1. Chapter 18 Responsibilities and Costs of Credit
Ch Using Credit Responsibly

2. Responsibilities of Consumer Credit
Responsibilities to Yourself
You must use credit wisely and not get into debt beyond an amount you can comfortably repay
Never having enough money and always scrambling to make your next payment is a stressful way to live
If you cant make your payments a creditor may take you to court to have your wages garnished
Garnishment- is legal process that allows part of your paycheck to be withheld for payment of a debt
Don’t buy on impulses, shop around and do research before buying

3. Responsibilities of Consumer Credit
Responsibilities to Yourself Cont.
Tying up future income should be done with careful planning to maximize your purchasing power
Comparison shop for credit and become familiar with the interest rates and due dates
Have the right attitude about using credit
Enter into each transaction in good faith and with the expectation of meeting your obligations and keeping your credit reputation

4. Responsibilities of Consumer Credit
Responsibilities to Creditors
Opening an account is entering a relationship with a store, bank or credit card company
You are promising your honesty and sincerity in using credit
You have the responsibility to limit your spending to amounts that you can repay
By singing a credit application you agree to make all payments promptly on or before a due date

5. Responsibilities of Consumer Credit
Responsibilities to Creditors Cont.
You are responsible for reading and understanding the terms of all agreements
It is your responsibility to contact the creditor immediately when you find a problem with the bill or discover defective merchandise
If an emergency prevents you from making a payment you should contact the creditor to make arrangements to pay at a later date

6. Responsibilities of Consumer Credit
Creditors Responsibilities to You
Assisting consumers in making wise purchases by honestly representing goods and services
Informing consumers about all rules and regulations, interest rates, credit policies, and fees
Cooperating with established credit reporting agencies, making credit records available to the consumer and promptly fixing any mistakes
Establishing and carrying out sound lending and credit policies
Using reasonable methods of contacting customers who fail to meet their obligations and assisting them when possible with repayment schedules and helping to minimizes credit problems

7. Protecting Yourself from Credit Card Fraud
Most common type is the illegal use of a lost or stolen credit card or of credit card information intercepted online
You are only liable for up to $50, the merchant is not protected from a loss
Consumers as a whole ultimately pay higher prices because of this

8. Protecting Yourself from Credit Card Fraud
Safeguarding Your Cards
It is your responsibility to protect your cards from unauthorized use
Tips to protect your cards
Sign them as soon as you get them
Carry only the ones you need
Keep a list of your card numbers, expiration dates, and phone number and address of each company
Notify creditors immediately by phone when your card is lost or stolen and follow up wit a letter so that you have documentation
Watch your card during transactions and get it back as soon as you can

9. Protecting Yourself from Credit Card Fraud
Safeguarding Your Cards
Tips to protect your cards
Tear up an carbon or carbonless paper that contains account info
Don’t lend them to anyone or leave them lying around
Destroy expired cards by cutting them up
Don’t give your numbers and expiration dates over the phone to people or business you don’t know
Keep your sales receipts and verify all charges on your card statements promptly

10. Protecting Yourself from Credit Card Fraud
Protecting Your Cards Online
Buying on the Internet opens up the possibility for criminals to steal credit card info
Software makers and online companies are fighting these people constantly by developing new ways to offer secure electronic transmission of your info
Ways you can protect yourself online
Only deal with companies you know and trust
Always look for your browser’s symbol that indicates a secure site before entering info
IE7 has a closed lock next to your address bar
Legitimate online merchants clearly state their privacy policy (how they are going to handle the info you give them)

11. Protecting Yourself from Credit Card Fraud
Protecting Your Cards Online
Ways you can protect yourself online
Many sites offer assurance by displaying the seal of a nonprofit watchdog group, such as the BBB or TRUSTe
Sites are only allowed to display the seal if they follow the guidelines of these watchdogs
Phishing is a scam that uses online pop-up messages or to deceive you into disclosing your info
“Phishers” send messages that appear to be from a business that you normally deal with, ISP’s, banks, or credit card Co.
They ask you to verify your bank account number, password, card number or there personal info
Never respond to these requests, if your bank or ISP needs you to verify the information they will contact you by means other than

12. Avoiding Unnecessary Credit Costs
Credit is helpful if used wisely
Before borrowing money ask these 3 questions
Do I need Credit?-Can I afford credit?-Can I qualify for credit?
If you can say “yes” to any of these, follow these guidelines
Accept only the amount of credit that you need
Unused credit is the remaining credit available to you(credit limit - the amount you have already spent)
can count against you because if your limit is much higher than what you typically use other creditors will be reluctant to loan money because even though you don’t use all of it you could and possibly could not pay it back
Can be temptations to use more credit than you need

13. Avoiding Unnecessary Credit Costs
If you can say “yes” to any of these, follow these guidelines
Make more than the minimum payment
Minimum payments result in the max cost to you
Mean you will remain in debt for a very long time
Ex: $5,000 balance and your rate is 18% you make the min. payment(of which is usually 2% of total) it would take you 33 years to pay it off resulting in paying $12,000 for a $5,000 loan
Don’t increase credit spending when your income increases
Instead of spending your extra income save it or invest it
It is wiser to reduce existing debt or invest for future use

14. Avoiding Unnecessary Credit Costs
If you can say “yes” to any of these, follow these guidelines
Keep the number of credit cards to a minimum
Credit counselors recommend carrying no more than 1 or 2 cards
If you have more you will be tempted to make more purchases
1 major card (Visa or MasterCard) is good at most businesses eliminates needing mult. Cards
Pay cash for purchases under $25
If pay cash for small purchases you won’t be surprised with a big bill at the end of the month
Paying cash will help you see how much you are spending and typically will spend less doing so

15. Avoiding Unnecessary Credit Costs
If you can say “yes” to any of these, follow these guidelines
Understand the cost of credit
Think about how finance charges, monthly payments, and length of time you will be committed to payments will affect your lifestyle
Shop for loans
Type and source of your loan will make a big difference in cost
Plan your major purchases carefully
Never make decisions on the spur of the moment
Take advantage of rebate programs
Rebate is a partial refund of an amount spent
Some allow you to accumulate points that can be used for hotel rooms, airline tickets, or cash back
Don’t use these types of cards just to get the rebates!!!!

16. Ch. 18-2
Analyzing and Computing Credit Costs

17. Why Credit Costs Vary Method of computing finance charges
Source of credit
Some lenders are better than others
Amount financed and length of time
More you borrow and time it takes = the more finance charges you will pay
Ability to repay debt
Higher your creditworthiness is, the better your rates will be
Type of credit selected
Different plans impose different charges

18. Why Credit Costs Vary Collateral Prime Rate Economic Conditions
Secured loans generally have fixed interest rates that are lower than current variable rates charged on credit cards and open ended credit
Fixed-rate loan- are loans for which the interest rate does not change over the life of the loan
Prime Rate
Interest rates charged for the use of credit are affected by this
Prime rate- is the interest rate that banks offer to their best business customers, such as large companies
Economic Conditions
Borrowers pay more for the use of credit during inflationary economic periods
When prices are rising (inflation), then money is more in demand to buy higher priced goods for which lenders charge higher interest rates
The business’s costs of providing credit
Businesses pass along their costs to their creditors via higher finance charges and higher rates

19. Computing the Cost of Credit
Simple Interest Formula
Simple interest- is interest computed on the amount borrowed (or saved) only, without compounding
Assumes one payment at the end of the loan period
Cost is based on three things principal, interest rate and the time money is borrowed for
Formula
Interest = Principal x Rate x Time
Principal- is the amount borrowed or the unpaid portion of the amount borrowed, on which the borrower pays interest
Rate is expressed as a percentage
Time is expressed as a fraction of a year

20. Computing the Cost of Credit
Annual Percentage Rate Formula
Use this type of formula for installment credit purchases (boats, cars and furniture), when making payments over time
Requires a down payment- part of the purchase price paid in cash up front, reducing the amount of the loan
When buying a car many dealers ask for at least 10% down or will consider your trade in your down payment
Each payment includes principal and interest
The difference between the total price and the cash price is the finance charge
By law installment contracts must reveal the finance charge and the APR
Formula
n = number of payment periods in one year
F = finance charge
P = principal or amount borrowed
N = total number of payments to pay off loan
APR = 2 x n x F
P (N + 1)

21. Computing the Cost of Credit
Credit Card Billing Statements
Cost of open-ended credit accounts varies with the method creditors use to get the finance charge
Creditors must tell you the method they use to figure out their finance charge
Finance charges are usually calculated based on the monthly billing cycle
Finance charges are computed on the unpaid balance after the billing date
Creditors must tell you when finance charges begin on your account
Most creditors give you a day grace period before starting a finance charge

22. Computing the Cost of Credit
Credit Card Billing Statements
4 different ways creditors can figure finance charges
Adjusted Balance Method
Finance charge is only applied to the amount owed after you’ve paid your bill each month
Formula
Monthly interest rate x balance remaining after payment = finance charge added to next months balance
This type of method has the lowest finance charges
Previous Balance Method
Finance charge is applied to the entire amount owed from the previous month
Monthly interest rate x previous monthly balance = finance charge added to next months balance
This type of method has the highest finance charges

23. Computing the Cost of Credit
Credit Card Billing Statements
4 different ways creditors can figure finance charges
Average Daily Balance Method
Most used type
Creditors calculate your balance on each day of the billing cycle
Compute average daily balance by adding together all daily balances and dividing by the number of days in the cycle (25 or 30)
Payments made during the billing cycle are used in figuring the average
Formula
Average daily balance x monthly interest rate = finance charge
To figure the average daily balance
(amount before payment)+(amount after payment)
25 or 30 days

24. Computing the Cost of Credit
Credit Card Billing Statements
4 different ways creditors can figure finance charges
Two-Cycle billing
Newest way companies are finding finance charges
Method calculates the finance charge on the average daily balance over the last two billing periods rather than just one
Example situation
If you start with no balance, you make a purchase and you only pay part of your balance off at the end of the month. The following month you pay the entire balance. The month following those two months you would pay a finance charge for the two months you had balances.
The result is higher interest and no grace period
You pay interest from the date of purchase
Try to avoid these types of cards