credit card debt traps

8/7/2019 credit card debt traps

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What is Credit Card?


3/18

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

Documents

credit card debt traps