2022 AFBA Financial Planning Guide

Chapter 11. Personal Credit Credit Cards............................................................................................................................. 11–1 Consumer Loans...................................................................................................................... 11–2 Home Mortgages..................................................................................................................... 11–3 Education Loans. ..................................................................................................................... 11–4 Reverse Mortgages.................................................................................................................. 11–5 Credit History........................................................................................................................... 11–6 Credit Freeze. .......................................................................................................................... 11–7 Bankruptcy. ............................................................................................................................. 11–8

Most credit cards do not charge interest as long as the entire balance is paid within a specified “grace period” which is generally 20 to 25 days from the date of the monthly statement. However, about 25% of all credit cards charge interest from the date that a purchase is posted to the account. Consequently, the availability of a grace period is another factor to consider when choosing between credit cards. Determining the Account Balance. The account balance consists of all unpaid purchases plus the monthly interest charge. Credit card companies normally use one of three methods to calculate the monthly interest charge (remember, the monthly interest is not payable as long as all transaction charges are paid within the applicable grace period). a. Average Daily Balance. This approach totals the daily account balances and then divides by the number of

11–1. CREDIT CARDS. According to the American Banking Association, about 7 in 10 Americans have at least one credit card. Credit cards are considered open or revolving credit because the card provides credit before the purchase and can be continually reused as long as a minimum payment is made each month. Interest Rate. The interest on credit cards is expressed as an Annual Percentage Rate (APR). The APR is stated on a simple interest or principal only basis. If the card charges interest on unpaid balances, the effective rate is higher. For example, if you carry a balance on a card that requires a minimum monthly payment with a stated APR of 19.8%, the effective annual rate is closer to 21.7%. Since the Federal Truth in Lending Act requires that all lenders disclose the APR, it is a good place to start when evaluating alternative lines of credit.

CHAPTER 11: PERSONAL CREDIT

Made with FlippingBook. PDF to flipbook with ease