Transcript Chapter 18 Responsibilities and Costs of Credit

Chapter
18
Responsibilities and
Costs of Credit
18.1 Using Credit Wisely
18.2 Costs of Credit
© 2010 South-Western, Cengage Learning
Responsibilities of
Consumer Credit
You have responsibilities to yourself.
You have responsibilities to creditors.
Creditors have responsibilities to you.
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Responsibilities to Yourself
Use credit wisely and do not get into debt
beyond an amount you can comfortably
repay.
Comparison shop and avoid impulse
buying. Clip
Enter into each transaction in good faith
and with full expectation of meeting your
obligations and upholding your good
credit reputation
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Responsibilities to Creditors
When you open an account, you are
pledging your honesty and sincerity in the
use of credit.
Some of your responsibilities are:
Limit your spending
Make payments
Read and understand terms
Contact creditor to resolve problems
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Avoiding Unnecessary
Credit Costs
 Accept only the amount of credit that you need.
 Unused credit can count against you.
 Unused credit is the remaining credit available to
you on current accounts.
 Make more than the minimum payment.
 Do not increase spending as income
increases.
 Keep your credit accounts to a minimum.
 Pay cash for small purchases.
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Avoiding Unnecessary
Credit Costs
(continued)
 Understand the cost of credit.
 Shop for loans.
 Take advantage of credit incentive programs.
 With a rewards program, you will receive a
payback in the form of points that can be redeemed
for merchandise or airline tickets.
 With a rebate plan, you get back a portion of what
you spent in credit purchases over the year.
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(continued)
Simple Interest Formula
The cost is based on three elements:
A loan’s principal is the amount borrowed,
or the unpaid portion of the amount
borrowed, on which the borrower pays
interest.
The rate is the percentage of interest you
will pay on a loan.
Time is the period during which the borrower
will repay a loan; it is expressed as a fraction
of a year.
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(continued)
Annual Percentage Rate Formula
2nf
APR 
P (N  1)
Where:
n = number of payment periods in one year
f = finance charge
P = principal or amount borrowed
N = total number of payments
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Credit Card Billing Methods
Adjusted balance method – lowest Finance
charge
Average daily balance method
Previous balance method – more expensive
Two-cycle billing -- most expensive; AVOID
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