Garman/Forgue
Personal Finance
Ninth Edition
Chapter 7:
Credit Cards and
Consumer Loans
PPT slide program prepared by
Amy Forgue and Ray Forgue.
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.
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Learning Objectives
4. Describe the important features of
consumer installment loans.
5. Calculate the interest and annual
percentage rate on consumer loans.
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Introduction
• Annual Percentage Rate (APR): The
cost of credit on a yearly basis as a
percentage rate.
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Types of Consumer Credit
• Installment credit (or closed-end
credit)
• Noninstallment credit
• Open-ended credit (or revolving credit)
– Credit limit
• Credit (or charge) card
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Types of Consumer Credit
• Cash advances
• Personal line of credit
• Home-equity line of credit
• Service credit
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Credit Card Accounts
• Minimum payment
• Principal
• Default
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Types of Credit Card Accounts
• Bank credit cards
– Cash advance (or convenience) checks
– Balance transfer
– Prestige card
– Affinity cards
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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
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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
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Aspects of Credit Card Accounts
• 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
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Aspects of Credit Card Accounts
• Secured (or collateralized) credit card
• Late-payment, bounced check, and
over-the-limit fees
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Credit Card Insurance
• Credit Disability Insurance: Repays
the outstanding loan balance if the
borrower becomes disabled.
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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.
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Managing Credit Cards Wisely
• 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.
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Managing Credit Cards Wisely
• 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.
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Managing Credit Cards Wisely
• Credit for merchandise returns and
errors
• Credit receipt: Written evidence of any
items returned that notes the specific
amount and date of the transaction.
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Managing Credit Cards Wisely
• Computation of finance charges
– Periodic Rate
– Average Daily Balance
• Correcting errors on your credit card
statement
– Goods and services dispute
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How Credit Card Balances Are
Calculated
• Understand consumer installment loans.
– Cash Loan
– Purchase Loan (or Sales Credit)
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Installments Loans
• Installment loans can be unsecured or
secured.
• Unsecured Loan (or Signature Loan)
• Secured Loan
– Cosigner
– Collateral
• Acceleration Clause
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Purchase Loan Installment Contracts
• Installment purchase agreements (or
collateral installment loans)
• Conditional sales contracts (or
financing leases)
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Calculating Interest on Consumer
Loans
•
Truth in Lending Act (or TIL)
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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
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The Declining-Balance Method
• Periodic Interest Rate: The monthly
rate applied to the outstanding balance
of the loan.
• Amortization
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Other Methods
• Add-On Interest Method
• Rule of 78s (or Sum of the Digits)
method for calculating prepayment
penalties
• Discount method of calculating interest
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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.
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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.
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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.
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