Transcript Chapter 18 Responsibilities and Costs of Credit

Ch. 18-1 Using Credit Responsibly
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Responsibilities to Yourself
◦ You must use credit wisely and not get into debt
beyond an amount you can comfortably repay
◦ Never having enough money and always scrambling
to make your next payment is a stressful way to live
◦ If you cant make your payments a creditor may take
you to court to have your wages garnished
 Garnishment- is legal process that allows part of your
paycheck to be withheld for payment of a debt
◦ Don’t buy on impulses, shop around and do
research before buying
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Responsibilities to Yourself Cont.
◦ Tying up future income should be done with careful
planning to maximize your purchasing power
◦ Comparison shop for credit and become familiar
with the interest rates and due dates
◦ Have the right attitude about using credit
 Enter into each transaction in good faith and with the
expectation of meeting your obligations and keeping
your credit reputation
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Responsibilities to Creditors
◦ Opening an account is entering a relationship with a
store, bank or credit card company
 You are promising your honesty and sincerity in using
credit
◦ You have the responsibility to limit your spending
to amounts that you can repay
◦ By singing a credit application you agree to make all
payments promptly on or before a due date
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Responsibilities to Creditors Cont.
◦ You are responsible for reading and understanding
the terms of all agreements
◦ It is your responsibility to contact the creditor
immediately when you find a problem with the bill
or discover defective merchandise
◦ If an emergency prevents you from making a
payment you should contact the creditor to make
arrangements to pay at a later date
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Creditors Responsibilities to You
1. Assisting consumers in making wise purchases by
honestly representing goods and services
2. Informing consumers about all rules and regulations,
interest rates, credit policies, and fees
3. Cooperating with established credit reporting
agencies, making credit records available to the
consumer and promptly fixing any mistakes
4. Establishing and carrying out sound lending and credit
policies
5. Using reasonable methods of contacting customers
who fail to meet their obligations and assisting them
when possible with repayment schedules and helping
to minimizes credit problems
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Most common type is the illegal use of a lost
or stolen credit card or of credit card
information intercepted online
◦ You are only liable for up to $50, the merchant is
not protected from a loss
 Consumers as a whole ultimately pay higher prices
because of this
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Safeguarding Your Cards
◦ It is your responsibility to protect your cards from
unauthorized use
 Tips to protect your cards
 Sign them as soon as you get them
 Carry only the ones you need
 Keep a list of your card numbers, expiration dates, and
phone number and address of each company
 Notify creditors immediately by phone when your card is
lost or stolen and follow up wit a letter so that you have
documentation
 Watch your card during transactions and get it back as
soon as you can
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Safeguarding Your Cards
 Tips to protect your cards
 Tear up an carbon or carbonless paper that contains
account info
 Don’t lend them to anyone or leave them lying around
 Destroy expired cards by cutting them up
 Don’t give your numbers and expiration dates over the
phone to people or business you don’t know
 Keep your sales receipts and verify all charges on your
card statements promptly
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Protecting Your Cards Online
◦ Buying on the Internet opens up the possibility for
criminals to steal credit card info
◦ Software makers and online companies are fighting
these people constantly by developing new ways to offer
secure electronic transmission of your info
◦ Ways you can protect yourself online
 Only deal with companies you know and trust
 Always look for your browser’s symbol that indicates a
secure site before entering info
 IE7 has a closed lock next to your address bar
 Legitimate online merchants clearly state their privacy policy
(how they are going to handle the info you give them)
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Protecting Your Cards Online
◦ Ways you can protect yourself online
 Many sites offer assurance by displaying the seal of a
nonprofit watchdog group, such as the BBB or TRUSTe
 Sites are only allowed to display the seal if they follow the
guidelines of these watchdogs
 Phishing is a scam that uses online pop-up messages or
email to deceive you into disclosing your info
 “Phishers” send messages that appear to be from a business
that you normally deal with, ISP’s, banks, or credit card Co.
 They ask you to verify your bank account number, password,
card number or there personal info
 Never respond to these requests, if your bank or ISP needs you
to verify the information they will contact you by means other
than email
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Credit is helpful if used wisely
Before borrowing money ask these 3 questions
◦ Do I need Credit?-Can I afford credit?-Can I qualify for
credit?
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If you can say “yes” to any of these, follow these
guidelines
1. Accept only the amount of credit that you need
 Unused credit is the remaining credit available to you(credit
limit - the amount you have already spent)
 can count against you because if your limit is much higher
than what you typically use other creditors will be reluctant to
loan money because even though you don’t use all of it you
could and possibly could not pay it back
 Can be temptations to use more credit than you need
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If you can say “yes” to any of these, follow
these guidelines
2. Make more than the minimum payment
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Minimum payments result in the max cost to you
Mean you will remain in debt for a very long time
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Ex: $5,000 balance and your rate is 18% you make the min. payment(of
which is usually 2% of total) it would take you 33 years to pay it off
resulting in paying $12,000 for a $5,000 loan
3. Don’t increase credit spending when your income
increases
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Instead of spending your extra income save it or invest it
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It is wiser to reduce existing debt or invest for future use
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If you can say “yes” to any of these, follow
these guidelines
4. Keep the number of credit cards to a minimum
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Credit counselors recommend carrying no more than 1 or 2
cards
If you have more you will be tempted to make more purchases
1 major card (Visa or MasterCard) is good at most businesses
eliminates needing mult. Cards
5. Pay cash for purchases under $25
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If pay cash for small purchases you won’t be surprised with a
big bill at the end of the month
Paying cash will help you see how much you are spending and
typically will spend less doing so
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If you can say “yes” to any of these, follow these
guidelines
6. Understand the cost of credit
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Think about how finance charges, monthly payments, and
length of time you will be committed to payments will affect
your lifestyle
7. Shop for loans
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Type and source of your loan will make a big difference in cost
Plan your major purchases carefully
Never make decisions on the spur of the moment
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Rebate is a partial refund of an amount spent
Some allow you to accumulate points that can be used for hotel
rooms, airline tickets, or cash back
Don’t use these types of cards just to get the rebates!!!!
8. Take advantage of rebate programs
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Analyzing and Computing
Credit Costs
Method of computing finance charges
Source of credit
1.
2.
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3.
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Some lenders are better than others
Amount financed and length of time
More you borrow and time it takes = the more
finance charges you will pay
Ability to repay debt
4.
◦
Higher your creditworthiness is, the better your
rates will be
Type of credit selected
5.
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Different plans impose different charges
1.
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Collateral
Secured loans generally have fixed interest rates that are lower than
current variable rates charged on credit cards and open ended credit
Fixed-rate loan- are loans for which the interest rate does not change
over the life of the loan
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2.
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3.
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Prime Rate
Interest rates charged for the use of credit are affected by this
Prime rate- is the interest rate that banks offer to their best business
customers, such as large companies
Economic Conditions
Borrowers pay more for the use of credit during inflationary economic
periods
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4.
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When prices are rising (inflation), then money is more in demand to buy
higher priced goods for which lenders charge higher interest rates
The business’s costs of providing credit
Businesses pass along their costs to their creditors via higher finance
charges and higher rates
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Simple Interest Formula
◦ Simple interest- is interest computed on the amount
borrowed (or saved) only, without compounding
◦ Assumes one payment at the end of the loan period
◦ Cost is based on three things principal, interest rate and
the time money is borrowed for
◦ Formula
 Interest = Principal x Rate x Time
 Principal- is the amount borrowed or the unpaid portion of
the amount borrowed, on which the borrower pays interest
 Rate is expressed as a percentage
 Time is expressed as a fraction of a year
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Annual Percentage Rate Formula
◦ Use this type of formula for installment credit purchases
(boats, cars and furniture), when making payments over
time
◦ Requires a down payment- part of the purchase price
paid in cash up front, reducing the amount of the loan
◦ When buying a car many dealers ask for at least 10%
down or will consider your trade in your down payment
◦ Each payment includes principal and interest
◦ The difference between the total price and the cash price
is the finance charge
◦ By law installment contracts must reveal the finance
charge and the APR
◦ Formula
n = number of payment periods in one
APR = 2 x n x F
P (N + 1)
year
F = finance charge
P = principal or amount borrowed
N = total number of payments to pay off
loan
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Credit Card Billing Statements
◦ Cost of open-ended credit accounts varies with the
method creditors use to get the finance charge
◦ Creditors must tell you the method they use to figure
out their finance charge
◦ Finance charges are usually calculated based on the
monthly billing cycle
◦ Finance charges are computed on the unpaid balance
after the billing date
◦ Creditors must tell you when finance charges begin on
your account
◦ Most creditors give you a 20-25 day grace period before
starting a finance charge
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Credit Card Billing Statements
◦ 4 different ways creditors can figure finance charges
1. Adjusted Balance Method
 Finance charge is only applied to the amount owed after
you’ve paid your bill each month
 Formula
 Monthly interest rate x balance remaining after payment = finance
charge added to next months balance
 This type of method has the lowest finance charges
2. Previous Balance Method
 Finance charge is applied to the entire amount owed from the
previous month
 Formula
 Monthly interest rate x previous monthly balance = finance charge
added to next months balance
 This type of method has the highest finance charges
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Credit Card Billing Statements
◦ 4 different ways creditors can figure finance
charges
3. Average Daily Balance Method
Most used type
Creditors calculate your balance on each day of the
billing cycle
Compute average daily balance by adding together all
daily balances and dividing by the number of days in the
cycle (25 or 30)
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Payments made during the billing cycle are used in
figuring the average
Formula
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Average daily balance x monthly interest rate = finance charge
To figure the average daily balance
(amount before payment)+(amount after payment)
25 or 30 days
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Credit Card Billing Statements
◦ 4 different ways creditors can figure finance charges
1. Two-Cycle billing
Newest way companies are finding finance charges
Method calculates the finance charge on the average daily
balance over the last two billing periods rather than just
one
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Example situation
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If you start with no balance, you make a purchase and you
only pay part of your balance off at the end of the month.
The following month you pay the entire balance. The month
following those two months you would pay a finance charge
for the two months you had balances.
The result is higher interest and no grace period
You pay interest from the date of purchase
Try to avoid these types of cards