1. Chapter 6 Review

2. Do you have the cash for the down payment?
What are two factors you should consider before using credit?
Do you have the cash for the down payment?
Do you want to use your savings instead of credit?
Can you afford the item?
Could you use the credit in some better way?
Could you put off buying the item for a while?
What are the costs of using credit?

3. What are two advantages to using credit?
Enjoy things now and pay later
Can combine several purchases in one monthly payment
Need one to rent car, make reservations, buy online
Gives you a record of your expenses
Safer to carry when shopping or traveling
Use responsibly and you will get good credit

4. What are two disadvantages to using credit?
Temptation to buy more than you can afford
Bad purchases may cause loss of income and property
Credit does not give you more money – still have to pay later
May have trouble paying bills

5. What is the difference between closed-end and open-end credit
Closed-End Credit
One time loan paid back in specific time period in payments of equal amounts
Lower interest rates than open-end credit
Open-End Credit
Credit with a limit (line of credit) that you can use continuously on various items and pay at least a minimum amount per month

6. Give an example of closed-end credit
Examples: mortgages and car loans

7. Give an example of open-end credit
Examples: department store credit cards, Visa, Mastercard

8. Inexpensive Loans Medium-Priced Loans Expensive Loans
Where do you get cheap loans, medium priced loans, and expensive loans
Inexpensive Loans
Friends or family, little or no interest, potential problems with these?
Medium-Priced Loans
From banks, credit unions, may be patient with those late with payment for good reason
Expensive Loans
Finance companies
Easiest to get, cash advances (billed to credit cards)

9. Why is a cash advance so expensive?
Charge high interest from the day they are made

10. How many credit cards does the average cardholder have?
B. 7
C. 5
D. 3

11. Interest Calculations
Simple Interest Formula I = P * R * T
I = Interest – the cost of borrowing money
P = Principal – the amount of money you borrowed
R = Rate – the interest rate
T = Time – the amount of time you borrowed it for – expressed as fraction in formula
3 mo 3/ mo 6/ mo 10/12

12. Simple Interest Problem
T = 3 months (remember to put as a fraction in the formula)
6 = P * .12 * 3/12 (combine like terms)
6 = P * 0.03 (get P alone)
_6_ = __P * 0.03_ $200 = P

13. What does APR stand for?
Annual Percentage Rate – the cost of the credit over the year

14. Calculating Monthly Interest Rate
Take APR and divide by 12 because there are 12 months in the year
18% APR %/12 = 1.5 % or .015
15% APR %/12 = 1.75% or .0175
12% APR %/12 = 1% or .01

15. Adjusted Balance
Use 18% APR to compute the interest charges for the following three months.
Calculate the monthly percentage rate by taking the APR and dividing by 12 (months in the year) 18%/12 = 1.5%
Beginning Balance
Finance Charge
Adjusted Balance
Payment
New Balance
$100
$1.50 (100*1.5%)
$ ( )
$20.00
$81.50 ( )
81.50
$1.22 (81.50*1.5%)
82.72 ( )
62.72 ( )
62.72
$.94 (62.72*1.5%)
63.66 ( )
43.66 ( )
Total Finance Charges $ ( )

16. Previous Balance Method
Use 18% APR to computer the interest charges for the following three months
Calculate the monthly percentage rate by taking the APR and dividing by 12 (months in the year) 18% /12 = 1.5%
Beginning Balance
Payment
Adjusted Balance
Finance Charge
New Balance
$500
$50.00
$450 (500-50)
$6.75 (450*1.5%)
( )
456.75
( )
$6.10 (406.75*1.5%)
( )
412.85
( )
$5.44 (362.85*1.5%)
( )
Total Finance Charges $ ( )

17. Average Daily Balance Use 15% APR and a 30 day billing cycle
Calculate the monthly percentage rate by taking the APR and dividing by 12 (months in the year) 15%/12 = 1.25%
Date
Item
Debit
Credit
Balance
# of Days
Extension
6/5
$500
2 (6/5-6/7)
1000 (500*2)
6/7
Charge
$75
$575
5 (6/7-6/12)
2875 (575*5)
6/12
Payment
$25
$550
7 (6/12-6/19)
3850 (550*7)
6/19
$35
$515
3 (6/19-6/22)
1545 (515*3)
6/22
$50
$565
4 (6/22-6/26)
2260 (565*4)
6/26
$45
$520
9 (30 day cycle =9)
4680 (520*9)
Average Daily Balance $ ( =16,210/30)
Monthly Finance Charge $ (540.33*1.25%)

18. Credit Cards Be familiar with inappropriate uses of credit
Retail therapy
Financing debt
Utility bills
Perishable items

19. Credit Cards Be able to give two tips for using a credit card wisely
Wants vs needs – don’t buy it just because you want it
Pay off balances strategically
Don’t apply for unnecessary credit
Keep balances low

20. Choosing a Credit Card Know the most popular type of credit card
Standard card

21. Choosing a Credit Card
Be familiar with the hidden costs of a credit card
Annual fees
Credit limits
Fees
Cash advance fee
Late fee
Inactivity fee

22. Choosing a Credit Card
Be familiar with what a consumer should consider when choosing a credit card
Spending habits
Interest rates
Credit limit
Fees and penalties
Interest computation

23. Credit Files/Reports Who can look at/access your credit report?
Can -- Potential employers, lenders, financial institutions
Cannot -- Friends, family, and neighbors or anyone not dealing with lending or credit

24. Credit Files/Reports
Know the two places you should contact if inaccurate information was recorded in your credit report
Credit bureau
Organization/business reporting it

25. Credit Files/Reports
Know who the Fair Debt Collection Practices Act protects?
The consumer

26. 5 C’s of Credit
Character: Will You Repay the Loan, reputation responsibility
Capacity: Can You Repay the Loan, what is your job
Capital: Resources invested, assets
Collateral: Form of security (don’t pay for car, then they take it)
Conditions: Purpose of the loan, what are you doing with the money?

27. 5 C’s of Credit Give two ways to improve your credit score
Pay off bills and credit cards and on time
Use credit cards lightly and don’t max out
Check your limits
Don’t apply for credit too often

28. 5 C’s of Credit
Know what credit bureaus are and where they get their information?
Collect consumer credit information and make it public to places that you request loans or credit from
Banks, credit card companies, stores, public and court records

29. Bankruptcy Give two signs of debt problems or overspending
Use credit cards to pay for necessities
Borrowing money to pay for other debts
Needing a co-signer
Depending on friends and family to bail you out
Only paying minimum payment on credit cards
Unsure of how much you own

30. Bankruptcy Give one way to avoid/prevent bankruptcy
Get help from friends or family
Sell some assets
Ask creditors to help you
Seek credit counseling
Restructure mortgage
Make sacrifices

31. Identity Theft Give two signs that your identity has been stolen
Warrant out for your arrest
You receive calls for debt that isn’t yours
See withdrawals from accts you can’t explain
See charges on cards you didn’t make
You see withdrawals from your bank account that you can’t explain.
You don’t get your bills or other mail.
Debt collectors call you about debts that aren’t yours.
You find unfamiliar accounts or charges on your credit report.
Medical providers bill you for services you didn’t use.
You get notice that your information was compromised by a data breach at a company where you do business or have an account.

32. Identity Theft
Give two ways you can protect yourself against or prevent identity theft
Destroy items with personal information on them
Don’t carry around pin numbers
Don’t carry around social security number in wallet/purse
Store information in safe place
Do not give information out over phone
Use secure sites