Use the Interest Rates and Interest Charges given to you ...



Use the Interest Rates and Interest Charges given to you in the handout. This is the example provided on the Federal Reserve website. Read the credit card activity below and then answer the following questions:

Credit Card Activity - assume that you have had this card for more than a year and that the introductory period has passed.

January 1 no balance

January 10 use credit card to pay for a meal at a restaurant $25

January 20 buy a new computer for $1,000 using your credit card

February 1 receive credit card statement and immediately send out payment to cover the entire balance

February 15 transfer balance from another card to this one: $500

February 20 Use credit card to obtain $200 in cash from an ATM machine

March 1 receive credit card statement and immediately send out payment to cover the entire balance

March 12 Paid for airline ticket $750

April 1 receive credit card statement

April 30 send payment out to cover the entire balance

Questions:

1. What interest rate were you charged on the January purchases? NONE BECAUSE YOU HAD NO PREVIOUS BALANCE AND YOU PAID THE BILL RIGHT AWAY

2. What interest rate were you charged for the February 15 balance transfer?

ANSWER: 15.99%

3. What fee were you charged for the February 15 balance transfer?

ANSWER: 3% OF $500 =$15

4. What interest rate were you charged for the February 20 transaction?

ANSWER:21.99%

5. What fee were you charged for the February 20 transaction?

ANSWER: 3% OF $200 = $6

6. What interest rate were you charged for the airline ticket (hint: the bill was not paid until April 25?)

ANSWER:28.99% THE PENALTY APR

7. What other fees did you pay with the April 30 payment?

ANSWER: $29 PENALTY FEES

8. How much do you pay each year just to have this card? ANSWER: $20 ANNUAL FEE OR $12 PARTICIPATION FEE

9. Do you always have to pay interest on:

a. Purchases? ANSWER: NOT IF YOU PAY IT OFF RIGHT AWAY AND YOU DIDN’T HAVE A PREVIOUS BALANCE

b. Cash advances? ANSWER: YES, INTEREST IS CHARGED WHEN YOU RECEIVE THE CASH

c. Balance transfers? ANSWER: DEPENDS ON IF THEY HAVE A SPECIAL INTRODUCTORY OFFER, OTHERWISE YES,

10. Explain the difference between FIXED and VARIABLE interest rates. Explain how variable interest rates are calculated. FIXED DOES NOT CHANGE WITHOUT A 45 DAYNOTICE; VARIABLE IS TIED TO AN INDEX, USUALLY PRIME RATE AND WILL INCREASE/DECREASE IF THE INDEX RATE CHANGES

NEW CREDIT CARD RULES Review the consumer information on new credit card rules at - I will also post this link on the blog.

1. Credit card companies must now send you a 45 day notice before they can increase your interest rate except if you have a ______VARIABLE__________interest rate.

2. CC companies must now include information on how long it will take you to pay off your balance if you only make the minimum payments. It must include the amount you would need to pay each month in order to pay it off in 3 years. How big is the difference in the minimum payment due and the monthly amount needed to pay it off in 3 years according to this example. $__13___ (difference)

Do you think that this will impact consumer behavior regarding making more than minimum payments or do you think this is unnecessarily confusing?

3. The changes include “protections” for underage consumers. Do you agree with these changes? Why or why not?

OTHER MISCELLANEOUS QUESTIONS

1. Name some types of purchases you think would be okay to use a credit card for? (for example: a car? A new tire? College textbooks?

2. Name some types of purchases that you do not think you should use a credit card for?

3. Give an example of when it would be better to use a credit card rather than your debit card simply for the protection that a credit card might provide.

USING THE MINIMUM PAYMENT CALCULATOR

on (The true cost of paying the minimum)



1. If your credit card balance is $1,000 and the interest rate is 10%, and you pay a minimum payment of Interest + 1% of the balance, then how long would it take to pay off your debt and what would you pay in interest?

______ months of payments $_______ in interest

2. If you pay a fixed payment of $25 per month, how long would it take and what would the interest be?

______ months of payments $_______ in interest

How much money did you save? How much time?

Knowing what you now know about credit cards, do you want a credit card? How would you handle one? Under what circumstances would you use one and how? What are your views?

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