Problem

This case is available in MyFinanceLab.Maria will be a college sophomore next year and she...

This case is available in MyFinanceLab.

Maria will be a college sophomore next year and she is determined to have her own credit card. She will not be employed during the school year but is convinced that she can pay for credit card expenses based on her summer earnings. Maria’s parents have read a number of articles about the problems of credit cards and college students, including examples of students leaving school after a downward spiral of credit cards, overspending, working to pay bills, worrying about bills, working more hours to pay bills, and eventually withdrawing from school. When Maria showed up with a handful of applications including Visa, a Gold MasterCard, Discover, a Visa sponsored by her university, an American Express, a secured MasterCard, and a gas company card her parents were overwhelmed. Maria admitted she didn’t want them all. “I’m not stupid,” she declared. Since Maria obviously needed to learn about credit cards, her parents agreed to cosign her application on one condition. She had to approach her choice just as she would a class project and research the following questions.

List and summarize the basic factors that affect credit card costs. Rank these factors in terms of importance and relevance based on Maria’s situation.

Step-by-Step Solution

Solution 1

Some basic factors that affect the credit card costs are as follows:

1. The annual percentage rate – The annual percentage rate (APR) is the actual simple interest rate paid over the life of the loan. Credit cards may have different APRs for different types of balances. APR includes interest on the balance, the loan processing fee, and the document preparation fee.

2. The balance calculation method – The method by which a credit card balance is calculated. The dollar charges are then based on the level of this balance. There are three primary methods used to calculate interest charges on a due credit balance: the average daily balance method, the previous balance method, and the adjusted balance method.

3. Grace period – The lender permits a grace period to the consumer before charging interest against the outstanding balance on a credit card. Thus, the finance charges are based on the length of time given to make a payment.

4. Annual fee – The annual fee is the fixed annual charge imposed by credit card issuers for the opportunity of using their card. The charge varies from $10 to $100, but American Express Charges $450 annually for its Platinum card.

5. Additional fees – Credit card issuers also impose some additional and penalty fees for the privilege of using their credit card. It includes cash advance fees, late fees, over-the-limit fees, and penalty rates.

Answers may vary:

Rank

Factors

1

Annual fee

2

Grace period

3

The balance calculation method

4

APR

5

Additional fees

Given her condition, a card with zero annual fees, a grace period with zero interest, an average daily balance method with a minimum interest rate, and a minimal fee structure would be best.

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