6.00 Sources of Credit Unit C Basic Business Law Objective 6.02

2 Sources of Credit  Credit Cards and Charge Accounts Unsecured form of credit Interest Calculations  Adjusted Balance – Finance charges added after subtracting payment  Previous Balance – Finance charges are figured as if no payment was made  Average Daily Balance – Finance charges figured by adding balances for each day in billing period and then divide by the number of days in the billing period  Simple Interest = Principal * Rate * Time

3 Sources of Credit  Installment Plans Secured – Collateral used to secure loan Pledge – Creditor obtains possession of collateral by written or oral agreement Security agreement – Contract where debtor retains possession of collateral under a written contract Repossession – Taking back of items used to secure loan when payment is not made Unsecured – No collateral used

4 Sources of Credit  Closed end credit – Credit given for a specific amount of money and payments are made.  Open end credit – Credit that can be increased by debtor up to a limit set by creditor, a line of credit is given.

5 Simple Interest Formula  Simple Interest Formula: I = PRT Sally buys a car at 6% interest for $25, on a 5 year plan. How much interest does she pay? I – Interest = $ P – Principle = $25, R – Rate = 6% T – Time = 5 years  I = $25, * 6% * 60  I = $

6 Adjusted Balance Method  Adjusted Balance = Previous Balance – Payments  Adjusted Balance * Interest = Finance Charge Michael’s credit card has a balance of $ and he makes a payment of $ The credit card company charges 7.75% interest per month. What is the interest using the adjusted balance method?  Adjusted Balance = $  Previous Balance = $  Payment = $50.00  Interest = 7.75%  Finance Charge = $7.75  $ $50=$  $ * 7.75% =$7.75

7 Previous Balance Method  Previous Balance * Interest = Finance Charge Michael’s credit card has a balance of $ and he makes a payment of $ The credit card company charges 7.75% interest per month. What is the interest using the adjusted balance method?  Previous Balance = $  Interest = 7.75%  Finance Charge = $11.63  $ * 7.75% =$11.63