18 Consumer Credit 18-1 Credit Fundamentals 18-2 Cost of Credit C H A P T E R 18 Consumer Credit 18-1 Credit Fundamentals 18-2 Cost of Credit 18-3 Credit Application and Documents 18-4 Protection of Credit Rights

USING CREDIT Credit is the privilege of using someone else’s money for a period of time Two parties Debtor Creditor Trust

CHARGE ACCOUNTS A charge account represents a contract between the firm offering the account and the customer. Regular accounts – requires the buyer to make full payment within a sated period – usually 25 to 30 days. Budget accounts – requires that a customer make payments of a fixed amount over several months. Revolving accounts – most popular form of sales credit; you may charge purchases at any time but only part of the debt must be paid each month. Finance charge – the total dollar cost of credit, including interest and all other charges.

CREDIT CARDS Can be used at thousands of restaurants, stores, and other businesses by consumers as well as to pay for goods and services online. Bank cards – the bank takes on the liability and expense of granting credit and they are accepted by many businesses all over the world (MasterCard and VISA) Charge cards – card with yearly membership fee, no spending limit, and full balance must be paid each month (American Express and Diners Club)

CREDIT CARDS CONTINUED Affinity cards – organizations allow their names to be affiliated with a credit card; banks allow an organization to receive a small percentage of credit sales (charity, sports team, oil company) Retail store cards – these show the name of the retail store that issues them and customer can only use these cards at the issuing stores (Dillard’s, Best Buy, Target)

FEATURES OF INSTALLMENT CREDIT Signing a sales contract that shows the terms of the purchase Receiving the purchased item at the time of the sale Making a down payment – a payment of part of the purchase price usually made at the time of purchase Paying a finance charge on the amount owed Making regular payments at stated times

CONSUMER LOANS A loan is an alternative to charge account buying or installment sales credit. Installment loans – you agree to make monthly payments in specific amounts over a period of time. Promissory note – a written promise to repay based on a debtor’s excellent credit history. Collateral – property that is used as security or offered up in order to receive a loan (car, house, jewelry). Cosigner – responsible for the payment of a note if you do not pay as promised.

Checkpoint  What are the major types of consumer credit? The major types of consumer credit are loan credit and sales credit.

BENEFITS OF CREDIT Convenience Immediate possession Savings Credit rating – a person’s reputation for paying bills on time Useful for emergencies

Checkpoint  What are potential drawbacks of buying on credit? Potential drawbacks of buying on credit include overbuying, careless buying, paying higher prices, and overuse of credit.

KEY TERMS Interest (I) – the cost of borrowing or using someone else’s money Annual percentage rate (APR) – a disclosure required by law that states the percentage cost of credit on a yearly basis.

FINDING INTEREST Principal, P Interest Rate, R Time, T Amount of the loan Interest Rate, R Percent of interest charged or earned Time, T Length of time for which interest will be charged, usually expressed in years or parts of a year

I P R T SIMPLE INTEREST Interest  Principal  Rate  Time

SIMPLE INTEREST EXAMPLES  P  R T One year $100 .12 1 $12 Two years 2 $24 One month 1/12 $1 60 days 60/360 $2

CREDIT BUREAU Gathers information on credit users Sells information to businesses offering credit, such as banks, finance companies, and retail stores Creates a credit report showing debts owed, how often credit is used, and whether debts are paid on time

MAIN COMPONENETS OF A CREDIT REPORT Personal information Public records Adverse accounts Accounts in good standing Credit history requests Personal statement

CREDIT DOCUMENTS Credit contracts Statement of account – record of the transactions completed during the billing period. Accuracy of records Avoiding fraud

SAMPLE CREDIT CARD STATEMENT

Checkpoint  What are the main items reported on a statement of account? the balance due the amounts charged during the month the amounts credited for payments or returned items the current balance the minimum amount due

ONLINE RESEARCH https://www.creditcards.com/student/ Look through the various credit cards for students. Answer the following questions based on your findings. What are the top 2 credit cards available for students? Give 2 facts about each credit card that make it better than the others.