Chapter 3
Credit Cards
Ken Long
New River Community College
Dublin, VA 24084
http://www.nr.cc.va/fin107
1
Should I switch to a
lower rate credit card?
Maybe No
Not if the new card
uses the two-cycle
method of interest
calculation
2
What are the two interest
calculation methods?
Average daily balance
Two-cycle
3
What is the Average
Daily Balance method?
Interest at time of billing is
calculated by adding up
the interest charges for
each day of a 25 day cycle
4
With an interest of 18% and
a balance of $1,500 the
interest the first day is?
$1,500 x .18 = $270
$270/360 = .75
5
What is the interest the
second day of the cycle?
$1,500 + .75 = $1,500.75
$1,500.75 x .18 = $270.14
$270.14 / 360 = .75
6
What is the interest the
third day of the cycle?
$1,500.75 + .75 = $1,501.50
$1,501.50 x .18 = $270.27
$270.27 / 360 = .75
7
How much interest
will I owe at the
end of the cycle?
$22.50
8
How does the twocycle method work?
Each billing cycle is
two months instead of
one month despite
monthly billing
9
Suppose I owe $1,500 and
pay $500, what is my
balance the second month?
With the average daily
balance method
$1,000
10
Suppose I owe $1,500 and
pay $500, what is my
balance the second month?
With the two-cycle method
$1,500
11
All else being equal,
what is the difference?
You will pay about twice as
much with the two-cycle
method on any balance
carried over
12
Which credit card
company uses the
two-cycle method?
The Discover Card
Some MasterCards
and VISA as well
13
What is a time tiered
interest calculation?
The interest rate is different
for old purchases and new
purchases
14
What are new purchases?
Purchases made in the current
billing cycle and previous
are considered new
15
What are old purchases?
Purchases made more
than two billing cycles
ago and carried
forward are old
16
What is the difference in
interest rates?
Typically new purchases
9.9% and for old
prime + 9.9%
17
What is the name of
this credit card?
Prime Option MasterCard
18
Does it make any difference
when I pay my bill as long
as it is paid on time?
Yes
Every day the bill is
not paid you owe
another day of interest
19
What is a grace period?
That time which you
are not charged
interest on a purchase
20
Do I have a grace period
if I carry over a balance
from month to month?
NO! A grace period
applies only if you
start the month with
a zero balance
21
Is there a credit card
that always gives me a
grace period?
American Express Optima
True Grace Card
22
Why should I pay off my
balance each month?
To take advantage of the
grace period and to
avoid interest and
possibly other charges
23
Is a low minimum
payment a good thing?
NO! The lower the
monthly payments
you make the longer
and the more interest
you will pay
24
Sometimes I can skip
payments without penalty,
is this a good thing?
NO!
Interest charges
continue to be
accrued each day
25
How do credit cards
make money?
26
Charging retail store owners
a percentage of every purchase
made with their card
Penalty fees
Annual fee
Interest
27
How do I compare
different credit cards?
28
Cash advance fees
Penalty fees
Fixed or variable interest rate
Billing method
Annual fee
29
What are some
perks that go along
with credit cards?
30
Insurance
Flight and hotel arrangements
Guarantees
Record keeping
Convenience
31
How do I qualify for
a low interest rate
credit card?
32
Close any accounts not needed
Pay down high balances
Be careful not to have a high debt
to income ratio
Do not mention consolidation
Apply to no more than 2 card
companies in any 6 month period
33
What are some tips in
using credit cards?
34
Beware insurance's
Switch to a lower interest rate
Avoid impulse buying
Mail payments as soon as you can
Keep track of purchases in
checkbook - avoid double spending
Pay off balance in full each month
 Use short term savings account
35
Why should I mail my
payments in promptly?
If you carry over a
balance, the sooner you
make a payment the
more money you save
36
What is
double spending?
When you charge something but
feel like you still have the money
- you spend the money again
37
How do I avoid
double spending?
Subtract from your
checkbook any money
spent when using your
credit card if you plan to
pay it off with the next bill
38
How can I use my short
term savings account?
For any unusual or large
outlays that you plan to pay
off, take the money from
your short term savings
39
What is
impulse buying?
The feeling that you are
using play money
40
Should I feel a
loyalty to my credit
card company?
NO! Never hesitate to
cancel a card if
another card can give
you a better deal
41
Are the insurance's
that come with a
card a good thing?
That all depends!
Usually they are
much more expensive
than the same insurance
coverage elsewhere
42
Can I challenge a
rate increase?
Yes!
Some card companies
will offer you a lower
rate if you ask
43
I have a credit card with
my ex-spouse, am I liable
for all charges made?
Yes! If your ex-spouse does
not pay - you must pay or
be sued and suffer a bad
credit report
44
END
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