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

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

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

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

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

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

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

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

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

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)

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 email 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 email

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

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

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

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!!!!

Ch. 18-2 Analyzing and Computing Credit Costs

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

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

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

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)

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 20-25 day grace period before starting a finance charge

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

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

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