Download - credit card debt traps
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What is Credit Card?
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Background Statisticsy More than 60% of credit card users carry balances
y Only 37.4% were convenience users in 03/04
y In 03/04, average credit card debt (including thosewith no balances!) was $8,000
y Those with balance: average about $12,000
y The average household pays > $1,000 in interestand fees annually
y The typical cardholder has 7-10 credit cards
y Bankruptcy rate continues to soar!
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Top 10 Credit Card Trapsy 1. Universal default The utility bill you sent in a little late may be the reason for
your cards skyrocketing interest rate.
y 2. Change of terms Credit card terms are always in flux--those long notices intiny print may mean you lose.
y 3. Teaser rates The low rate you signed up for expires you pay more.
y 4. Minimum payment If you pay the minimum payment every month you maybe on the hook for a very long time.
y 5.On time paymentYou mail the bill before the due date, but it still might becounted as late.
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Top 10 Credit Card Traps (Contd..)y 6. Double cycle billing If you alternate between paying off and carrying a
balance, youre paying more interest.
y 7. Cash advances/convenience checks The interest rates on these are higherthan for your credit card.
y 8. Penalty interest rates Late payments can raise your interest rate from 7% to27%!
y 9. Fees, fees, and more feesAs if the penalties weren't enough, there areoftentimes more fees for pay-by-phone and charging in a foreign country.
y 10.Balance transfer switcheroosA seemingly lower APRincreases your debt!
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What is theWorst redit ardTra
ofAll?
Teaser rates?
Default rates (penalty APRs)?
Late fees?
Over-the-limit fees? Minimum payments?
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Case Exampley Outstanding balance: $2,000
y Interest rate: 18%
y
Minimum monthly payment: 2% of balance, nopayment less than $15
y Interest cost over loan period: $4,183
y
Paying off the debt will take 23 years!!!
Source: Credit Card Smarts calculator, Advantage Publications
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Factors ffecting Finance Charges
y APR (interest rate)
y Grace Period
y Balance calculation method
Result: significant effect on the cost of credit.
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Average Daily Balance Methody Most common computation method used
yOutstanding balances added daily
y Total is divided by days in cycle
y New purchases may or may not be added
y Interest assessed each day at daily rate
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Transaction Feesy Fee charged each time a credit card is used
y Example: 50 cents per charge
y Most common transaction fees are for
y Cash advances
y Balance transfers
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Tiered Pricing
y
Range of possible APRs quotedyAPR determined by applicants credit score
y Lower scores pay higher APRs
yAPR unknown until consumer gets card
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Skip-A-Month Offersy Often used around the holiday season
y Cardholders can skip payment without penalty
y Interest continues to accrue
y Increases total cost of borrowing
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Teaser (Introductory) Ratesy Low initial interest rates
y Entice people to apply for credit card
y May only apply to balance transfers, not newpurchases (read the fine print!)
y Check disclosure box for non-promotional APR
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Punitive Policiesy Inactivity fees for:
y not using credit card within specified period
y using card less than specified number of times
y charging less than a certain dollar amount
y Penalty for paying less bill in full on time
y Target: convenience users who do not pay interest
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Credit Card Tipsy Read disclosure charts carefully
y Shop around before accepting a credit card
y Dont use credit to extend your income
y Pay bills in full, if possible
y If not, pay as much of balance as possible
yAvoid using full credit line
y Protect your account numbers
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More Credit Card Tipsy Match credit cards to bill-paying habits
yAsk creditors to make concessions:
y drop annual fee
y reduce interest rate (APR)
y Limit your debt level
y Read mail from card issuers
y Complain if you are unfairly penalized
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How to Sa
v
e Moneyy Pay bill in full to avoid finance charges
y If carrying a balance, shop for a lower interest rate
y If paying in full, shop for a card with a grace periodand no annual fee
y Pay bill immediately or ASAP to avoid late fee
(short turnaround time)
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THANK YOU