1. Chapter 7
Credit Cards

2. Credit Card
A credit card is a payment card issued to users as a system of payment.
Allows cardholder to pay for goods/services based on the holder’s promise to pay for them.

3. Credit Cards
The issuer creates a revolving account and grants line of credit to the consumer. The user can borrow money for payment to a merchant or as a cash advance.
Line of credit is how much money you are allowed to borrow

4. Credit Card VS Debit Card
◦Borrow money from a bank. You pay back this money at a later date.
◦Money you have in your bank account. This money comes out of your account at the time of purchase.
◦ Interest is charged when balance is not paid off in full
◦No interest (unless you overdraft your account!)

5. What’s Important When Choosing a Card?
Low Interest Rate (APR)
Some cards offer a 0% intro APR (balance transfers) for a fixed time.
Fixed or Variable?
No Annual Fee
Credit Limit
Rewards Program
Cash Back

6. Section 7.1 – Account Statements
With a credit card, you receive a monthly account statement
Lists all items purchased during a one-month period
If your previous bill was not paid in full, the credit card company adds on a finance charge

7. Account Statements
A finance charge is interest that is charged for delaying payment
New Balance =
Previous Balance
+ Finance Charge
+ New Purchases
- (Payments + Credits)

8. Example 1 – Account Statements
Billing Date
04/22/12
Previous Balance
$157.42
Finance Charge
$5.21
Payments & Credits
$60.00
New Purchases
$39.99
New Balance
What is the new balance for the credit statement shown?
$142.62

9. 7.2 – Finance Charge: Unpaid-Balance Method
Some companies use the unpaid-balance method to compute finance charges
The finance charge is computed based on the portion of the previous balance you have not paid

10. Finance Charge: Unpaid-Balance Method
Unpaid Balance = Previous Balance
- (Payments + Credits)
Finance Charge = Unpaid Balance x Periodic Rate
New Balance = Unpaid Balance
+ Finance Charge
+ New Purchases

11. Example Emily Walsh’s account statement: Previous Balance of $1,351.00
Payment of $300.00
New Purchases: $65.00 and $38.00
Periodic rate is 1.95 percent
FIND THE NEW BALANCE
Step 1(unpaid balance): $1, – = $1,051.00
Step 2(finance charge): $1,051.00(0.0195) = $20.49
Step 3(new balance): $1,051 + $ $65 + $38 = $1,174.49

12. Pg. 260 #5-14
Pg. 263 #5-12

13. Finance Charge: Average-Daily-Balance Method
Average of the account balance at the end of each day of the billing period
Used to calculate finance charge

14. Average-Daily-Balance Method
= Sum of Daily Balances
Number of Days
Finance Charge = ADB x APR x (days in billing period/365)
New Balance = Unpaid Balance
+ Finance Charge

15. Example 6/01-6/15 $300 15 *$ 6/16 $100 200 1 6/17-7/2 16 TOTAL 4,500
Billing Periods
Payment
End-of-day Balance
# of Days
Sum of Balance
6/01-6/15
$300 15 *$
6/16
$100
200 1
6/17-7/2 16
TOTAL
4,500
200
3,200
200 32
$7,900
What is the average daily balance?
7,900 ÷ 32 = $246.88

16. Example (cont.)
Mario Mario checks the finance charge and the new balance. The finance charge APR is 18%. What is the finance charge? What is the new balance?
$246.88(.18)(32/365) = $3.90
$ = $203.90

17. Calculating Number of Days
6/01 to 6/10 is 10 days
Be careful. 10-1=9. You subtracted the 1st day away, so add it back in =10 days
EX: 7/04-7/09
9-4+1=6 days.