1. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE1 CHAPTER 18 18-1 18-1Credit Fundamentals 18-2 18-2Cost of Credit 18-3 18-3Credit Application and Documents 18-4 18-4Protection of Credit Rights Consumer Credit

2. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE2 Credit Fundamentals Goals Identify the types of consumer credit. Describe the benefits of using credit. Explain some disadvantages of using credit. 18-1

3. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 3 Key Terms credit finance charge down payment installment loan promissory note collateral cosigner credit rating

4. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 4 USING CREDIT Credit Debtor Creditor

5. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 5 TYPES OF CREDIT Trade credit Loan credit Installments Sales credit

6. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 6 CHARGE ACCOUNTS Regular accounts Budget accounts Revolving accounts Credit limit Payments Finance charge

7. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 7 CREDIT CARDS Bank cards Travel and entertainment cards Oil company cards Retail store cards

8. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 8 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 Paying a finance charge on the amount owed Making regular payments at stated times

9. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 9 CONSUMER LOANS Installment loan Single payment loan Promissory note Collateral Secured loan Cosigner

10. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 10 What are the major types of consumer credit? Answer The major types of consumer credit are loan credit and sales credit. Checkpoint >>

11. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 11 BENEFITS OF CREDIT Convenience Immediate possession Savings Credit rating Useful for emergencies

12. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 12 What are the main advantages of consumer credit? Answer The main advantages of consumer credit are convenience (shopping without carrying cash), immediate possession of items bought on credit, savings (when stores offer special prices to credit customers), the chance to build a favorable credit rating, and for emergencies. Checkpoint >>

13. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 13 CREDIT CONCERNS Overbuying Careless buying Higher prices Overuse of credit

14. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 14 QUESTIONS TO ASK How will you benefit from this use of credit? Is this the best buy you can make or should you shop around? What will be the total cost of your purchase, including the finance charges? What would you save if you paid cash? Will the payments be too high for your income?

15. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 15 What are potential drawbacks of buying on credit? Answer Potential drawbacks of buying on credit include overbuying, careless buying, paying higher prices, and overuse of credit. Checkpoint >>

16. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE16 Cost of Credit Goals Calculate interest in consumer credit situations. Explain finance charges when using credit. 18-2

17. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 17 Key Terms interest annual percentage rate (APR)

18. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 18 FINDING INTEREST Principal, PAmount of the loan Interest Rate, RPercent of interest charged or earned Time, TLength of time for which interest will be charged, usually expressed in years or parts of a year

19. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 19 SIMPLE INTEREST Interest  Principal  Rate  Time IPRT

20. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 20 SIMPLE INTEREST EXAMPLES IPRT One yearI  $100 .12  1  $12 Two yearsI  $100 .12  2  $24 One monthI  $100 .12  1/12  $1 60 daysI  $100 .12  60/360  $2

21. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 21 MATURITY DATES Maturity date is the date on which a loan must be repaid. Time stated in months One month loan made on January 15 is due on February 15 Two month loan made on January 15 is due on March 15 Time stated in days 90 day loan made on March 4 is due on June 2

22. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 22 90-DAY LOAN EXAMPLE Determine maturity date for a 90-day loan made on March 4 Find the number of days remaining in March Add days until you reach 90 days Due date is June 2 March27 days(31–4) April30 days May31 days June 2 days Total90 days

23. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 23 INSTALLMENT INTEREST Decreasing loan payments Level loan payments

24. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 24 Amortization Schedule

25. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 25 What three things are necessary to calculate interest? Answer To calculate interest, one must know the principal (amount of the loan), the interest rate, and the length of time for which interest will be charged. Checkpoint >>

26. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 26 FINANCE CHARGES Annual percentage rate (APR) Total dollar charges Compare credit costs

27. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 27 What does APR represent? Answer APR represents the annual percentage rate, which is the percentage cost of credit on a yearly basis. This disclosure is required by law. Checkpoint >>

28. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE28 Credit Application and Documents Goals Explain the credit application process. Describe the activities of a credit bureau. Discuss commonly used credit documents. 18-3

29. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 29 Key Terms credit application credit bureau statement of account

30. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 30 CREDIT APPLICATION PROCESS The three Cs of credit Character Capacity Capital Credit applications Documenting credit data Actions to establish credit

31. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 31 Personal information Employment information Information about other credit Banking information Joint account information Request for additional cards Signature Sample Credit Card Application

32. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 32 What are the three Cs of credit? Answer character capacity capital Checkpoint >>

33. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 33 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

34. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 34 Sample Credit Report

35. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 35 What is the main purpose of a credit bureau? Answer The main purpose of a credit bureau is to gather information on credit users and report the facts in credit reports that it sells to businesses that offer credit. Checkpoint >>

36. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 36 CREDIT DOCUMENTS Credit contracts Statement of account Accuracy of records Avoiding fraud

37. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 37 Sample Monthly Credit Statement

38. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 38 What are the main items reported on a statement of account? Answer The main items reported are the balance due, the amounts charged during the month, the amounts credited for payments or returned items, the current balance, and the minimum amount due. Checkpoint >>

39. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE39 Protection of Credit Rights Goals Identify credit application regulations. Explain credit use regulations. Discuss credit problems and available assistance. 18-4

40. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 40 Key Terms credit counselor bankruptcy

41. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 41 CREDIT APPLICATION REGULATIONS Truth-in-Lending Act of 1968 Equal Credit Opportunity Act

42. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 42 How does the Truth-in-Lending Act assist consumers? Answer The Truth-in-Lending Act assists consumers by requiring that they be fully informed of all of the costs of credit before signing an agreement. Borrowers must be informed of the annual percentage rate and total finance charge. The Law also limits consumers’ liability for unauthorized use of credit cards to $50 for unauthorized purchases made prior to notifying the card issuer, and card holders are not liable for any purchases made after notifying the credit card company. Checkpoint >>

43. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 43 CREDIT USE REGULATIONS Fair Credit Billing Act Fair Credit Reporting Act Consumer Credit Reporting Reform Act Fair Debt Collections Act

44. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 44 What is the purpose of the Fair Credit Reporting Act? Answer The purpose of the Fair Credit Reporting Act is to give consumers the right to know what information credit bureaus are giving to potential creditors, employers, and insurers. The Act requires credit bureaus to keep records for both a husband and wife if both are responsible for the debt so that each spouse can develop a credit history. It also requires credit bureaus to delete information dealing with a personal bankruptcy that is more than 10 years old and any other adverse information that is more than 7 years old. Checkpoint >>

45. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 45 CREDIT PROBLEMS AND ASSISTANCE Credit Counseling Bankruptcy

46. Intro to Business, 7e © 2009 South-Western, Cengage Learning SLIDE Chapter 18 46 What actions can a person take when facing credit problems? Answer A person can contact creditors and explain the situation, make a realistic proposal, keep any promises made, and make a written copy of agreements. A person with credit problems may be able to work out a debt repayment plan. He or she could also contact a credit counselor for advice. Bankruptcy is a final option for extreme debt situations. Checkpoint >>