Understanding Open Credit: Costs, Interest Rates, and Fees of Using Credit Cards, Slides of Fundamentals of E-Commerce

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Chapter 6

Using Credit Cards: The Role of Open Credit

Definitions and Examples of Credit •

Credit -- receiving cash, goods, or services with anobligation to pay later.^ –

Examples -- auto loans or personal loans

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Open credit -- credit that you can use and repay atyour pace so long as you pay the required minimummonthly payment.^ –

Examples -- Credit cards or department store credit cards

Interest Rates

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Annual percentage rate (APR) – true simpleinterest rate paid over the life of the loan

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Teaser rates – introductory rates used toattract new customers, some as low as 2.9%

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Most credit cards compound interest

Balance Calculation Methods^ •

Average daily balance,most common^ –

Including new purchases – Excluding new purchases – Two-cycle

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Previous balance – mostexpensive

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Adjusted balance – leastexpensive

The Grace Period

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Normally 20 to 25 days, excluding cashadvances

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Doesn’t apply if you carry a balance

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With no balance, you could avoid paying for apurchase for nearly 2 months

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Not all credit cards offer a grace period

The Annual Fee

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Range from $0 to $100 (American Expresscharges $300 for their Platinum card.)

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70%of the 25 biggest card issuers don’t chargean annual fee.

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Merchant’s discount fee -- charged tomerchants, typically 1.5% to 5.0% of thepurchase amount

The Pros of Credit Cards

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Convenience or ease of shopping

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Emergency use

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Consume and use before the purchase is fullypaid for

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Bill consolidation

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Can be used in anticipation of price increases

The Pros of Credit Cards

(cont’d)

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Interest-free credit

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Make reservations

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Use as identification

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A source of freebenefits