F1.6 Compare interest rates, annual fees, and rewards and other incentives offered by various credit card companies and consumer contracts to determine the best value and the best choice for different scenarios.
Skill: Comparing the Various Incentives and Consumer Contracts Offered by Credit Card Companies
Misunderstanding interest rates and the differences between credit card and line of credit interest rates are two factors that can lead to debt.
The interest rates associated with credit cards can vary. Most credit cards have interest rates between 20% and 22%, but some may have interest rates as high as 30% or more. Interest is only accrued when the entire balance of an account is not paid off by the due date indicated on the statement, with certain exceptions such as cash advances. A person who always uses his or her credit card and always pays his or her debts on time will not pay interest charges.
However, for a person who does not pay the balance on time, an interest charge will be applied to the amount to be repaid. This fee is most often calculated from the end of the previous period using the interest rate stated in the card agreement. This interest is charged monthly on the unpaid amounts and can add up very quickly and should therefore be limited.
A person wishing to borrow for a purchase should consider a line of credit rather than paying with a credit card, if the amount is substantial and cannot be repaid quickly. A line of credit, unlike a credit card, offers low annual interest rates.
Credit cards have advantages and disadvantages (for example, immediate access to funds, convenience, rewards, security, fees, interest, etc.). When choosing a credit card, it's important to make an informed choice and consider all factors.
Advantages and Disadvantages of Credit Cards
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Immediate Access to Funds This allows consumers to purchase planned or unplanned items for which money would not be available in a bank account. |
Fees are charged and interest accrues when the balance is not paid in full and on time. The credit limit often exceeds the amount of money a person can hold in their account. Misuse of credit cards can affect a consumer's credit rating. |
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Security Transactions are secure. If a credit card is lost or stolen, it can be cancelled. Companies protect customers from unauthorized card purchases. |
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Transaction Log A credit card statement lists all monthly expenses, allowing you to prepare a budget for purchases and expenses. |
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Convenience Credit cards allow you to purchase products over the Internet or by phone and do not require the exchange of currency internationally. Major credit card companies often accept credit cards in other countries. Credit card companies convert the money into the consumer's home currency for an additional fee. |
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Consolidation of Invoices Credit cards allow consumers to automate the payment of various bills, making budgeting easier and reducing oversights. |
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Rewards Credit cards can offer rewards and incentives for purchases. |
Note on credit card accessibility: Although credit cards and lines of credit are used by much of the population, it is important to note that some people do not have access to them because credit checks are required. This tool, which allows people to make purchases, receive benefits and increase their credit, can also increase the socio-economic gaps in a population. Several factors can influence a company's refusal to finance an individual's credit, such as:
- A low credit score
- A poor credit history
- The person's financial situation (income, debts and other)
- Too many applications for credit in a condensed time
Throughout the course of their learning, students will relate credit card use to the effect on the financial and personal well-being of the user. Students will compare credit cards and learn about fees, interest, and rewards programs.
The following is a list of questions that could be asked of intermediate students to help them learn more about credit cards.
- What are the most important criteria to consider when selecting a credit card? Are they the same for everyone?
- Is it better to have one or more credit cards? Explain your reasoning.
- What links can be made between credit card use and debt?
- How can some credit cards offer cash back? Where does the money come from?
- Why do some businesses not accept certain credit cards?
Knowledge: Credit Card Fees and Incentives
Credit cards vary greatly. Some credit cards are free but offer few incentives, others have an annual fee and offer incentives (travel, rewards, cash back). Many credit cards also offer point rewards for purchases. There is a direct link between the fees associated with using the credit card and the incentives. It is important for consumers to determine how often they use the card and the rewards and benefits associated with it to determine if it is worthwhile.