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Costs of Using Credit And Types of Credit Credit.

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Presentation on theme: "Costs of Using Credit And Types of Credit Credit."— Presentation transcript:

1 Costs of Using Credit And Types of Credit Credit

2 Costs of Using Credit Annual Percentage Rate (APR) Annual fee Credit limit Finance charge Origination fee Loan term Grace period Over-the-limit fee Universal default Minimum monthly payment Closed-end credit Open-end credit Line of credit

3 Cost of Using Credit Annual Percentage RateExample Total amount of what it costs you to use credit in a given year. It is expressed as a percentage of the amount borrowed An APR of 18 percent means that you pay $18 per year on each $100 you owe.

4 Cost of Using Credit Annual Fee Usually charged by credit card companies A yearly charge you pay for the privilege of using credit

5 Cost of Using Credit Credit Limit or line of credit Maximum amount of credit a lender will extend to a customer Finance charge Usually seen on credit card statements Represents the actual dollar cost of using credit to maintain a balance Origination fee Usually associated with home loans Charge for setting up the loan

6 Cost of Using Credit Loan term Length of time you have to pay off the loan Grace period Length of time you have before you start accumulating interest Over-the-limit fee This usually applies to credit cards Spending more than your credit limit

7 Cost of Using Credit Late fee A penalty for making a payment after the due date Universal default A growing number of credit card companies are now including this They can hike up your interest rate if you make just one late payment Minimum monthly payment Smallest amount you can pay and remain a borrower in good standing

8 Cost of Using Credit Closed-end credit Credit as a one-time loan that you will pay back over a specified period of time in payments of equal amounts A mortgage – a long term loan extended to someone who buys property is a common use of closed-end credit Vehicle loans Installment loans for purchasing furniture or large appliances These type of loans usually carry lower interest rates than open-end credit.

9 Cost of Using Credit Open-end credit Credit as a loan with a certain limit on the amount of money you can borrow for a variety of goods and services Department store credit cards Bank credit cards such as Visa or Mastercard

10 $6000 loan APRTerm of Loan Monthly Payment Total Finance Charge Total Cost Creditor A14%3 years$205.07$1,382.52$7382.52 Creditor B14%4 years$163.96$1,870.08$7,870.08 Lower costloan fromCreditor A Creditor Bprovidessmallermonthlypaymentsbut adds $488 toyour totalfinancecharge

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