1. Ch. 6.1 Credit Cards: Plastic Money
Objectives
Describe how credit cards are used
Identify 3 categories of credit cards
Determine the new balance that will be shown on a credit card
Calculate the effective rate of interest on a credit card purchase

2. 1. What is a Credit Card and how does it work?
A credit card is a small piece of plastic…..duh! Most cards entitle the holder to charge purchases up to a maximum credit limit. By signing the application for the card the applicant agrees to the credit card terms. The Truth in Lending Act – requires that the credit card company discloses all the terms associated with the card. For example: grace period, membership fee, annual % rate, finance charges, late payment penalties.

3. 2. Types of Cards
There are 4 categories of cards: 1. Single purpose credit cards: there is no fee for this kind of card. The purpose is to encourage the card holder to buy exclusively at that store

4. 2. Types of Cards
2. Multi-Purpose travel and entertainment cards – There is an annual membership fee for these cards. These cards have offers that regular credit cards cannot give. For example, free travelers insurance, discounts, and emergency card replacement. However, these are charge cards, which means that the total balance must be paid at the end of the month.

5. 2. Types of Cards
3. All-purpose bank cards - these are your regular credit cards. There usually is an annual fee. These are accepted at most stores.

6. 2. Types of Cards
Debit Card – Essentially electronic checks. These are not credit. The amount is immediately withdrawn from your bank account. Usually called ATM.
Grace Period - The amount of time that is given to you to pay the charges without interest.

7. Sharpen Your Skills
Ex. Sylvia wants her father to buy her a sewing machine that costs $550. He charges it on a new VISA card with which he has made no other purchases. He will make monthly payments of $60. What new balance will be shown on his first three monthly statements if his bank applies a 1.5% monthly finance charge and he refrains from using the card again? For Finance Charges multiply the balance by .015

8. Sharpen Your Skills Month Previous Balance New Charges (purchases)
Finance Charges
Payment Received
New Balance 1
0.00
550.00 2
8.25
60.00
498.25 3
7.47
445.72 4
6.69
392.41

9. Sharpen Your Skill
Annual Percentage Rate (APR) – for example say the rate is 21%. However, credit card interest is charged on a monthly basis. Monthly interest rate – Since the credit card charges are compounded, we must determine the effective interest rate.

10. Effective Interest Rate Formula