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
Lesson 18.1
Using Credit Wisely
GOALS
Describe the responsibilities of consumer
credit.
Discuss how to protect your credit from
fraud.
Explain how you can reduce or avoid
credit costs.
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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.
Check out businesses before making
credit purchases.
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(continued)
Responsibilities to Yourself
Comparison shop and avoid impulse
buying.
Comparison shopping involves checking
several places to be sure you are getting the
best price for equal quality.
Impulse buying occurs when you buy
something without thinking about it and
making a conscious decision.
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(continued)
Responsibilities to Yourself
Have the right attitude about using credit.
Enter into each transaction in good faith and
with full expectation of meeting your
obligations and upholding your good credit
reputation.
Garnishment is a legal process that allows
part of your paycheck to be withheld for
payment of a debt.
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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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Creditors’ Responsibilities to You
 Assisting consumers in making wise purchases by
honestly representing goods and services.
 Informing customers about all rules and regulations,
interest rates, credit policies, and fees.
 Cooperating with established credit reporting agencies.
 Establishing and adhering to sound lending and credit
policies.
 Using reasonable methods of contacting customers
who fail to meet their obligations and assisting in
solving credit problems.
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Protecting Yourself from
Credit Card Fraud
 Credit card fraud costs businesses and
consumers millions of dollars each year.
 Common types of fraud
 Illegal use of a lost or stolen credit card
 Illegal use of credit card information intercepted
online
 While the credit card holder’s liability is limited
to $50, the merchant is not protected from loss.
 Merchants often raise their overall prices to
cover such losses.
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Safeguarding Your Cards
Sign and activate cards immediately.
Carry only cards you need.
Keep a list of cards and information
about them in a safe place.
Notify creditors if a card is lost or stolen.
Watch card during transactions.
Tear up old receipts.
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(continued)
Safeguarding Your Cards
Do not lend cards or leave them lying
around.
Destroy expired cards.
Do not give credit card information by
phone or online to people or businesses
you don’t know.
Keep receipts and verify charges on
statements.
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Protecting Your Accounts Online
Deal with companies you know and trust.
Look for secure site symbol.
Encryption is a code that protects your
account name, number, and other
information.
When information is encrypted, it is made
unreadable to others trying to read it.
Review privacy policy.
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(continued)
Protecting Your Accounts Online
 Look for the seal of a non-profit watchdog
group.
 Initiate all transactions yourself at sites you
trust.
 Phishing is a scam that uses online pop-up
messages or e-mail to deceive you into disclosing
personal information.
 “Phishers” send messages that appear to be from a
business that you normally deal with, such as your
bank or Internet service provider (ISP).
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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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Lesson 18.2
Costs of Credit
GOALS
Explain why credit costs vary.
Compute and explain simple interest and
APR.
Compare methods of computing finance
charges on revolving credit.
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Why Credit Costs Vary
 Source of credit
 Amount financed and length of time
 Ability to repay debt
 Collateral
 Interest rates
 The prime rate is the interest rate that banks offer
to their best business customers, such as large
corporations.
 Individuals pay higher rates because the risk is
greater to the lender.
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(continued)
Why Credit Costs Vary
 Economic conditions
 Type of credit or loan
 Fixed-rate loans are loans for which the interest
rate does not change over the life of the loan.
 With variable-rate loans, the interest rate goes up
and down with inflation and other economic
indicators.
 The business’s costs of providing credit.
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Computing the Cost of Credit
Simple interest formula
Annual percentage rate formula
Credit card billing methods
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Simple Interest Formula
Simple interest is interest computed
only on the amount borrowed (or saved),
without compounding.
The simple interest method of calculating
interest assumes one payment at the end
of the loan period.
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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)
Simple Interest Formula
The formula for simple interest is:
Interest (I) = Principal (P) × Rate (R) × Time (T)
I=P×R×T
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Annual Percentage Rate Formula
There are two ways to calculate APR:
APR formula
APR tables
The APR tables are more precise; the
formula only approximates the APR.
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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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Down Payment
An installment contract requires a down
payment, which is part of the purchase
price paid in cash up front.
The down payment reduces the amount
of the loan.
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Credit Card Billing Methods
Adjusted balance method
Previous balance method
Average daily balance method
Two-cycle billing
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