Chapter

© 2010 South-Western, Cengage Learning

Responsibilities and Costs of Credit

18.1 Using Credit Wisely18.2 Costs of Credit

18

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Chapter 18

Lesson 18.1

Using Credit Wisely

GOALS�What are the responsibilities of consumer

credit?�How do you protect yourself from fraud?�How can you reduce or avoid credit

costs?

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Chapter 18

Responsibilities ofConsumer Credit�You have responsibilities to yourself.�You have responsibilities to creditors.�Creditors have responsibilities to you.

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Chapter 18

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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Chapter 18

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.

(continued)

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Chapter 18

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.

(continued)

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Chapter 18

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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Chapter 18

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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Chapter 18

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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Chapter 18

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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Chapter 18

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.

(continued)

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Chapter 18

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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Chapter 18

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).

(continued)

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Chapter 18

Avoiding UnnecessaryCredit 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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Chapter 18

Avoiding UnnecessaryCredit Costs� 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.

(continued)

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Chapter 18

Lesson 18.2

Costs of Credit

GOALS�Why do credit costs vary?�How do you compute simple interest and

APR?�How do you compute finance charges on

revolving credit?

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Chapter 18

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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Chapter 18

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.

(continued)

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Chapter 18

Computing the Cost of Credit

�Simple interest formula�Annual percentage rate formula�Credit card billing methods

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Chapter 18

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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Chapter 18

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.

(continued)

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Chapter 18

Simple Interest Formula

�The formula for simple interest is:

(continued)

Interest (I) = Principal (P) × Rate (R) × Time (T)

I = P × R × T

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Chapter 18

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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Chapter 18

Annual Percentage Rate Formula

APR = 2 × n × fP (N + 1)

Where:n = number of payment periods in one yearf = finance chargeP = principal or amount borrowedN = total number of payments

(continued)

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Chapter 18

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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Chapter 18

Credit Card Billing Methods

�Adjusted balance method�Previous balance method�Average daily balance method�Two-cycle billing