Using Credit Wisely Costs of Credit RESPONSIBILITIES AND COSTS OF CREDIT

SLIDE 2 Week 14 - Responsibilities & Cost of Credit Using 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.

SLIDE 3 Week 14 - Responsibilities & Cost of Credit Responsibilities of Consumer Credit You have responsibilities to yourself. You have responsibilities to creditors. Creditors have responsibilities to you.

SLIDE 4 Week 14 - Responsibilities & Cost of Credit 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.

SLIDE 5 Week 14 - Responsibilities & Cost of Credit 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)

SLIDE 6 Week 14 - Responsibilities & Cost of Credit 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)

SLIDE 7 Week 14 - Responsibilities & Cost of Credit 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

SLIDE 8 Week 14 - Responsibilities & Cost of Credit 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.

SLIDE 9 Week 14 - Responsibilities & Cost of Credit 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.

SLIDE 10 Week 14 - Responsibilities & Cost of Credit 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.

SLIDE 11 Week 14 - Responsibilities & Cost of Credit 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)

SLIDE 12 Week 14 - Responsibilities & Cost of Credit 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.

SLIDE 13 Week 14 - Responsibilities & Cost of Credit 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 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)

SLIDE 14 Week 14 - Responsibilities & Cost of Credit Avoiding Unnecessary Credit 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.

SLIDE 15 Week 14 - Responsibilities & Cost of Credit Avoiding Unnecessary Credit 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)

SLIDE 16 Week 14 - Responsibilities & Cost of Credit Costs of Credit GOALS Explain why credit costs vary. Compute and explain simple interest and APR. Compare methods of computing finance charges on revolving credit.

SLIDE 17 Week 14 - Responsibilities & Cost of Credit 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.

SLIDE 18 Week 14 - Responsibilities & Cost of Credit 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)

SLIDE 19 Week 14 - Responsibilities & Cost of Credit Computing the Cost of Credit Simple interest formula Annual percentage rate formula Credit card billing methods

SLIDE 20 Week 14 - Responsibilities & Cost of Credit 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.

SLIDE 21 Week 14 - Responsibilities & Cost of Credit 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)

SLIDE 22 Week 14 - Responsibilities & Cost of Credit Simple Interest Formula The formula for simple interest is: (continued) Interest (I) = Principal (P) × Rate (R) × Time (T) I = P × R × T

SLIDE 23 Week 14 - Responsibilities & Cost of Credit 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.

Week 14 - Responsibilities & Cost of Credit SLIDE 24 Annual Percentage Rate Formula APR  2  n  f P (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)

SLIDE 25 Week 14 - Responsibilities & Cost of Credit 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.

SLIDE 26 Week 14 - Responsibilities & Cost of Credit Credit Card Billing Methods Adjusted balance method Previous balance method Average daily balance method Two-cycle billing