Credit Cards

1. Credit Cards Personal Finance

2. Three friends check into a motel for the night and the clerk tells them the bill is $30, payable in advance.  So, they each pay the clerk $10 and go to their room.  A few minutes later, the clerk realizes he has made an error and overcharged the trio by $5.  He asks the bellhop to return $5 to the 3 friends who had just checked in.  The bellhop sees this as an opportunity to make $2 as he reasons that the three friends would have a tough time dividing $5 evenly among them; so he decides to tell them that the clerk made a mistake of only $3, giving a dollar back to each of the friends.  He pockets the leftover $2 and goes home for the day!  Now, each of the three friends gets a dollar back, thus they each paid $9 for the room which is a total of $27 for the night.  We know the bellhop pocketed $2 and adding that to the $27, you get $29, not $30 which was originally spent.  Where did the other dollar go????

3. Understanding your credit card application is much like a challenging riddle. Much like this riddle, the objective of the application is to trick you by redirecting terms, and emphasizing the wrong information. This presentation will help prepare you to solve the riddle.

4. APR • Annual Percentage Rate. The APR is a measure of the cost of credit, expressed as a yearly rate. It also must be disclosed by the issuer (credit card company) before you become obligated on the account and on your account statements.

5. APR Variable - ‘Warning’! • The key word here is variable - - which means changing. Generally credit cards will emphasize the current APR rate while deflecting as much attention as possible away from the word ‘variable’, and the explanation of what variable means in relation to the credit card.

6. APR Citibank Example • 14.24%variable • Note on the back of the Citibank disclosure the APR for purchases is listed as above. To avoid misunderstanding what your APR actually is, you must read the explanation within ‘Variable Rate Information’

9. APR Variable • The card issuer also must disclose the "periodic rate" - the rate applied to your outstanding balance to figure the finance charge for each billing period. Keep in mind, this issuer is going to work very hard at disguising this rate. Read the contract carefully to ‘solve the riddle’.

10. APR Variable Continued • Some credit card plans allow the issuer to change your APR when interest rates or other economic indicators - called indexes - change. Because the rate change is linked to the index's performance, these plans are called "variable rate" programs. Rate changes raise or lower the finance charge on your account. If you're considering a variable rate card, the issuer must also provide various information that discloses to you: • that the rate may change • how the rate is determined - which index is used and what additional amount, the "margin," is added to determine your new rate.

11. APR Citibank Example • The stated rate for APR on purchases is 14.24%. • The rate is determined by the US Prime Rate (Index Rate) + the stated ‘margin’ (5.99%). • 8.25% (US Prime Rate) + 5.99% = 14.24%

14. APR Continued • What if US Prime climbed to 20%? • 20% + 5.99% = 25.99% • Remember, your APR can go as high as Prime + the stated margin! • The Net - - APR Variable is a changing rate!

15. APR’s continued • The APR variable rate can vary from service to service. For example, Citibank’s APR for balance transfers is 0% until November, 2007. Yet the cash advance APR is US Prime + 14.99%.

16. Default Rate • The default APR is the APR for consumers who default under any circumstances. This is very important to understand because it can be a crushing blow to your credit card debt. The explanation for ‘Default Rate’ is just below the grid at the top of the Citibank application just beside*.

19. Default Rate Continued • According to Citibank, all of your APR’s may automatically increase up to the Default APR under any card member agreement that you have with us because you fail to make a payment to us when due or you make a payment to us that is not honored.

20. Default Rate Citibank Example • The Citibank default rate is US Prime Rate plus up to 23.99%, or up to a total rate of 28.99%, whichever is greater. • Current Default Rate: 8.25% (US Prime) + 23.99% (set margin) = 32.24% • What would the Default Rate be if US Prime Rate was 15%?

23. Free Period • Also called a "grace period," a free period lets you avoid finance charges by paying your balance in full before the due date.

26. Annual Fees • Most issuers charge annual membership or participation fees. They often range from $25 to $50, sometimes up to $100; "gold" or "platinum" cards often charge up to $75 and sometimes up to several hundred dollars.

27. Transaction Fees and Other Charges • A card may include other costs. Some issuers charge a fee if you use the card to get a cash advance, make a late payment, or exceed your credit limit. Some charge a monthly fee whether or not you use the card.

30. Read Carefully! • Credit card companies can change the terms of the agreement for whatever reason they like! • Credit card companies are required by law to make you aware 45 days prior to changing the terms of a credit card agreement. • Note this on the Citibank example under ‘Rates, fees, and terms may change’

33. ‘Minimum Payments’Don’t Get Trapped!! • Credit card companies can charge minimum payments as low as 2% of the total amount owed. • Minimum payment on $8,000 owed would be $160. Yet you would be making interest payments on $7,840!! This would crush you!

34. Minimum Payment Continued • Paying the minimum payment only prevents paying late fees, it does not prevent paying interest on debt.

35. Most Importantly • All of your concerns go away if you pay your credit card debts off in full every month during the grace ‘free’ period.