Chapter 6: credit cards
Chapter 6: credit cards AAEC 2104
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This 3 page Class Notes was uploaded by Jennifer Cartwright on Sunday March 20, 2016. The Class Notes belongs to AAEC 2104 at Virginia Polytechnic Institute and State University taught by Dr. White in Spring 2016. Since its upload, it has received 26 views. For similar materials see Personal Financial Planning in Agricultural & Resource Econ at Virginia Polytechnic Institute and State University.
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Date Created: 03/20/16
Chapter 6: Credit Cards and Open Credit What is Credit? o Credit is buying something today with the obligation to pay later o Consumer credit Non-mortgage credit purchases Auto loan, credit card, vacation loans o Open or Revolving credit Borrow up to credit limit Variable payback Minimum payment to full amount Interest charges build on the outstanding balance Open or Revolving Credit o EX: Credit cards Open accounts at stores Operating lines of credit Home equity line of credit Main Factors o Interest Rate (apr) Measure by annual percentage rate APR is the estimate of actual annual cost of the account Allows comparison of different accounts Different rates Purchases rate Balance transfer rate Chas advances rate Default rate May be fixed or variable Fixed rates on credit cards can change over time o 45 days notice from company Variable rate o Variable rates usually tied to an index o Variable rate may change each month Teaser rates Short term low rates After stated term, rate increases o Calculating the balance owed Average daily balance method Most common Add up each day’s balance, divide by number of days Previous balance method Uses the previous statements ending balance Higher interest charges Adjusted balance method Subtracts any payments from previous balance Lower interest charges than PBM o Cash Advance Borrow cash against your credit limit Pay advance fee High apr on advances Starts accruing immediately o Grace period Time from initial purchase to first interest charges No grace period if there is an outstanding balance o Annual Fee Fee charge just to have card o Other Fees Minimum interest charge Balance transfer fee Cash advance fee Late fee Over the limit fee Types of open credit o Bank credit cards Issued by banks o Variations of bank credit cards Premium or platinum cards Affinity cards Secured credit cards Collateral o Travel and Entertainment cards Not revolving- entire balance each month Probably an annual fee o Single purpose cards Used for only one store Good way to limit spending o Charge accounts Use product/service today, pay at the end of the month Advantages of Credit Cards o Convenience o Safer o Great for emergences o Helps with record keeping o Internet shopping o Helps build credit history o Extra warranties and consumer protection Disadvantages o Typically spend more with credit card vs cash o Easy to lose track of purchases o Fees and interest charges o Live above your means now but pay for it later o Destroy your credit history if used unwisely Getting a credit card o 5 c’s of credit Character: measure by credit score/history Capacity: current income Capital: value of investment assets Collateral: only for secured credit cards Conditions: overall economy Troubleshooting credit card situation o Determne how long it will take to pay balance in full o Switch to lowest apr card possible o Use savings to reduce credit card balances o Pay credit card balances with home equity line o Work with creditor Credit history o Creditors report to credit bureaus Credit limits Outstanding balance Payment history Date opened Judgement, collections o Used to calculate credit score o
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