Bell Ringer

• Do you think having a credit card is a good or a bad thing? Why or why not?

Lesson 7-3Computing the Costs of Credit

Learning Goals:Explain credit card rates and methods used for

calculating interest.Discuss credit card practices and how they affect

consumers.Discuss how consumers can make wise credit choices.

Computing Interest on Credit Cards• If you carry an ongoing balance on your credit card,

you will have to pay interest on your account.• Interest and fees you pay are called finance charges• Example fees are Annual Account Fees, Interest Charges,

and Penalities• Fixed versus Variable Rates• Fixed Interest rates do not change from month to month.• They can be raised but only with 30 days written notice.

• Variable interest rates can change every month without notice.

Methods of Computing Interest on revolving accounts (credit card accounts)• Adjusted Balance Method• Interest is calculated based on the amount owed after you have paid

your bill each month. • Previous Balance Method• Interest is calculated based on the outstanding balance at the end of the

previous billing period• Average Daily Balance Method• An adjusted balance is computed for each day on the month. The

adjusted balance for all the days are added and then divided by the number of days. This amount is the average daily balance. Interest is calculated based on the average daily balance. The interest is added at the month of billing period.

Example based on Previous Balance = $500.00, New Charges = $160.00,

Payment = $100.00Adjusted Balance Method

• Previous Balance$500.00

• New Charges+160.00

• Payment- 100.00

• Adjusted Balance$560.00

• Interest for 1 month (18% yearly) $560 x 18% x 30/360

8.40• New Balance (Amount Owed)

$568.40

Previous Balance Method• Previous Balance $500.00• Interest for 1 month (18% yearly)

$500 x 18% x 30/360 + 7.50• New Charges +160.00• Payment - 100.00• New Balance (Amount Owed)

$567.50

Average Daily Balance Method

Common Credit Policies• Minimum Payments are the amount you are required

to pay each month on a credit account.• Penalties and Fees• A penalty is a fee charged for violating a term of the credit

agreement, such as making a late payment.• Over-the-limit fee is a penalty charged when you exceed

your approved credit limit.• Cancellation Fee is a penalty for closing your account prior

to a stated period.• Interest Rate Increases• Lowered Credit Limit

Making Wise Credit Choices• Special Offers• Introductory Rate – A low temporary interest rate on new accounts.• Balance Transfers – A low interest rate on transferring balance from other

credit cards.• Easy Access Credit are types of credit that can be obtained quickly

and easily but often come with high and hidden costs.• Access Checks are provided by a credit card company that allow you to

borrow against your credit card account.• Instant Credit Offer is a savings on the current purchase when you open a new

account.• Payday loan businesses offer a short tem loan to cover expenses until your

next payday. Interest and fees can be substantial.• Online Credit Approval• Make sure it is a reliable site. Avoid credit offers that come to you by e-mail or

pop-up ads. They may be scam.

Making Wise Credit Choices• Credit Card Statement• Compare the charges listed on the statement with your sales receipts and

records of online or telephone purchases, making sure they match.• Verify the payments you have made are shown on the statement.• Verify that credits (such as for returned items) are listed.• Take note of any fees or penalties you have been charged. Determine

whether these fees are permitted according to the credit agreement. You can always call and ask to have them removed.

• Verify that the interest amount and the new balance owed are correct.• Good Credit Practices• Don’t overspend• Don’t make late payments• Try to pay the full amount of credit card balance every month• Be aware of the billing cycle.

Assignment

• Pg. 243 problems 1-15, 17-19• Check you Budget Challenge – do this week’s quiz, pay bills.