Do you know the answer?What is the annual interest rate of most

credit cards in Canada?Government restricts it to less than 20%, so

the credit card companies usually charge 19.999%

Other than charging interest on overdue balances, how do credit card companies make money?

Merchants pay a service fee of 1-3% of the overall bill

What is the formula for Future Value?FV=PV(1+i)n

Unit 8 - Finance

Managing Credit Cards

How Credit Card companies make money:Merchants pay service fee of 1-3%

of total amount charged.Interest paid on overdue balances

Credit cardsPros ConsEasy to useCan purchase things

even if you don’t have the money

Can purchase items over the phone or internet

Some credit cards have reward programs (i.e. Air miles, Aeroplan, cash back)

High amounts of interest on overdue balances

Easy to lose track of how much is spent (spend beyond what one can afford)

Have to apply for a credit card. usually have to be over 18 and have good credit rating

Credit card fraud

Credit card examplesFor each credit card statement answer the following:a) What is the amount of new purchases? What is the

new balance?b) What is the minimum payment? c) How many days after the statement date is the

minimum payment due?d) What are the credit limit and the available credit

limit? Why are they different?e) What is the annual interest rate? The daily interest

rate?f) If the balance was paid in full 100 days after the

payment due date, how much interest will be charged?

MBNAa)

b)

c)

d)

e)

f)

MBNAa) $707.26, $707.26b)

c)

d)

e)

f)

MBNAa) $707.26, $707.26b) $15c)

d)

e)

f)

MBNAa) $707.26, $707.26b) $15c) 20 daysd)

e)

f)

MBNAa) $707.26, $707.26b) $15c) 20 daysd) $10,000, $9,292.74e)

f)

MBNAa) $707.26, $707.26b) $15c) 20 daysd) $10,000, $9,292.74e) 19.99%, 0.054767%f)

MBNAa) $707.26, $707.26b) $15c) 20 daysd) $10,000, $9,292.74e) 19.99%, 0.054767%f) FV=$707.26(1+0.00054

767)100 FV=$747.06

I=FV-PrincipalI=$747.06-707.26I=$40.00

VISAa) $821.94, $821.94b)

c)

d)

e)

f)

VISAa) $821.94, $821.94b) $17c)

d)

e)

f)

VISAa) $821.94, $821.94b) $17c) 10+10=20 daysd)

e)

f)

VISAa) $821.94, $821.94b) $17c) 10+10=20 daysd) $6,500, $5,678.06e)

f)

VISAa) $821.94, $821.94b) $17c) 10+10=20 daysd) $6,500, $5,678.06e) 19.99%, 0.05476%f)

VISAa) $821.94, $821.94b) $17c) 10+10=20 daysd) $6,500, $5,678.06e) 19.99%, 0.05476%f) FV=$821.94(1+0.0005

476)100 FV=$868.20

I=FV-PrincipalI=$868.20-821.94I=$46.26

MBNA VISAa) $707.26, $707.26 $821.94, $821.94b) $15 $17c) 20 days 10+10=20 daysd) $10,000, $9,292.74 $6,500, $5,678.06e) 19.99%, 0.054767% 19.99%, 0.05476%f) FV=$707.26(1+0.00054

767)100 FV=$747.06

I=FV-PrincipalI=$747.06-707.26I=$40.00

FV=$821.94(1+0.0005476)100 FV=$868.20

I=FV-PrincipalI=$868.20-821.94I=$46.26

g)If the interest rate was 5% annually compounded

daily, how much would you owe after 100 days?i=5%/365, n=100, PV=$707.26

FV=$707.26(1+0.05/365)100 FV=$717.01

I=FV-PrincipalI=$717.01-707.26I=$9.75

What are some strategies to avoid paying high interest rates?

Spend WiselyHave a budgetPay before due date

RefinancingReplacing a loan or debt with a new loan/debt offering

better terms.

Priority is to reduce high interest penalties by borrowing at a lower rate to pay of high interest debt.

Methods:Spend less / Save moreIncreasing mortgageTake out line of credit on houseBank loanWork moreDebt consolidation – Consolidating various types of

debt into one loan/debt