credit cards may change over timeNeed 45 days notice from company◦Variable rateVariable rates usually tied to an index (prime, LIBOR)Example: Variable rate = prime rate + 2.99%Variable rate may change each monthMain Factors
Interest rates (cont.)◦Teaser ratesShort-term low rates – as low as 0% APRAfter stated term, rate increases◦National average credit card APR = 17% - 19%Main Factors
Calculating the balance owed◦Several methods & variations◦Average Daily Balance MethodMost common methodAdd up each day’s balance, divide by number of days◦Previous Balance MethodUses the previous statement’s ending balanceHigher interest charges◦Adjusted Balance MethodSubtracts any payments from previous balanceLower interest charges than Previous Balance methodMain Factors
Cash Advance◦Bad way to get cash (IMO)◦Borrow cash against your credit limit◦