CS+275+Week+5+Managing+Credit+Lecture.ppt - Consumer...

Consumer Science 275
Consumer Finance
Week 5
Managing Credit Wisely

Chapter 6
Using Credit Cards:
The Role of Open
Credit

Learning Objectives
1. Know how credit cards work.
2. Understand the costs of credit.
3. Describe the different types of credit and
charge cards.
4. Know what determines your credit card
worthiness and how to secure a credit card.
5. Manage your credit cards and open credit.

Introduction
•
Convenient, but if you’re not careful, credit
cards will cost you.
•
Some charge over 20% interest on unpaid
balances.
•
Most people don’t consider interest charges
on purchases they have to have.
•
Manage credit wisely to avoid high interest .

Pre-Plastic “Charge Cards”
•
“Charge Coins” first
issued in 1865
–
Mostly by Department
stores
–
Used account numbers
•
Charge plates
–
Used until 1960s

“Charge Cards”
•
Issued by oil companies and department
stores in early 1900s
•
“Charg-It” card issued in 1946 by Brooklyn
bank
–
Merchants forwarded bills to bank for payment
•
Diner’s Club was first major card in 1950
–
By 1951 over 20,000 in use
–
Technically a credit card with no revolving
balance—payable in full every month

“Charge Cards” to “Credit Cards”
•
American Express issued T&E (travel and
entertainment) card in 1958
–
First with plastic in 1959
•
First card with “ revolving credit ” was
introduced in 1959
–
Now could carry a balance
•
First widespread card issued was by Bank of
America in 1966
–
BankAmericard

A First Look at Credit Cards
and Open Credit
•
Credit involves receiving cash, goods, or services with an
obligation to pay later.
•
Open credit ( revolving credit ) is a line of credit extended
before the purchase.
•
Unpaid balance plus interest carries over to next month.
•
Pay back at your pace as long as you meet minimums
•
Unpaid balances plus interest carry over to next billing cycle
•
Higher balances on credit lines, higher costs.

Interest Rates
•
Annual Percentage Rate (APR)
•
The true “ simple interest rate ” paid over the life of the
loan.
•
Calculated same way but what varies is what is
included
•
APR for all consumer loans must be disclosed.
•
Truth in Lending Act

“ Schumer Box”
The credit card issuer must tell you:
•
the APR or APRs
•
finance charges, including the minimum finance charge
•
the minimum payment required
•
the method used for computing your outstanding balance
•
the actual company offering you credit (sometimes not the
company marketing the card)
•
the credit limit
•
the grace period
•
the annual fee, if any
•
the fees for credit insurance, if any

Interest Rates
Key things to look out for:
•
Fixed APR vs. variable APR
•
Different rates for different products
•
Silver
•
Gold
•
Platinum
•
Teaser Rates
•
Different rates for different lines
•
Card balance
•
Cash advance balance
•
Past due balance
•
Compound interest

Let’s take another look

Calculating the Balance Owed
Key is balance calculation method
•
Average daily balance method (most common)
•
Mathematical average calculated from summing the individual
daily balances and dividing by the number of days in the billing
period.
•
Some methods include new purchases when determining the daily balance,
while others exclude the new purchase amounts.