The Cost of Credit Cards

Presented by:

What is a Credit Card?

Fast Fact• Credit Cards let you charge

purchases up to a preset dollar limit, called your available credit or credit limit

Fast Fact• Credit cards like Visa and MasterCard are

issued by banks, which charge an interest rate – called Annual Percentage Rate (APR) – on purchases

Fast Fact• Some credit cards include annual fees –

once a year fees for the privilege of using the card

Fast Fact• All credit cards charge late fees – charges

incurred when payments are late

What is the difference between a credit card and a debit card?

Fast Fact• Debit cards are not credit cards; debit

cards are similar to checks, allowing retailers to debit, or reduce, your bank account directly for the amount of a purchase

When you use a debit card for purchases which of the following are true?

A. You are billed monthly for the amount of money you charge to the card.

B. Money is deducted directly from your account

C. A bank will approve debit transactions even if a person has insufficient funds in their account.

B and CB. Money is deducted directly from your

accountC. A bank will approve debit transactions even

if a person has insufficient funds in their account (then the bank tacks on an overdraft fee).

How is the interest charge for a credit card calculated?

Credit Card QuestionWhat is the average interest rate for a credit

card?

A. 5.9%B. 11.9%C. 18.9%

C. 18.9%That’s almost 20% more you are paying when

you use a credit card. Even if you bought something on sale, you are paying 20% more

when you use your credit card.

Fast Fact

Simple Interest =Principal X Interest Rate X Time

Example• $1,000.00• 18% APR • 1 month billing cycle• What is the interest?

Example• PRINCIPAL = $1,000.00• RATE = 18% APR • TIME = 1 out of 12 months

Example• PRINCIPAL X RATE X TIME

1,000 x 18% x (1/12) = $15

Credit Card Myth• Paying just the minimum balance

each month is okay

Credit Card Fact• Paying just the minimum balance

extends your balance and payments for months, even years adding to the interest paid

Example• 1,000 x 18% x (1/12) = $15.00– Pay $20 minimum payment.

• 1,000 + 15.00 – 20.00 = $995.00– 995.00 x 18% x (1/12) = $14.93

• Pay $20 minimum payment.– 995.00 + 14.93 – 20.00 = $989.93

• Total paid = $40, reduced balance $11

If you kept paying $20 a month, how long would it take you to pay off your balance?

At that rate it would take about 90 months or 7.5 years to pay off the card!!!

How much interest will you pay?

• At that rate you would pay approximately $800 in interest!

• Your initial $1000 purchase now cost you $1800!

When are credit cards and purchases good?

Fast Fact• When you need protection on a

repair or purchase, e.g. auto, appliances, mail order

Fast Fact

• As a safe substitute for cash

Fast Fact• When placing orders by phone or internet

Fast Fact• As a means of identification

Fast Fact• When accurate records are needed

What if I have credit card debt?

Paying Credit Card Debt• Stop making purchases using credit –

pay cash!

Paying Credit Card Debt• Pay more than the minimum balance

each month.

Paying Credit Card Debt• Negotiate with the bank for a lower

interest rate, or transfer the balance to a credit card with a lower interest rate

Questions? Comments?