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Lecture Focus on personal finance: An active approach to help you develop successful financial skills (2e) - Chapter 5B

Chapter 5B: Consumer credit. In this chapter, you will learn to: Determine the cost of credit by calculating interest using various interest formulas, develop a plan to protect your credit and manage your debts, determine whether you can afford a loan and how to apply for credit. | 5B Consumer Credit #2 Covered so far Advantages and disadvantages of credit Types and sources of credit Credit capacity (how much you can afford) Credit reports and scores Still to cover The cost of credit Protecting your credit Consumer credit protection laws Debt problems and bankruptcy 5- Objective 4 Determine the Cost of Credit by Calculating Interest Using Various Interest Formulas Finance charge Total dollar amount you pay to use credit Includes interest costs and fees, such as service charges, credit-related insurance premiums, or appraisal fees Annual Percentage Rate (APR) Percentage cost of credit on a yearly basis Key to comparing costs when shopping for rates It is important to shop around for credit 5- Tackling the Trade-Offs Term (length of loan) versus interest cost Longer loan: higher interest rate; total cost Lender risk versus interest rate Fixed rate: increases lender risk To reduce the lender’s risk and thus the interest rate you can: Accept a variable interest rate Provide collateral to secure a loan Provide up-front cash Take a shorter term loan 5- Secured Credit Cards Secured Credit Card (or Collateralized Credit Card) – Backed by collateral in the form of a savings account opened at the financial institution that issues the card. Example: Deposit $1,000 with creditor to borrow $1,000 Calculating the Cost of Credit Simple interest Computed on principal only without compounding The dollar cost of borrowing Interest = Principal x Rate x Time Simple interest on the declining balance Interest is paid only on the amount of original principal not yet repaid Add-on interest Interest calculated on full amount of principal Interest added to original principal Payment = Total divided by number of payments to be made 5- Calculating the Cost of Credit Avoid minimum monthly payment trap The longer to pay bill, the more interest you pay Avoid credit card fees Annual Fee- fee charged each year just to have a credit card (many are . | 5B Consumer Credit #2 Covered so far Advantages and disadvantages of credit Types and sources of credit Credit capacity (how much you can afford) Credit reports and scores Still to cover The cost of credit Protecting your credit Consumer credit protection laws Debt problems and bankruptcy 5- Objective 4 Determine the Cost of Credit by Calculating Interest Using Various Interest Formulas Finance charge Total dollar amount you pay to use credit Includes interest costs and fees, such as service charges, credit-related insurance premiums, or appraisal fees Annual Percentage Rate (APR) Percentage cost of credit on a yearly basis Key to comparing costs when shopping for rates It is important to shop around for credit 5- Tackling the Trade-Offs Term (length of loan) versus interest cost Longer loan: higher interest rate; total cost Lender risk versus interest rate Fixed rate: increases lender risk To reduce the lender’s risk and thus the interest rate you can: Accept a variable .