1. MYPF 9.1 Using Credit Wisely 9.2 Computing the Costs of Credit
3/26/2018 9
Costs of Credit
9.1 Using Credit Wisely
9.2 Computing the Costs of Credit
© 2016 South-Western, Cengage Learning
Chapter 1

2. Lesson 9.1 Using Credit Wisely
Learning Objectives
LO 1-1 Describe the responsibilities of consumer credit.
LO 1-2 Discuss how to protect your credit accounts from fraud.
LO 1-3 Explain how you can reduce or avoid credit costs.
Chapter 9
© 2016 South-Western, Cengage Learning

3. Responsibilities of Credit
You have responsibilities to yourself.
You have responsibilities to creditors.
Creditors have responsibilities to you.
Chapter 9
© 2016 South-Western, Cengage Learning

4. Responsibilities to Yourself
Use credit wisely and do not get into debt beyond an amount you can comfortably repay.
Check out businesses before making credit purchases.
Chapter 9
© 2016 South-Western, Cengage Learning

5. Responsibilities to Yourself
(continued)
Comparison shop and avoid impulse buying.
Comparison shopping involves checking several places to be sure you are getting the best price for equal quality.
Impulse buying occurs when you buy something without thinking about it and making a conscious decision.
Chapter 9
© 2016 South-Western, Cengage Learning

6. Responsibilities to Yourself
(continued)
Have the right attitude about using credit.
Enter into each transaction in good faith and with full expectation of meeting your obligations and upholding your good credit reputation.
Chapter 9
© 2016 South-Western, Cengage Learning

7. Responsibilities to Creditors
When you open an account, you are pledging your honesty and sincerity in the use of credit.
Some of your responsibilities are:
Limit your spending
Make payments promptly
Read and understand terms
Contact creditor to resolve problems and avoid judgments and garnishment
Judgment is a court order that allows creditors to collect debts.
Garnishment is a legal process that allows part of your paycheck to be withheld for payment of a debt.
Chapter 9
© 2016 South-Western, Cengage Learning

8. Creditors’ Responsibilities to You
Honestly representing goods and services
Informing customers about all rules and regulations, interest rates, credit policies, and fees
Cooperating with established credit reporting agencies
Making credit card statements available to customers
Establishing and adhering to sound lending and credit policies
Using reasonable methods of contacting customers who fail to meet their obligations, and assisting in solving credit problems
Keeping credit users informed about credit policy changes
Chapter 9
© 2016 South-Western, Cengage Learning

9. Protecting Yourself from Fraud
Credit card fraud costs businesses and consumers millions of dollars each year.
Common types of fraud
Illegal use of a lost or stolen credit card
Illegal use of credit card information intercepted online
While the credit card holder’s liability is limited to $50, the merchant is not protected from loss.
Merchants often raise their overall prices to cover such losses.
Chapter 9
© 2016 South-Western, Cengage Learning

10. Safeguarding Your Cards
Sign and activate cards immediately.
Carry only cards you need.
Keep a list of card numbers, expiration dates, and other information about them in a safe place.
Notify creditors if a card is lost or stolen.
Keep card in view during transactions.
Tear up old receipts.
Chapter 9
© 2016 South-Western, Cengage Learning

11. Safeguarding Your Cards
(continued)
Keep receipts and verify charges on statements.
Do not lend cards or leave them lying around.
Destroy expired cards–cut them up.
Destroy unwanted credit card offers.
Do not give credit card information by phone or online to people or businesses you don’t know.
Chapter 9
© 2016 South-Western, Cengage Learning

12. Protecting Your Accounts Online
Deal only with online companies that you know and trust.
Verify website security – look for
Encryption is a code that makes your account name, number, and other information unreadable to others.
Don’t always trust watchdog group seals.
Review the company’s privacy policy.
Chapter 9
© 2016 South-Western, Cengage Learning

13. Protecting Your Accounts Online
(continued)
Don’t store your information on the merchant’s site.
Be alert for phishing scams.
Phishing uses online pop-up messages or to deceive you into disclosing personal information.
“Phishers” send s or direct you to websites that appear to belong to legitimate businesses that you normally deal with, such as your bank or Internet service provider (ISP). Instead, these are spoofed sites.
Chapter 9
© 2016 South-Western, Cengage Learning

14. Avoiding Unnecessary Credit Costs
Guidelines to minimize the cost of credit:
Make more than the minimum payment.
Do not increase spending as income increases.
Accept only the amount of credit that you need.
Unused credit is the remaining credit available to you on current accounts.
Unused credit can sometimes count against you.
Keep the number of credit accounts to a minimum.
Pay off your balances as quickly as you can.
Chapter 9
© 2016 South-Western, Cengage Learning

15. Avoiding Unnecessary Credit Costs
(continued)
Pay for small purchases.
Understand the cost of credit, and shop around.
Take advantage of credit incentive programs.
With a rewards program, you will receive a payback in the form of points, cash back, airline miles, or other awards to redeem later.
With a rebate plan, you get back a portion of what you spent in credit purchases over the year.
Chapter 9
© 2016 South-Western, Cengage Learning

16. Lesson 9.2 Computing the Costs of Credit
Learning Objectives
LO 2-1 Explain why credit costs vary.
LO 2-2 Compute and explain simple interest and APR.
LO 2-3 Compare methods of computing the finance charge on revolving credit.
Chapter 9
© 2016 South-Western, Cengage Learning

17. Why Credit Costs Vary Source of credit
Amount financed and length of time
Ability to repay debt
Collateral
Interest rates
The prime rate is the interest rate that banks offer to their best business customers, such as large corporations.
Individuals pay higher rates because the risk is greater to the lender.
Chapter 9
© 2016 South-Western, Cengage Learning

18. Why Credit Costs Vary Economic conditions Type of credit or loan
(continued)
Economic conditions
Type of credit or loan
Fixed-rate loans are loans for which the interest rate does not change over the life of the loan.
With variable-rate loans, the interest rate goes up and down with inflation and other economic conditions.
The business’s costs of providing credit.
Chapter 9
© 2016 South-Western, Cengage Learning

19. Computing Interest
Interest is the money paid by a financial institution for the use of your deposit in a savings (or other) account.
In the case of a loan, interest is the cost to you of borrowing money.
Simple interest formula
Annual percentage rate formula
Credit card billing methods
Chapter 9
© 2016 South-Western, Cengage Learning

20. Simple Interest Formula
Simple interest is interest computed only on the amount borrowed (or saved), without compounding.
The simple interest method of calculating interest assumes one payment at the end of the loan period.
Chapter 9
© 2016 South-Western, Cengage Learning

21. Simple Interest Formula
(continued)
The cost is based on three elements:
A loan’s principal is the amount borrowed, or the unpaid portion of the amount borrowed, on which the borrower pays interest.
The rate is the percentage of interest you will pay on a loan.
Time is the period during which the borrower will repay a loan; it is expressed as a fraction of a year.
Chapter 9
© 2016 South-Western, Cengage Learning

22. Simple Interest Formula
(continued)
The formula for simple interest is:
Interest (I) = Principal (P) × Rate (R) × Time (T)
I = P × R × T
Chapter 9
© 2016 South-Western, Cengage Learning

23. Annual Percentage Rate Formula
There are two ways to calculate APR:
APR formula
APR tables
The APR tables are more precise; the formula only approximates the APR.
Chapter 9
© 2016 South-Western, Cengage Learning

24. Annual Percentage Rate Formula
(continued)
APR 
2  n  f
P (N  1)
Where:
n = number of payment periods in one year
f = finance charge
P = principal or amount borrowed
N = total number of payments to pay off amount borrowed
Chapter 9
© 2016 South-Western, Cengage Learning

25. Down Payment
An installment contract requires a down payment, which is part of the purchase price paid in cash up front.
The down payment reduces the amount of the loan.
Each installment payment includes principal and interest.
The difference between the total price paid and the cash price is the finance charge.
Chapter 9
© 2016 South-Western, Cengage Learning

26. Credit Card Billing Methods
Adjusted balance method
The finance charge is applied only to the amount owed after the bill is paid each month.
Previous balance method
The finance charge is imposed on the entire amount owed from the previous month.
Average daily balance method
The balance is calculated each day of the billing cycle, and payments made reduce the finance charge.
Chapter 9
© 2016 South-Western, Cengage Learning