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Chapter 7: Credit Cards and Consumer Loans Garman/Forgue Personal Finance Ninth Edition PPT slide program prepared by Amy Forgue and Ray Forgue.

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Presentation on theme: "Chapter 7: Credit Cards and Consumer Loans Garman/Forgue Personal Finance Ninth Edition PPT slide program prepared by Amy Forgue and Ray Forgue."— Presentation transcript:

1 Chapter 7: Credit Cards and Consumer Loans Garman/Forgue Personal Finance Ninth Edition PPT slide program prepared by Amy Forgue and Ray Forgue.

2 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 2 Learning Objectives 1.Compare the common types of consumer credit, including credit cards and installment loans. 2.Describe the types and features of credit card accounts. 3.Manage your credit card accounts to avoid fees and finance charges.

3 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 3 Learning Objectives 4.Describe the important features of consumer installment loans. 5.Calculate the interest and annual percentage rate on consumer loans.

4 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 4 Introduction Annual Percentage Rate (APR): The cost of credit on a yearly basis as a percentage rate.

5 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 5 Types of Consumer Credit Installment credit (or closed-end credit) Noninstallment credit Open-ended credit (or revolving credit) –Credit limit Credit (or charge) card

6 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 6 Types of Consumer Credit Cash advances Personal line of credit Home-equity line of credit Service credit

7 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 7 Credit Card Accounts Minimum payment Principal Default

8 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 8 Types of Credit Card Accounts Bank credit cards –Cash advance (or convenience) checks –Balance transfer –Prestige card –Affinity cards

9 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 9 Types of Credit Card Accounts Retail credit card accounts Retail Credit Card: Allows customers to make purchases on credit at any of the outlets of a particular retailer. Travel and Entertainment (T&E) cards

10 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 10 Aspects of Credit Card Accounts Teaser Rate: A temporarily low introductory rate to entice borrowers to apply for a credit card. Default rates –Universal default Variable interest rates, variable interest rate cards

11 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 11 Aspects of Credit Card Accounts Preapproved credit card offers Annual and Transaction Fees –Transaction fee: A small charge levied each time a card is used. Liability for lost or stolen cards

12 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 12 Aspects of Credit Card Accounts Secured (or collateralized) credit card Late-payment, bounced check, and over-the-limit fees

13 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 13 Credit Card Insurance Credit Disability Insurance: Repays the outstanding loan balance if the borrower becomes disabled.

14 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 14 Managing Credit Cards Wisely Credit (or periodic) statement Billing (or closing or statement) date Due date: The specific day by which the credit card company should receive payment from you.

15 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 15 Managing Credit Cards Wisely Transaction date: The day on which a credit cardholder makes a purchase. Posting date: The day the credit card company is informed of the transaction and the charge is posted to the account.

16 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 16 Managing Credit Cards Wisely Grace period: Time period between the posting date of a transaction and the payment due date during which no interest accrues. Minimum payment amount: Lowest allowable monthly payment required by the lender.

17 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 17 Managing Credit Cards Wisely Credit for merchandise returns and errors Credit receipt: Written evidence of any items returned that notes the specific amount and date of the transaction.

18 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 18 Managing Credit Cards Wisely Computation of finance charges –Periodic Rate –Average Daily Balance Correcting errors on your credit card statement –Goods and services dispute

19 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 19 How Credit Card Balances Are Calculated Understand consumer installment loans. –Cash Loan –Purchase Loan (or Sales Credit)

20 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 20 Installments Loans Installment loans can be unsecured or secured. Unsecured Loan (or Signature Loan) Secured Loan –Cosigner –Collateral Acceleration Clause

21 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 21 Purchase Loan Installment Contracts Installment purchase agreements (or collateral installment loans) Conditional sales contracts (or financing leases)

22 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 22 Calculating Interest on Consumer Loans Truth in Lending Act (or TIL)

23 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 23 Calculating an Installment Loan Payment Use Table 7.1 in the text for the interest rate and time of the loan amount involved. Variable-rate (or adjustable-rate) loans

24 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 24 The Declining-Balance Method Periodic Interest Rate: The monthly rate applied to the outstanding balance of the loan. Amortization

25 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 25 Other Methods Add-On Interest Method Rule of 78s (or Sum of the Digits) method for calculating prepayment penalties Discount method of calculating interest

26 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 26 The Top 3 Financial Missteps with Credit Cards and Consumer Loans People slip up in building and maintaining good credit when they do the following: 1.Fail to shop for the lowest APR on their credit cards and consumer loans. 2.Pay more than 15 percent of disposable income toward nonmortgage debt payments. 3.Fail to regularly check the accuracy of credit bureau files.

27 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 27 Good Money Habits in Credit Cards and Consumer Loans Move credit card balances to lower-cost accounts, if necessary. Never make convenience purchases on bank credit cards on which you carry a balance. Pay your credit card balances in full each month, or no longer than two or three months later.

28 Copyright ©Houghton Mifflin Company. All rights reserved.7 - 28 Good Money Habits in Credit Cards and Consumer Loans Check your monthly billing statements against your receipts for accuracy, and challenge discrepancies. Use student loans for direct education expenses only rather than to maintain a better lifestyle. Select installment loans that have a low annual percentage rate.

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