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CREDIT CARDS

CREDIT CARDS. Interest, APR, Balance Transfers and Rewards. Learning Intentions. Define what interest is. Understand the term interest rates. Understand the term APR. Understand the link between interest rates and APR. Understand how to calculate interest.

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CREDIT CARDS

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  1. CREDIT CARDS Interest, APR, Balance Transfers and Rewards

  2. Learning Intentions • Define what interest is. • Understand the term interest rates. • Understand the term APR. • Understand the link between interest rates and APR. • Understand how to calculate interest. • Complete problems in relation to interest. • Understand what balance transfers are and how they work. • Understand what rewards are. • List advantages and disadvantages of rewards.

  3. What is interest? Interest – The cost of borrowing money. If you wanted to borrow a small amount of money from a friend or parent they will usually give it to you and ask you to pay it back. Therefore there is no cost. However if you borrow an amount of money from a bank, loan or credit card company they will generally charge you some extra money in addition to paying back your loan. This extra money is called INTEREST.

  4. Interest Rate A common phrase when talking about interest is Interest Rate. The Interest Rate is the rate at which a bank, loan or credit card company will charge you on the loan you have taken. Interest Rates are generally shown as a percentage.

  5. Interest Rates and APR APR is another common phrase used in the area of interest. APR stands for Annual Percentage Rate. The Annual Percentage Rate is the rate of interest charged throughout a whole year. However APR also includes other financial charges such as fees and costs paid to acquire the loan, and the term of the loan. Therefore it is generally higher than interest rates. Like interest rates it is expressed as a percentage. APR is the best way to compare the cost of borrowing from one lender to another. We will use APR figures when completing loan calculations.

  6. CREDIT CARD CALCULATIONS

  7. Method One – Using the Formula "Jim wants to borrow £1000 to buy a new car. He decides to use his credit card which is 18.9% APR. He wants to have it paid back after one year. How much does he have to pay back?" • We can use a formula of P x R x T = Interest to calculate the interest paid. Where P(principal) is the amount borrowed, R is the rate at which its borrowed (APR) and T is the time in years in which is loan is taken for. Therefore the example above will look as follows, • P= £1000 R = 0.189 T= 1 year (Note: R must be converted into decimal form to complete this formula. This can be done by dividing 18.9% by 100.) • P x R x T = 1000 x 0.189 x 1 • Interest = £189. • This is the value of interest only and therefore must be added to the original loan amount to find the amount paid back. Therefore Jim will have to pay back £1189.

  8. Method Two- Using Fractions "Jim wants to borrow £1000 to buy a new car. He decides to use his credit card which is 18.9% APR. He wants to have it paid back after one year. How much does he have to pay back?" Find 18.9% of £1000. 18.9% = so x Therefore the interest is £189. This must be added to the original value of £1000. £189 +£1000 = £1189 Amount Jim has to pay back is £1189

  9. Method Three – Using Decimals "Jim wants to borrow £1000 to buy a new car. He decides to use his credit card which is 18.9% APR. He wants to have it paid back after one year. How much does he have to pay back?" Find 18.9% of £1000 Find 18.9% as a decimal. 18.9% ÷ 100 = 0.189 So 0.189 x £1000 = £189 Therefore the interest is £189. This must be added to the original value of £1000. £189 +£1000 = £1189 Amount Jim has to pay back is £1189

  10. Method Four – By parts "Jim wants to borrow £1000 to buy a new car. He decides to use his credit card which is 18.9% APR. He wants to have it paid back after one year. How much does he have to pay back?" Find 18.9% of £1000 Find 1% of £1000 1000÷ 100 = 10 10 x 18.9% = 189 Therefore the interest is £189 This must be added to the original value of £1000. £189 +£1000 = £1189 Amount Jim has to pay back is £1189 

  11. Credit Card Calculations Complete the following calculations using the formula method. P x R x T = Interest • My credit card has 23.2% APR. I pay £2000 for an object. I want to pay it back in two years time. How much do I pay back in total.? • My credit card has 33.3% APR. I pay £1500 for an item. I want to pay it back in three years time. How much do I pay back in total? • My credit card has 15% APR. I pay £800 for an item. I want to pay it back in 6 months time. How much do I pay back in total?

  12. Credit Card Calculations Complete the following calculations using the fractions method. • My credit card has 19.9% APR. I pay £999 for an object. I want to pay it back in two years time. How much do I pay back in total.? • My credit card has 16.9% APR. I pay £1500 for an item. I want to pay it back in three years time. How much do I pay back in total? • My credit card has 20% APR. I pay £700 for an item. I want to pay it back in 3 months time. How much do I pay back in total?

  13. Credit Card Calculations Complete the following calculations using the decimals method. • My credit card has 18.36% APR. I pay £2000 for an object. I want to pay it back in two years time. How much do I pay back in total.? • My credit card has 17.9% APR. I pay £1600 for an item. I want to pay it back in three years time. How much do I pay back in total? • My credit card has 14.9% APR. I pay £999 for an item. I want to pay it back in 9 months time. How much do I pay back in total?

  14. Credit Card Calculations Complete the following calculations using the by parts method. • My credit card has 50.8% APR. I pay £8000 for an object. I want to pay it back in three years time. How much do I pay back in total.? • My credit card has 22.3% APR. I pay £1500 for an item. I want to pay it back in one years time. How much do I pay back in total? • My credit card has 22.5% APR. I pay £900 for an item. I want to pay it back in 6 months time. How much do I pay back in total?

  15. Questions Did you find any calculations with very high interest? Did you find this surprising? Do you think this would occur in real life situations or is it much too high? http://www.avios.com/gb/en_gb/collect/lloydsbank/lloyds-premier-rewards-credit-card-account-nonav?utm_source=Moneysupermarket1&utm_medium=aggregator&utm_term=lloyds&utm_content=premier&utm_campaign=apply&so=Moneysupermarket1_Premier_Avios_RewardsNS Do you think people would actually use this credit card and why?

  16. Balance Transfers, 0% Purchases andRewards

  17. What are Balance Transfers? Balance Transfers allow credit card users to shift debt from one credit card to another. 0% Balance Transfer credit cards allow the owner to move debt from one credit card to another without any cost. This gives the owner a longer time period to clear their credit card debt. You are also normally unable to switch a balance from one card to another in the same banking group.

  18. Example of how Balance Transfers work. If I have £1000 of debt on my Tesco credit card and I am unable to pay it back at the minute. I can get a new credit card from Barclaycard which has 29 Months 0% Balance Transfer. This will give me an extra 29 Months to pay of my £1000 of debt. 0% Balance Transfers can be a very useful tool for managing money as long as they are used correctly.

  19. What are 0% Purchases Some credit cards offer 0% purchases which means that as long as you clear the balance in full when you receive your monthly statement, there is no interest to pay. So effectively you are getting a free loan, as long as you pay the money back within the 0% purchase time frame.

  20. Example of 0% Purchase If I buy £300 of clothes on my Credit Card and my 0% Purchase limit is six months then I have six months to pay back my £300 before I will be charged any interest. However when the six months is over and I still haven’t paid my debt then I will be charged interest and possibly extra fees.

  21. What are rewards? Credit Card companies used rewards to attract customers to use their product. Follow this link to view some rewards that these companies may use. http://www.moneysupermarket.com/credit-cards/search/results/

  22. Examples of Rewards • Vouchers • Cash • Flying miles • Tesco club card points • Nectar Card Points • High Street Vouchers • M+S Points • Other branded vouchers

  23. Advantages and Disadvantages of Rewards

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