Credit Statistics

• The average family carries a balance of between $5,000 and $8,000 on all their credit cards, depending on which figures you believe. Over $1,000 per family goes towards paying interest every year. And that’s just the average – some people owe much more! Overall, Americans spend over $1 trillion every year on their credit cards, and owe more than $500 billion of it.

• If debt continues at the current rate, then one family in a hundred will be forced into bankruptcy. Over 90% of Americans’ disposable incomes are spent paying back debts. Whatever happened to saving?

Chapter 18

Responsibilities and Costs of Credit

Goals for Chapter 18.1

• Describe the responsibilities of consumer credit.

• Discuss how to protect your credit card from fraud.

• Explain how you can reduce or avoid credit costs.

Responsibilities of Consumer Credit

• Responsibilities to Yourself

• Responsibilities to Creditors

Protecting Yourself from Credit Card Fraud

• Safeguarding your cards:– 1. Sign cards as soon as you receive them.– 2. Carry only cards you need.– 3. Keep a list of card numbers and phone numbers in a

safe place.– 4. Notify creditors immediately when card is lost or

stolen.– 5. Do not lend your card to anyone.– 6. Destroy expired cards.– 7. Don’t give card number to businesses or people you

don’t know.

Avoiding Unnecessary Credit Costs

• Accept only the amount of credit that you need.– Unused credit is the remaining credit available to you.

This can count against you on your credit report.

• Do not increase credit spending when your income increases.

• Keep the number of credit cards to a minimum.• Pay cash for purchases under $25.00• Understand the cost of credit

Goals for Chapter 18.2Analyzing and Computing Credit

Costs• Explain why credit costs vary.

• Compute and explain simple interest and APR.

• Compare methods of computing finance charges on revolving credit.

Why do credit costs vary?

• Source of credit• Total amount financed• Length of time you are making payments• Ability to repay debt• Type of credit selected• Collateral or security offered• Interest rates• Economic conditions

Computing the cost of credit

• Simple Interest Formula

I P R TI = interestP = principleR = interest rateT = time

• A loan’s principle is the amount borrowed, or the unpaid portion of the amount borrowed on which the borrower pay interest.

• The interest rate is expressed as a percentage.

• Time is the length of time the borrower will take to repay a loan.– Time is expressed as a fraction of a year: 12

months, 52 weeks, or 360 days.– Examples: If a loan is taken for 6 months, the

time is expressed as ½. When a loan is for a certain number of days, such as 90, the time is expressed as 90/360, or ¼.

Annual Percentage Rate Formula

• An installment contract requires a down payment, or part of the purchase price paid in cash up front.

Annual Percentage Rate Formula

APR 2 n fP (N 1)

n = number of payment periods in one year f = finance charge P = principle or amount borrowed N= total number of payments

Credit Card Billing Statements

• Adjusted Balance Method– The finance charge is applied only to the amount owed

after you’ve paid your bill each month.

• Previous Balance Method– The finance charge is imposed on the entire amount

owed from the previous month.

• Average Daily Balance Method– Finance Charge is imposed on you average balance.