Lesson 6.

CREDIT CARDS: WISE

CHOICES AND PROPER
MANAGEMENT
 LESSON OUTCOMES:

(a) define what is a credit card and familiarize its features;

(b) use the average daily balance formula correctly in the

computation of interest on credit cards

(c) evaluate credit card choices wisely and ways of using

credit card responsibly.

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 WHAT IS A CREDIT CARD REALLY?
A CREDIT CARD is a financial tool issued by a bank or financial institution that
allows the cardholder to purchase goods and services on credit. The cardholder agrees to
repay the issuing entity for the amount spent, along with any applicable interest and
fees, at a later date.

In short, a credit card is a card that represents a line of credit. A line of credit
is an account with money that you can borrow repeatedly. The money comes from a
credit card issuer, for example, a bank. Then you can swipe your card as needed to spend
money out of it.

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CREDIT CARD FEATURES
ANNUAL PERCENTAGE RATE

This is the interest rate applied to any

BALANCE
balance you carry past the grace period or
The total amount you owe, including purchases,
the amount of interest that is charged on a
finance charges and fees. The higher your credit
card balance, the lower the available credit you
balance over the course of a year. A

have 5o make additional purchases. monthly percentage rate would be

approximately 1/12 of the APR.

GRACE PERIOD

This is the amount of time you have to pay your CREDIT LIMIT
balance in full before finance charge or interest
This represents the maximum balance you
is applied.
can have on the credit card at a point in
time.

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CREDIT CARD FEATURES • DECLINE FEE – fee that is charged to your
account when you try to make a payment on

CREDIT CARD FEES something you do not have the money for.

These are usually based on a • FOREIGN TRANSACTION FEE – this fee shows up
certain type of transaction or as when you buy something overseas. It is used to
a penalty. Some of these are: cover the cost of transferring your money into
foreign currency.
• ANNUAL FEE – amount you have to pay
every year for using a credit card. • LATE FEE – fee charged to you in the event that
you do not make your payments on time.
• APPLICATION FEE – fee you may have to
pay to apply for a card. • OVER-THE-LIMIT FEE – this is a charge for times
when you go over your maximum credit card
• BALANCE TRANSFER FEE – this is the
limit.
amount you pay if you move the balance
of your card to another card. • MINIMUM MONTHLY PAYMENT – amount a
cardholder needs to pay each month to maintain
• CASH ADVANCE FEE – amount that you
a good standing with the credit card issuer so
have to pay when you withdraw money
that one can continue using the card without
from the card at an ATM.
interruption.

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CREDIT CARD FEATURES • REWARD CREDIT CARDS – offer rewards on
purchases and may come in cashback, points,
CARD TYPES
and travel.
There are several types of credit
cards, and a single credit card • STUDENT CREDIT CARDS – specifically
issuer may issue any or all of
designed for college students and may come
them, sometimes even multiple
versions of the same type of credit with additional perks like rewards or a low-
card. Below are some of these: interest rate on balance transfers.

• CHARGE CARDS – these cards do not have a

• STANDARD CREDIT CARDS ( Plain
Vanilla) – these cards offer no frills or
preset spending limit and balances must be

rewards. It allows you to have a revolving paid in full at the end of each month.

balance up to a certain credit limit. • SECURED CREDIT CARDS – these are for

• BALANCE TRANSFER CREDIT CARDS – people who don’t have credit history or who

one that offers a low introductory rate on have damaged their credit status and
balance transfers for a certain period of requires a security deposit to be placed on
time. the card. The credit limit is typically equal to
the amount of the deposit made on the card.

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CREDIT CARD FEATURES
CARD TYPES
• REWARDS AND PERKS – some credit
cards offer rewards in several different

• SUBPRIME CREDIT CARDS – these are forms: cashback, miles points 5o redeem,
geared toward applicants who have a bad and discounts on future purchases. Credit
credit history and these cards have high card perks vary by credit card and may
interest rates and fees. include things like travel and trip
• BUSINESS CREDIT CARDS – designed cancellation insurance, rental car
specifically for business use. They provide insurance, extended warranty, or
business owners with an easy method of purchase and price protection.
keeping business and personal
transactions separate.

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 AVERAGE DAILY
BALANCE METHOD
When one is using a credit
card, the balance changes from
day to d ay, hence interest
should be calculated daily to
consider the fact that the
principal owed is not the same
f o r t h e e n ti r e m o n t h .

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 HOW TO COMPUTE AVERAGE DAILY

EFFECTIVE DATE ACTIVITY BALANCE

APRIL 1 Start of month Php 500

APRIL 5 Charge Php 300 Php 800

APRIL 14 Paid Php 200 Php 600

APRIL 30 Charged Php 1,600 Php 2,200

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 TO CALCULATE THE INTEREST MONTHLY, THE MOST
COMMON IS CALLED AVERAGE DAILY BALANCE (ADB) METHOD.
THE QUESTION OF PRINCIPAL IS ANSWERED BY CHARGING
INTEREST ON THE AVERAGE OF THE DAILY BALANCES THROUGH
THE MONTH. BUT HOW DO WE CALCULATE THE AVERAGE?
CLARK’S ACCOUNT BALANCE ON EACH DAY OF APRIL CAN BE
ILLUSTRATED THIS WAY:
 APRIL
1 2 3 4 5 6 7
Php 500 Php 500 Php 500 Php 500 Php 800 Php 800 Php 800

8 9 10 11 12 13 14
Php 800 Php 800 Php 800 Php 800 Php 800 Php 800 Php 600

15 16 17 18 19 20 21
Php 600 Php 600 Php 600 Php 600 Php 600 Php 600 Php 600

22 23 24 25 26 27 28
Php 600 Php 600 Php 600 Php 600 Php 600 Php 600 Php 600
0

29 30
Php 600 Php 2,200

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 NOTE THAT EACH BALANCE AMOUNT WOULD COUNT
ONCE FOR EACH DAY THAT IT WAS THE CARD’S BALANCE. THE
PHP 500 BALANCE WHICH WE STARTED THE MONTH WILL BE
INCLUDED 4 TIMES, WHILE PHP 2,200 AT WHICH THE MONTH
ENDED WILL ONLY COUNT ONCE.
AS A SUMMARY WE HAVE THE FOLLOWING TABLE:
 Effective Date Activity Balance Days at Balance (Balance)(Days)

April 1 Start of month Php 500 4 Php 2,00

April 5 Charged Php 300 Php 800 9 Php 7,200

April 14 Paid Php 200 Php 600 16 Php 9,600

April 30 Charged Php Php 2,200 1 Php 2,200

1,200
Totals 30 Php 21,00

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 PHP 21,00
AVERAGE DAILY BALANCE = = PHP 700
30

AVERAGE DAILY BALANCE FORMULA

SUM OF THE TOTAL AMOUNTS OWED EACH DAY OF THE MONTH
AVERAGE DAILY BALANCE = NUMBER OF DAYS IN THE BILLING PERIOD

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IMPORTANT NOTE:

Most credit card companies issue monthly bills. The due date on the
bill is usually 1 month after the billing date (the date the bill is
prepared and sent to the customer). If the bill is paid in full by the
due date, the customer pays no interest charge. If the bill is not paid
in full by the due date, an interest charge is added to the next bill.
That is, you will pay NO INTEREST CHARGE if you make full payments
on time. The APR is sometimes divided into 12 (APR/12) as to express
it in monthly percentage. As defined, APR is what we used as our
interest rate in computing the interest charge.
COMPUTING INTEREST
Suppose an unpaid bill for
Php 315 had a due date of April
10. A purchase of Php 500 was
made on April 12, and Php 230
was charged on April 24. A
payment of Php 300 was made
on April 15. The next billing
date is May 10. The interest on
the average daily balance is
1.5% per month. Find the
interest owed on the May 10
bill.

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 HOW TO COMPUTE AVERAGE DAILY
Effective Date Activity Balance Days at Balance (Balance)(Days)

April 10-11 Php 315 2 Php 630

April 12-14 Charged Php 500 Php 815 3 Php 2,445

April 15-23 Paid 350 Php 515 9 Php 4,635

April 24-May 9 Charged 230 Php 745 16 Php 11,920

Totals 30 Php 19,630

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 19,630
AVERAGE DAILY BALANCE = = PHP 654.33
30
INTEREST:
I = PRT

I = (PHP 654.33)(.015)(1)

I = PHP 9.81

THE INTEREST OWED ON THE MAY 10 BILL IS PHP 9.81

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 QUESTION: WHAT WILL BE THE TOTAL BALANCE ON THE MAY 10 SATATEMENT?

ANSWER: INTEREST CHARGE WILL BE ADDED ON THE BALANCE AT THE END OF

THE BILLING PERIOD (PHP 745); THE TOTAL BALANCE ON THE MAY 10 BILL
STATEMENT WILL BE:

PHP 745 + PHP 9.81 = PHP 754.81

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COMPUTING MONTHLY MINIMUM

If you cannot pay your balance in full, a card issuer typically requires the cardholder to pay a certain
amount which is called the minimum monthly payment. The minimum monthly payment is the lowest amount a
cardholder needs to pay each month to maintain a good standing with the credit issuer. It is a percentage of your
billed balance or a certain amount, whichever is more. Consider the following examples

1. Suppose your billed balance is Php 10,000, and your minimum payment is 3.57% of your balance or Php 850.
compute your minimum monthly payment.

2. Lisa’s credit card has 36% APR and a 4.0% or Php 780 minimum monthly payment. Suppose she accumulate a
balance of Php 30,000 and then stop using the card. Assuming her grace period is over the and interest is due
on the entire Php 30,000, calculate her first month’s minimum monthly payment.

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CHOOSING THE BEST CARD
I d e a l l y, a s a c o n s u m e r, y o u w o u l d
want to choose the card that will ,give
you the least cost, that is, the card
that will not burden you with so much
fees at the end of the billing period.
Then, we might have to consider a
comparison of the corresponding
amou nt of th e costs an d su rely, we
will have to use m a t h e m a ti c s to
decide wisely.

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 APR Annual fee

Credit card 1 7% Php 200

Credit card 2 10% Php 1,00

Credit Card 3 40% None

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Situation 1: Mario always pay his bill within the grace period each month. What is the best card for him?

Answer: Card #3. Since APR id irrelevant in his case and the card offers no annual fee.

Situation 2: Shem normally carries a balance of Php 4000. What is the best card for him?

Answer: Credit card #2.

Situation 3: How large would my balance (principal) need to be for it to be worth choosing credit card #1 to get the
lower interest rate?

Answer: The balance should be greater than or equal to Php 33,333.3

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 HOW TO PROPERLY
MANAGE YOUR CREDIT

DO’S 5. Only charge the amount you can pay at

the end of the month. Pay your entire
1. Pay your bills on time.
balance at the end of the month.
2. Never spend up to more than your
6. Use your credit card over a long period of
limit.
time to show consistency.
3. Remember, credit cards are not
7. Read your monthly statement carefully
extra cash!
and notify your credit card company of any
4. Apply for and use three or fewer errors right away.
credit cards.

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 HOW TO PROPERLY
MANAGE YOUR CREDIT

DONT’S

1. Pay your bills late.

5. Constantly change credit cards
2. Spend more than your limit
6. Forget to review your monthly statement
3. Apply for and use many credit for errors.
cards.

4. Keep a high balance on your credit

card.

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THANK YOU

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