Title Slide
Title: Understanding Credit Cards and Loans
Group Members' Names:
Course Name: Business Mathematics 1 (LGB13003)
Introduction Slide
Overview:
This presentation covers the essentials of credit cards and loans, explaining their key
concepts, practical applications, and implications for personal financial management.
Understanding these financial tools is crucial for making informed financial decisions
and managing personal finances effectively.
Credit Cards
Definition and Functioning
Credit Cards: Payment cards issued by financial institutions allowing users to
borrow funds for purchases.
How They Work:
o Cardholders use the card to make purchases up to a pre-approved credit limit.
o The issuer bills the cardholder monthly, and the cardholder can choose to pay
in full or a minimum amount.
o Interest is charged on the remaining balance if not paid in full.
Types of Credit Cards
Rewards Credit Cards:
o Offer points, cash back, or travel benefits for each purchase.
o Examples: Cashback cards, travel rewards cards, and points cards.
Secured Credit Cards:
o Require a security deposit that becomes the credit limit.
o Ideal for individuals with no credit history or poor credit scores.
Unsecured Credit Cards:
o Do not require a security deposit.
o Most common type of credit card.
Key Terms
Credit Limit: The maximum amount that can be borrowed on a credit card.
APR (Annual Percentage Rate): The annual rate charged for borrowing, including
fees and other costs.
Minimum Payment: The smallest amount that can be paid to avoid late fees and
keep the account in good standing.
Billing Cycle: The period between billing statements, typically 30 days.
Interest Calculation and Payment Strategies
Interest Calculation:
o Interest is typically calculated daily on the outstanding balance.
o Formula: Interest=Principal×Daily Rate×Number of Days\text{Interest} = \
text{Principal} \times \text{Daily Rate} \times \text{Number of
Days}Interest=Principal×Daily Rate×Number of Days
o Example: If the APR is 18%, the daily rate is 18%365≈0.0493%\frac{18\%}
{365} \approx 0.0493\%36518%≈0.0493%.
Payment Strategies:
o Minimum Payment: Paying the least amount required to keep the account
current.
Leads to higher interest payments over time.
o Paying in Full: Paying the entire balance by the due date.
Avoids interest charges and keeps credit utilization low.
o Impact of Carrying a Balance:
Higher interest costs.
Increased credit utilization ratio, which can negatively affect credit
scores.
Fees and Penalties
Annual Fees: Yearly charge for using the card.
Late Fees: Charged for payments not made by the due date.
Over-Limit Fees: Charged if spending exceeds the credit limit.
Examples of Fees:
o A card with a $39 annual fee, a $25 late fee, and a $35 over-limit fee.
Impact on Credit Score
Credit Utilization: Ratio of credit card balances to credit limits.
o Recommended to keep utilization below 30%.
Payment History: Record of timely payments.
o Late payments can significantly lower credit scores.
New Credit Inquiries: Frequency of credit applications.
o Multiple inquiries in a short period can negatively impact scores.
Managing Credit Card Debt
Tips:
o Avoid High Balances: Try to keep balances low relative to credit limits.
o Pay More Than the Minimum: Reduces the principal faster and lowers
interest payments.
o Use Balance Transfer Offers Wisely: Can consolidate high-interest debt but
watch for transfer fees.
o Monitor Statements Regularly: Check for errors or fraudulent charges.
o Set Up Automatic Payments: Helps avoid late fees and maintain a good
payment history.
Loans
Definition and Types
Personal Loans:
o Unsecured loans for personal use.
o Can be used for various purposes like home improvements, debt consolidation,
or medical expenses.
Auto Loans:
o Secured loans specifically for purchasing vehicles.
o The vehicle serves as collateral for the loan.
Mortgages:
o Secured loans for purchasing property.
o Typically long-term loans (15-30 years) with lower interest rates due to the
collateral.
Student Loans:
o Loans for financing education.
o Can be federal or private, with different terms and repayment options.
Key Terms
Principal: The original amount borrowed.
Interest Rates: The cost of borrowing money, expressed as a percentage.
o Fixed vs. variable rates.
Term Length: The duration over which the loan is to be repaid.
o Short-term vs. long-term loans.
Repayment Plans and Amortization Schedules
Repayment Plans:
o Standard, graduated, extended, income-driven plans (for student loans).
Amortization Schedule:
o A table detailing each periodic payment on an amortizing loan.
o Shows the amount going towards interest and principal.
o Example:
Loan amount: $10,000
Interest rate: 5%
Term: 5 years
Monthly payment: $188.71
Interest Calculation
Simple Interest: Interest calculated only on the principal amount.
o Formula: I=P×r×tI = P \times r \times tI=P×r×t
o Example: I=1000×0.05×1=$50I = 1000 \times 0.05 \times 1 = \
$50I=1000×0.05×1=$50
Compound Interest: Interest calculated on the principal and the accumulated
interest.
o Formula: A=P(1+rn)ntA = P (1 + \frac{r}{n})^{nt}A=P(1+nr)nt
o Example: A=1000(1+0.0512)12×1=$1051.16A = 1000 (1 + \frac{0.05}
{12})^{12 \times 1} = \$1051.16A=1000(1+120.05)12×1=$1051.16
Fees and Penalties
Origination Fees: Charged for processing the loan.
Prepayment Penalties: Fees for paying off the loan early.
Examples:
o Origination fee of 1% on a $10,000 loan = $100.
o Prepayment penalty of 2% on the remaining balance.
Impact on Credit Score
Factors:
o Payment history.
o Amount owed.
o Length of credit history.
o New credit.
Impact:
o Timely payments boost credit scores.
o High outstanding loan balances can lower scores.
Managing Loans
Tips:
o Understand Terms: Know the interest rate, fees, and repayment schedule.
o Make Timely Payments: Avoid late fees and negative impact on credit
scores.
o Avoid Over-Borrowing: Only borrow what is necessary.
o Refinance Wisely: Consider refinancing to get a lower interest rate.
Case Study Slide
Case Study:
Scenario: John Doe, who manages his credit card debt poorly, faces financial
difficulties. He carries high balances and makes only minimum payments.
Impact:
o John's credit score drops, making it difficult to obtain a loan.
o He faces high interest payments and accumulates significant debt.
Solution:
o John consolidates his debt with a lower interest personal loan.
o He creates a budget and prioritizes paying off high-interest debt.
o Over time, his credit score improves, and he becomes eligible for better credit
terms.
Conclusion Slide
Summary:
Key Points:
o Understanding credit cards and loans is crucial for effective financial
management.
o Proper management of these financial tools can lead to financial stability and
growth.
Reflection: Emphasize the importance of being informed and disciplined in managing
credit cards and loans.
Takeaway: Always stay educated about financial products and seek advice when
needed.
References Slide
References:
o Garman, E. T., & Forgue, R. (2020). Personal Finance. Cengage Learning.
o Investopedia. (n.d.). Credit Cards. Retrieved from Investopedia
o Federal Reserve. (n.d.). Consumer Credit. Retrieved from Federal Reserve
o Your local bank or credit union for specific product details and brochures.
