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

Chapter 7:Credit Cards and Consumer Loans

Garman/Forgue

Personal FinanceNinth Edition

PPT slide program prepared by Amy Forgue and Ray Forgue.

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.


Learning Objectives

4. Describe the important features of consumer installment loans.

5. Calculate the interest and annual percentage rate on consumer loans.


Introduction

• Annual Percentage Rate (APR): The cost of credit on a yearly basis as a percentage rate.


Types of Consumer Credit

• Installment credit (or closed-end credit)

• Noninstallment credit

• Open-ended credit (or revolving credit)– Credit limit

• Credit (or charge) card


Types of Consumer Credit

• Cash advances

• Personal line of credit

• Home-equity line of credit

• Service credit


Credit Card Accounts

• Minimum payment

• Principal

• Default


Types of Credit Card Accounts

• Bank credit cards– Cash advance (or convenience) checks

– Balance transfer

– Prestige card

– Affinity cards


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


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



• 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



• Secured (or collateralized) credit card

• Late-payment, bounced check, and over-the-limit fees


Credit Card Insurance

• Credit Disability Insurance: Repays the outstanding loan balance if the borrower becomes disabled.


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.



• 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.



• 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.



• Credit for merchandise returns and errors

• Credit receipt: Written evidence of any items returned that notes the specific amount and date of the transaction.



• Computation of finance charges– Periodic Rate– Average Daily Balance

• Correcting errors on your credit card statement– Goods and services dispute


How Credit Card Balances Are Calculated

• Understand consumer installment loans.– Cash Loan– Purchase Loan (or Sales Credit)


Installments Loans

• Installment loans can be unsecured or secured.

• Unsecured Loan (or Signature Loan)

• Secured Loan– Cosigner– Collateral

• Acceleration Clause


Purchase Loan Installment Contracts

• Installment purchase agreements (or collateral installment loans)

• Conditional sales contracts (or financing leases)


Calculating Interest on Consumer Loans

• Truth in Lending Act (or TIL)


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


The Declining-Balance Method

• Periodic Interest Rate: The monthly rate applied to the outstanding balance of the loan.

• Amortization


Other Methods

• Add-On Interest Method

• Rule of 78s (or Sum of the Digits) method for calculating prepayment penalties

• Discount method of calculating interest


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.


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.


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.

Documents

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