5.03 Credit Card Costs and Calculations

The Cost of Credit

• Borrowing money has its advantages and disadvantages.
• Credit cards are a common form of debt.
• Credit cards allow users to buy now and pay later.

How Credit Cards Work

• Cost of credit: Total amount a borrower owes the lender for a loan above the loan amount.
• Credit card issuers (e.g., Chase Bank) loan money to consumers.
• Credit card networks (e.g., Visa, Mastercard) process transactions.
• APR (Annual Percentage Rate): Total cost of borrowing money for one year, expressed as a rate.
• Periodic Interest Rate: Rate charged on a loan over a specific period (e.g., daily rate is APR / 365).
• Average Daily Balance: Method to calculate interest based on the sum of daily balances divided by the number of days in the billing period.

Finance Charge Calculation Example

• Purchases:
  • April 1st: Laptop for $1,000$
  • April 4th: Brakes for $400$
  • April 8th: Printer for $100$
• Daily balances increase with each purchase.
• Finance charge (interest) is calculated daily using the daily periodic rate.
• Example: If APR is 15%, daily periodic rate is $0.041096\%$.

Grace Periods and Additional Fees

• Credit card issuers typically offer a 21-28 day grace period without finance charges.
• If the balance is not paid within the grace period, finance charges apply.
• Minimum payments are often allowed, but interest accumulates on the remaining balance.
• Late fees are charged for not meeting the minimum payment and are added to the balance.
• Annual fees may be charged for having the credit card.
• Not paying at least the minimum can negatively affect your credit rating.