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© 2010 South-Western, Cengage Learning
Chapter
© 2010 South-Western, Cengage Learning
Responsibilities and Costs of Credit
18.1 Using Credit Wisely18.2 Costs of Credit
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© 2010 South-Western, Cengage Learning
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Lesson 18.1Using 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 ofConsumer 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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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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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)
© 2010 South-Western, Cengage Learning
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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.
© 2010 South-Western, Cengage Learning
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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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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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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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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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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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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)
© 2010 South-Western, Cengage Learning
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Lesson 18.2Costs 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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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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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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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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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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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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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)
© 2010 South-Western, Cengage Learning
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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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