Lecture 7: Assessing, Managing, and Securing Your Credit (Part 2)

Types of Credit Cards: Specialized Cards

A card that is honoured only by a specific retail establishment (e.g. Walmart).

• Interest rate charged is normally higher than that charged on standard or prestige cards.

• Some credit cards offer rewards to cardholders (e.g. gas, cash back, travel).

Types of Credit Cards: Prestige Cards

A card issued by a financial institution to individuals with high incomes and exceptional credit histories.

• Usually charge an annual fee.

• Offer additional benefits (priority access to private jets, concierge service at luxury hotels).

Types of Credit Cards: Balance Transfer Cards

A card that allows you to transfer the balance, at a low introductory interest rate, from an existing card.

• Pay off the balance during the introductory rate period.

Types of Credit Cards: Student Cards

A card that helps you establish a credit rating while you are still in school.

• Create credit capacity

• Simplified application process.

Types of Credit Cards: Secured Cards

A card that is appropriate for individuals who have had credit problems.

• Credit limit is “secured” by funds on deposit.

Types of Credit Cards: Prepaid Cards

A card that has a preloaded amount of funds.

• Card can be reloaded.

• Convenient for people who do not have bank accounts.

• Fees can be high.

Credit Limit

The maximum amount of credit allowed on an individual’s credit card.

• Good practice is only using up to 30% of this amount.

Overdraft Fee

In which credit cards allow purchases beyond stated credit limit, for a fee.

Annual Fee

The yearly cost of owning a specific credit card.

Billing Period

The time between two credit card statement dates, in which the credit card issuer adds up all your transactions during the billing period.

• This amount, plus any finance charges and cash advances are added to your outstanding balance.

• Period typically lasts 30 days.

• Good practice is making large purchases at the beginning of your billing period.

Grace Period

The period of time from when the credit card statement is “closed” to the time the bill is due.

• Usually about 20 days.

• There is no interest if the balance is paid during this period.

• Credit card issuer essentially provides you with free credit (i.e., you spent money but don’t have to pay it back yet, and interest hasn’t been charged).

Cash Advances / Convenience Cheques

A method to gain immediate access to cash using your credit card.

• Interest is charged starting from the date the loan is made or a purchase is made (i.e., no grace period).

• Extremely costly source of financing and should be used only as a last resort.

Credit Card Financing

In which you pay only a portion of the monthly credit card bill.

• Interest rate is commonly between 20 and 30 percent.

• Interest is usually compounded daily.

• Rate may be variable, fixed, tiered, or may be a teaser rate.

Finance Charge

The interest and fees you must pay as a result of using credit (outside of the grace period).

• Either $10 or 3% of the outstanding balance, whichever is greater.

• Applies only to balances that were not paid in full before their due date.

Average Daily Balance Method

A method of credit card financing in which the interest is charged on the average daily balance for the billing period.

• Average daily balance is calculated by (total of your ending daily balances) / (number of days in the billing period). Multiply the average daily balance by the daily interest rate.

• Your finance charges will be lower if you pay part of the outstanding balance during the billing period.

Monthly Minimum Payments

A method of credit card financing in which you pay only the minimum balance each month.

• You should always strive to pay off your entire credit card balance in full each month.

Credit Card Statement

Details why your new balance differs from the balance shown on your statement for the previous month.

• Takes into account your previous balance, purchases, cash advances, payments, and finance charges.