PRESENTER’S GUIDE
The Cost of Credit Cards
Confirm with MSCPA Staff that
Prework has been sent to teacher.
Learning Objectives
Students will:
• Explain “annual percentage rate” (APR) and calculate the monthly interest
rate.
• Calculate simple interest per month (“finance charge”) and the monthly
balance for a credit card purchase.
• Determine the total amount paid on a credit card purchase, including
total interest paid.
Order of presentation
1. Introduce Yourself
• What’s your story?
• How did you become a CPA?
• What do you like best about
your job?
• Why would you tell others
to consider the accounting
profession?
• Briefly discuss some of the
jobs in the “Glossary of Job
Descriptions.”
2. Introduce “Feed the Pig” Campaign
3. Introduce today’s topic
“The Cost of Credit Cards”.
4. Ask the class:
• What do you think the cost
of a credit card is?
• How should credit cards be
used?
• Encourage them to interact
with you on the topic.
Presentation Suggestions
Use “Fast Facts” on Student Handouts to:
• Discuss how credit cards work—that banks issue the credit cards and set
the interest rates on purchase, cash advances, etc.
• Explain the term “APR”—annual percentage rate—and how the monthly
or daily rates is calculated, e.g., 18%/12 months = 1.5%
• Demonstrate how to calculate the monthly “Finance Charge”
$1,000
x
1.5%
=
$15
Previous Balance x Monthly interest rate = Finance Charge
$1,000 –
$50
+
$15
= $965
Previous Balance - Payment + Finance Charge = New Balance
• State that the manner in which the finance charge is calculated varies
from card to card. Some banks, for instance, use the average daily balance. When opening a new account, always check to see how the finance
charge is calculated. Here are some of the methods used:
5. Review the answers to “Behind the Numbers”
Adjusted balance method: Balance due at the beginning of the billing
cycle less any payments made during the cycle; excludes new purchases
made during the cycle
6. Give postwork exercises to the
teacher.
Previous balance method: Balance due at the beginning of the billing
cycle
Average daily balance method: Total of the balances due each day in the
billing cycle divided by the number of days in the cycle; payments made
are subtracted as posted to determine daily balances; new purchases may
or may not be added in
For more information:
www.feedthepig.org
For more information about
accounting career opportunities:
www.aicpa.org/nolimits
Two-cycle average daily balance method: Same as the average daily balance method, but over two consecutive billing cycles
The amount of your finance charge can vary widely from method to
method. Because finance charges result in higher interest charges, creditors favor either of the last two methods mentioned above.
PRESENTER’S GUIDE
The Cost of Credit Cards
Behind the
Numbers
Monthly Finance Charge: The fee for using the bank’s money (interest) is calculated using a
formula similar to this: Balance x (annual interest rate / 12 months)
$1,000
x
Basis for Finance Charge
1.5%
=
Monthly
Interest Rate
$15.00
Finance
Charge
$1,000 - $50
+ $200
+ $15 = $1,165
Previous Payment Purchase Finance New
Balance
Charge
Balance
On September 4th, Annie goes on a back-to-school shopping spree using her new credit card.
She spends a total of $675. Annie will receive her first credit card statement on October 4th. The due date of the payment is on October 15th. Determine Annie’s finance charge, including
the first month–October–assuming she doesn’t make any additional purchases, pays only the
monthly minimum of $50 and the issuer of the credit card charges an APR of 18%. (Interest is
based on the Previous Balance.)
1. What is the monthly interest rate? __$1.5%___
2. What is the total amount Annie will actually pay? _$747.35_______
3. What is the total amount of interest that Annie will pay? __$72.35______
Date
Previous
Balance
Purchases
Payments
Finance
Charges
New Balance
10/04
$0.00
$675.00
$50.00
$0.00
$625.00
11/04
$625.00
$0.00
$50.00
$9.38
$584.38
12/04
$584.38
$0.00
$50.00
$8.77
$543.15
01/04
$543.15
$0.00
$50.00
$8.15
$501.30
02/04
$501.30
$0.00
$50.00
$7.52
$458.82
03/05
$458.82
$0.00
$50.00
$6.88
$415.70
04/04
$415.70
$0.00
$50.00
$6.24
$371.94
05/05
$371.94
$0.00
$50.00
$5.58
$327.52
06/05
$327.52
$0.00
$50.00
$4.91
$282.43
07/04
$282.43
$0.00
$50.00
$4.24
$236.67
08/05
$236.67
$0.00
$50.00
$3.55
$190.22
09/05
$190.22
$0.00
$50.00
$2.85
$143.07
10/05
$143.07
$0.00
$50.00
$2.15
$95.22
11/05
$95.22
$0.00
$50.00
$1.43
$46.65
12/05
$46.65
$0.00
$47.35
$ .70
$0.00
$675.00
$747.35
$72.35
Total
This information has been developed by the Montana Society of Certified Public Accountants,
based upon examples provided by The Connecticut Society of Certified Public Accountants, Inc.
Reproduction of this material is prohibited without express written consent of the Montana Society of CPAs.
Presentation Notes:
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This information has been developed by the Montana Society of Certified Public Accountants,
based upon examples provided by The Connecticut Society of Certified Public Accountants, Inc.
Reproduction of this material is prohibited without express written consent of the Montana Society of CPAs.