Credit cards and store cards
Every credit card and store card has:
- interest rates (APR)
- terms and conditions
The companies offering these cards want to win customers and convince them that they offer good interest rates and attractive payment conditions. People are often asked in banks and shops (even in the street) to sign up to a new card.
Credit Cards are often used to:
- buy expensive items that you cannot afford straight away on your normal bank account (debit card)
- buy small cost items just before you get paid and your debit card account is low.
Store cards often offer:
- interest free purchases the day you sign up to them
- discounts on the day you take them out
Credit cards and store cards can be useful but you have to be aware that if the debt is not paid off within a certain time (usually each month), then interest is usually added to the amount you still owe.
Cards have different interest rates and the lower the interest rate (APR) the less interest you will be charged on top of your debt.
Credit card companies often give an introductory rate of interest and offer to transfer your debt from your present credit card to their credit card. Sometimes this may charge zero percent interest for six months.
Example
Suppose Mark has a credit card debt of \(\pounds700\).
His present credit card charges \(15.9\% APR.\)
He sees an advert for a new credit card which offers 6 months at \(0\%\) interest followed by an APR of \(17.4\%\).
Should he think about applying for the new card?
Answer
His present card will charge him \(15.9\%\) of \(\pounds700\) in the next year which is \(\pounds111.30.\)
The new card would charge \(17.4\%\) of \(\pounds700\) in a year which is \(\pounds121.80\) but this would be delayed for 6 months.
Mark could be better off in the short term with the new card but unless he can clear or reduce his debt the new card will eventually be costing him more.
Be aware also that credit cards usually have fees for:
- late payment
- exceeding the credit limit
- making purchases abroad
- withdrawing cash from an ATM
Some credit cards also charge:
- a joining fee for setting up the account (administration)
- a balance transfer fee
- an annual fee
Any of the above information can be mentioned in a question on this Lifeskills Mathematics Course but you will always be given all the numerical information you need to work on your answer.
Now try this question:
Question
Simon is buying \(\pounds200\) worth of clothes in a city centre store.
At the till he is offered \(10\%\) discount if he signs up for a store card charging \(1.9\%\) interest per month. He also does not have to pay anything today if he can prove his identity. The card conditions state that there must be a minimum repayment of \(3\%\) of the debt per month.
If Simon only repays the minimum each month how much will he owe after 3 months?
Discount of \(10\%\) means that the clothes cost \(200 - 20 = \pounds180\)
Month 1
Minimum payment = \(3\%\,of\,180 = \pounds5.40\)
Amount remaining = \(180 - 5.40 = 174.60\)
Interest = \(1.9\%\,of\,174.60 = \pounds3.31\)
Total now owing =\(174.60 + 3.31 = \pounds177.91\)
Month 2
Minimum payment = \(3\%\,of\,117.91 = \pounds5.34\)
Amount remaining = \(177.91 - 5.34 = 172.56\)
Interest = \(1.9\%\,of\,172.56 = \pounds3.28\)
Total now owing =\(172.56 + 3.28 = \pounds175.84\)
Month 3
Minimum payment = \(3\%\,of\,175.84 = \pounds5.28\)
Amount remaining = \(175.84 - 5.28 = 170.56\)
Interest = \(1.9\%\,of\,170.56 = \pounds3.24\)
Total now owing =\(170.56 + 3.24 = \pounds173.80\)
Simon is gradually repaying the debt. However a lot of his minimum payment is being taken up by paying the interest.
The longer he takes to pay back the original debt the more he will have paid in interest.
The discount is only useful to him if he can pay off the debt before the interest costs more than the \(\pounds20\) he received as discount.