Responsibilities and Costs of Credit

18 Responsibilities and Costs of Credit 18.1 Using Credit Wisely 18.2 Costs of Credit

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. Chapter 18

Responsibilities ofConsumer Credit • You have responsibilities to yourself. • You have responsibilities to creditors. • Creditors have responsibilities to you. 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. Chapter 18

(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. Chapter 18

(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. 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 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. 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. 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. Chapter 18

(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. 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. Chapter 18

(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). 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. Chapter 18

(continued) 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. Chapter 18

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. 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. Chapter 18

(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. Chapter 18

Computing the Cost of Credit • Simple interest formula • Annual percentage rate formula • Credit card billing methods 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. Chapter 18

(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. Chapter 18

(continued) Simple Interest Formula • The formula for simple interest is: Interest (I) = Principal (P) × Rate (R) × Time (T) I = P × R × T 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. Chapter 18

2  n  f APR  P (N  1) (continued) Annual Percentage Rate Formula Where: n = number of payment periods in one year f = finance charge P = principal or amount borrowed N = total number of payments 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. Chapter 18

Credit Card Billing Methods • Adjusted balance method • Previous balance method • Average daily balance method • Two-cycle billing Chapter 18

Responsibilities and Costs of Credit