Professional Documents
Culture Documents
Consumer Credit
Consumer Credit
Chapter 5
Objectives
Analyze advantages and disadvantages of using
consumer credit.
Assess the types of sources of consumer credit.
Determine whether you can afford a loan and how to
apply for credit.
Determine the costs of credit by calculating interest
using various interest formulas.
Develop a plan to protect your credit and manage
your debts.
Lesson 1
What is consumer
credit?
What is Consumer Credit?
6-5
Disadvantages of Consumer Credit
Temptation to overspend.
Can create long-term financial problems, slow
progress toward financial goals.
Potential loss of merchandise
due to late or non-payment.
Ties up future income.
Credit costs money - more costly than paying with
cash.
6-6
Lesson 2
Types of Credit
Types of Credit
Closed-End Credit.
– One-time loans for a specific purpose that you pay back
in a specified period of time, and in payments of equal
amounts.
Mortgage, automobile, and installment loans for furniture,
appliances and electronics.
Open-End Credit.
– Use as needed until reaching line of credit max.
Credit cards, departments store cards, bank credit cards,
incidental credit.
– You pay interest and finance charges if you do not pay
the bill in full when due. 6-8
Lesson 3
Sources of Credit
Sources of Consumer Credit-See
Exhibit 5-3
Inexpensive loans.
– Parents or family members.
– Loans based on assets- using CD as collateral.
Medium-priced loans.
– Commercial banks, savings and loan associations, and
credit unions.
Expensive loans.
– Finance and check cashing companies .
– Retailers such as car or appliance dealers.
– Bank credit cards and cash advances. 7-2
Credit Cards
6-9
Choosing and Using a Credit Card
6-12
General Rules of Credit Capacity
total liabilities
= Should be < 1
net worth*
APR = 2XnXI
P(n+1)
For 12 equal monthly payments
APR 2 X 12 X $8 = $192 .1476 or
= =
$100(12 + 1) $1,300 14.76%
Trade-Offs of Financing Choices
7-4
Calculating the Cost of Credit
Simple interest.
– Computed on principal only and without compounding. The
dollar cost of borrowing.
– I=PxRxT
Simple interest on a declining balance.
– Interest is paid only on the amount of original principal not yet
repaid.
Add-on interest.
– Interest is calculated on the full amount of the original principal,
added to the principal, and the total of both is divided by the
number of payments to be made.
7-5
Cost of Open-End Credit
7-6
(continued)
6-23
How to Protect Yourself From
Identity Theft
6-7
Protecting Yourself
Against Credit Card Fraud
6-10
When You Make Purchases Online
6-15
(continued)
Cosigning a Loan
Complaining About
Consumer Credit
Complaining About Consumer Credit
7-14
Fair Credit Reporting Act
6-22
Truth In Lending Rights
6-25
Fair Debt Collection Practices Act
Collection agencies...
Can’t be abusive or threaten.
Can’t call you at work if you say not to.
Can’t tell boss and friends.
Can’t call you at odd hours.
Must follow set procedures.
Act does not apply to creditors attempting
to collect the debt themselves.
6-26
Protection Under Other
Consumer Credit Laws
6-27
Lesson 8
7-15
Bankruptcy
7-17
After Bankruptcy You Still May Owe...
Go to www.cardratings.com. Compare
different cards.
What features are important to you in
choosing a credit card?
6-30