Chapter

© 2010 South-Western, Cengage Learning

Responsibilities and Costs of Credit

18.118.1 Using Credit Wisely

18.218.2 Costs of Credit

18

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Chapter 18

Lesson 18.1

Using Credit Wisely

GOALSDescribe 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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Chapter 18

Responsibilities ofConsumer CreditYou 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 spendingMake paymentsRead and understand termsContact 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 OnlineDeal 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

GOALSExplain why credit costs vary.Compute and explain simple interest and

APR.Compare methods of computing 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 formulaAnnual percentage rate formulaCredit 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 formulaAPR 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 year f = finance charge P = principal or amount borrowed N = 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 methodPrevious balance methodAverage daily balance methodTwo-cycle billing