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Chapter 6 Review
• What are two factors you should consider before using credit?
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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?
• What are two advantages to using credit?
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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
• What are two disadvantages to using credit?
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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
• 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
• Give an example of closed-end credit
• Examples: mortgages and car loans
• Give an example of open-end credit
• Examples: department store credit cards, Visa, Mastercard
• 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)
• What is a cash advance?
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Money loaned to you and charged to your credit card
• Why is a cash advance so expensive?
• Charge high interest from the day they are made
• How many credit cards does the average cardholder have?
A. 9
B. 7
C. 5
D. 3
Interest Calculations
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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 3/12
mo 6/12
10 mo 10/12
Simple Interest Problem
• I = $6
• P=?
• R = 12%
• 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
0.03
0.03
• What does APR stand for?
• Annual Percentage Rate – the cost of the credit over the year
Calculating Monthly Interest
Rate
• Take APR and divide by 12 because there are 12 months in the
year
• 18% APR 18%/12 = 1.5 % or .015
• 15% APR 15%/12 = 1.75% or .0175
• 12% APR 12%/12 = 1% or .01
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%)
$101.50 (100+1.50)
$20.00
$81.50 (101.50-20)
81.50
$1.22 (81.50*1.5%)
82.72 (81.50+1.22)
$20.00
62.72 (82.72-20)
62.72
$.94 (62.72*1.5%)
63.66 (62.72+.94)
$20.00
43.66 (63.66-20)
Total Finance Charges $3.66
(1.50 + 1.22 + .94)
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 (450+6.75)
456.75
$50.00
406.75 (456.75-50)
$6.10 (406.75*1.5%)
412.85 (406.75+6.10)
412.85
$50.00
362.85 (412.85-50)
$5.44 (362.85*1.5%)
368.29 (362.85+5.44)
Total Finance Charges $18.29
(6.75 + 6.10 + 5.44)
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
6/5
Balance
6/7
Charge
6/12
Payment
6/19
Credit
6/22
Charge
6/26
Payment
Debit
Credit
Balance
# of Days
Extension
$500
2 (6/5-6/7)
1000 (500*2)
$575
5 (6/7-6/12)
2875 (575*5)
$25
$550
7 (6/12-6/19)
3850 (550*7)
$35
$515
3 (6/19-6/22)
1545 (515*3)
$565
4 (6/22-6/26)
2260 (565*4)
$520
9 (30 day cycle-25-7-3-4=9)
4680 (520*9)
$75
$50
$45
Average Daily Balance $540.33
(1000+2875+3850+1545+2260+4680=16,210/30)
Monthly Finance Charge $6.75
(540.33*1.25%)
Credit Cards
• Be familiar with two inappropriate uses of credit
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Retail therapy
Financing other debt
Utility bills
Perishable items
Putting major purchases on credit cards
Having too many open accounts
Choosing a Credit Card
• Know places you can get credit cards
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Banks
Credit Unions
Department stores
Credit cards companies
Choosing a Credit Card
• Know the difference between charge cards, premium cards,
limited purpose cards, and prepaid cards
• Charge Cards – Can be used all month, but then must be paid in
full when monthly bill comes
• Premium Cards – Card that comes with special perks like airline
miles, cash back or hotel credit, but they may have high annual
fee
• Limited Purpose Card – Can only be used at specific place or for
specific items
• Prepaid Card – Money is placed on it before and can only use
what is there
5 C’s of Credit
• Character: Will you repay the loan, reputation, responsibility
• Capacity: Can you repay the loan, what is your job, how much
do you make
• Capital: Resources invested, assets
• Collateral: Form of security (don’t pay for car, then they take
it), down payment
• Conditions: Purpose of the loan, what are you doing with the
money?
5 C’s of Credit
• What are two things that will influence your credit score
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Payment history
Level of debt
Age of your accounts
Types of credit
Credit inquiries
Don’t affect – age, job, marital status, income, bank balances
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
5 C’s of Credit
• Know what the Equal Credit Opportunity Act is
• Prohibits creditors from discriminating against credit applicants
on the basis of race, color, religion, national origin, sex, marital
status, age, because an applicant receives income from a public
assistance program
Credit Files/Reports
• What info is included in your credit report
• Identifying Information - Your name, address, Social Security number,
date of birth and employment information are used to identify you.
• Trade Lines - These are your credit accounts. Lenders report the type
of account (bankcard, auto loan, mortgage, etc), the date you opened
it, your credit limit or loan amount, the account balance and your
payment history.
• Credit Inquiries - When you apply for a loan, you authorize your
lender to ask for a copy of your credit report. This is how inquiries
appear on your credit report. The inquiries section contains a list of
everyone who accessed your credit report within the last two years.
• Public Record and Collections - Credit reporting agencies also collect
public record information from state and county courts, and
information on overdue debt from collection agencies. Public record
information includes bankruptcies, foreclosures, suits, wage
attachments, liens and judgments.
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
Credit Files/Reports
• Know your employment can be affected by bad credit
• Someone might be hired over you
• Could make judgements on your responsibility level based on
credit
Credit Files/Reports
• Know how the Fair Debt Collection Practices Act protects?
• Protects you from debt collectors harassing you at all hours of the
night and at work, threatening you, etc
Bankruptcy
• Give two signs of debt problems or overspending
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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
Bankruptcy
• Know how debt collectors can contact you
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After 8:00 am
Before 9:00 pm
Cannot contact you at work unless you’ve given them permission
Can contact third parties, but only once
Bankruptcy
• Know two strategies for improving or getting out of debt
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Get help from friends or family
Sell some assets
Ask creditors to help you
Seek credit counseling
Restructure mortgage
Make sacrifices
Don’t take out more debt
Identity Theft
• Give two signs that your identity has been stolen
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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.
Identity Theft
• Give two ways thieves steal your information
• Dumpster Diving - They rummage through trash looking for bills
or other paper with your personal information on it.
• Skimming - They steal credit/debit card numbers by using a
special storage device when processing your card.
• Phishing - They pretend to be financial institutions or companies
and send spam or pop-up messages to get you to reveal your
personal information.
• Changing Your Address - They divert your billing statements to
another location by completing a change of address form.
• Old-Fashioned Stealing - They steal wallets and purses; mail,
including bank and credit card statements; pre-approved credit
offers; and new checks or tax information. They steal personnel
records, or bribe employees who have access.
Identity Theft
• What to do if identity has been stolen
• Call police
• Contact the credit reporting agencies' fraud alert departments
• Contact your lenders, banks, and insurance companies