RESPONSIBILITIES AND COSTS OF CREDIT CHAPTER 18 USING

RESPONSIBILITIES AND COSTS OF CREDIT CHAPTER 18

USING CREDIT WISELY RESPONSIBILITIES OF CONSUMER CREDIT • Your Responsibilities: – To yourself • • • Use credit wisely Investigate businesses before using credit with them Learn to comparison shop Control impulse buying Have the correct attitude and mindset towards credit – To creditors • • Limit your spending to amounts you can repay Make all payments in a timely manner Understand your agreement Contact the creditor immediately if you find an error

CREDITOR RESPONSIBILITIES TO YOU • Honest representation of goods and services – Disclose both advantages and disadvantages • Provide information about account rules – Minimum payments – Due dates – Interest rates – Credit policies – Fees • Keep current, accurate records • Follow sound lending and credit policies • Make effort to help customers return to good account standings

PROTECT YOURSELF FROM FRAUD • Keep your cards safe! – Sign the back – Only carry the cards you need and use – Keep your account number and information in a separate secure location – Be responsible with your card and paperwork containing your account information – Notify creditors if card is lost or stolen – Keep your account information secure – Check your transaction records – Destroy expired cards

AVOID UNNECESSARY CREDIT COSTS • Accept only the amount of credit you need • Make more than the minimum payment • Do not increase spending when income increases • Keep credit accounts to a minimum • Pay cash when you’re able • Understand the cost of credit • Shop for loans • Take advantage of credit incentive programs

COSTS OF CREDIT: CONSIDER THESE FACTORS • Source of credit – Some lenders offer a more competitive plan than others • Amount financed and length of time – The more you borrow and the longer you owe money, the more you will pay in finance charges • Ability to repay debt • Collateral – Secured loans generally have lower interest rates than other forms of credit • Interest rates

COSTS OF CREDIT, CONTINUED • Economic conditions – During inflation periods, borrowers pay more for the use of credit – During recessions, borrowers pay less • Type of credit or loan – Fixed rate: the interest rate does not change – Variable rate: the interest rate goes up or down depending on economic conditions • Cost of credit for the business – Businesses pass their costs on to consumers, including what it costs them to give you a credit account

COMPUTING THE COST OF CREDIT • Simple Interest Formula – Interest = Principal x Rate x Time – I = (P)(R)(T) – Principal: amount borrowed – Rate: the percentage of interest you’ll pay on a loan – Time: the period during which the borrower will repay a loan • Units = years!

FINANCE CHARGE FORMULA Finance Charge = Total Price – Cash Price (The finance charge is how much it costs you to finance the item instead of buying outright!)

APR FORMULA Remember, APR = annual percentage rate APR = (2)(n)(f) (P)(N+1) n = number of payment periods in one year f = finance charge P = principal or amount borrowed N = total number of payments to pay off amount borrowed

CREDIT CARD BILLING METHODS • Adjusted Balance Method – Finance charged is applied only to the remaining balance on your account – Ex. You owe $1, 000. You pay $800. A finance charge is applied to the $200 balance that will carry forward to next month’s statement. • Previous Balance Method – Finance charge is imposed on the entire amount owed from the previous month. – Ex. You owe $1, 000. A finance charge is added to your balance. Then your $800 payment is deducted. • Average Daily Balance Method – Creditors take an average of what you owed on a daily basis and compute the finance charge for that amount. – Most commonly used method – Typically results in a lower finance charge because the payments you make are accounted for. • Two-Cycle Billing – A more costly method of financing that uses the average daily balance for two billing periods – Avoid this type of lending because it is usually a higher interest rate with no grace period.