chapter © 2010 south-western, cengage learning responsibilities and costs of credit 18.1 18.1using...
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Chapter
© 2010 South-Western, Cengage Learning
Responsibilities and Costs of Credit
18.118.1 Using Credit Wisely
18.218.2 Costs of Credit
18
© 2010 South-Western, Cengage Learning SLIDE 2
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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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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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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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