Applied Business Practices
Chapter 18
Warm-Up
• Answer the following in three or more
complete sentences
• Besides a student loan, what other types
of loans might you need to apply for in the
next few years?
Warm-Up
• When you hear the word “credit” what do
you think of? How do you think consumer
credit affects the economy?
Credit
– Borrowing money with the promise
to repay in the future
Credit Terms
• Credit Limit
– Maximum amount that may be owed at one
time
• Finance Charge
– Total dollar cost of credit including interest and
all other charges
Credit Card
• Allows you to buy now, pay later
Types of Credit Cards
•
Bank Cards
– Visa or Master Card
•
•
Most common
Travel and Entertainment
– Diner’s Club, American Express
•
Pay yearly membership fee and pay full balance
when bill comes
Types of Credit Cards
• Oil Company Cards
– Cards offered by oil companies
• Retail Store Cards
– Cards offered by a specific retail store that
can only be used at that store
Warm-up
1. When is using credit a good idea? How
can you tell when taking out a loan is not
a good idea?
Installment Credit
• Make monthly payments in specific
amounts over a period of time.
– examples = car payments, mortgage
Benefits of Credit
•
•
•
•
•
Convenience
Immediate possession
Savings
Credit Rating
Useful for Emergencies
Credit Concerns
•
•
•
•
Overbuying
Careless buying
Higher prices
Overuse of credit
Help with Credit
• Collateral
– Property pledged to back a loan
• Example: a car is the collateral for a car loan
• Co-signer
– Agrees to pay the loan if the signor does not
• Example: your parents co-sign your first car loan
Questions to Ask
• How will you benefit from the use of the
credit?
• Is this the best buy you can make or
should you shop around?
• What will be the total cost of your
purchase including finance charges?
• What would you save if you paid cash?
• Will the payments be too high for your
income?
Credit Card Comparison
•
•
•
•
•
Annual Fees
Interest rates
Other Fees
Benefits
Introductory rates
Warm-Up
• Convert each of the following percents to
decimals:
40%
5%
3.5%
9% 112%
• Convert each of the following decimals to
a percent:
.02
.55
.075
1.23
.25
Simple Interest
• Interest
– The cost of borrowing money
• Principal
– Amount of the loan
• Rate
– Percent of interest charged
• Time
– Length of time for which interest will be
charged
Simple Interest
• Formula:
I = PxRxT
Example: borrow $10,000 at an APR of 6%
for 4 years
I = 10,000 x .06 x 4 = 2,400
Total loan = 12,400
Warm-Up
• Calculate the amount of interest for each
of the following loans
– $6,000 borrowed for 1 year at 7%
– $2,000 borrowed for 4 years at 8%
– $1,000 borrowed for 2 years at 6%
Credit Worthiness
• Your reliability to repay a loan
The Three C’s of Credit
• Character
– Willingness to repay
• Capacity
– Ability to repay the debt
• Capital
– Value of your assets
Review
• What is the total cost of credit?
• Give an example of a travel/entertainment
card.
• Give an example of revolving credit
• What is the formula for interest?
Warm-Up
• How can you establish Credit?
Example
Dear Freebie:
Wow, it’s a good thing you are in college…you have a lot
to learn, especially about credit. These companies offer
free stuff because they want you to sign up for their
credit….and you will have to pay interest if you carry a
balance. They know that college kids are good “targets”
because most of you don’t have jobs to pay back the
credit…thus they can charge you interest. So they afford
this free stuff from interest that people (like you) will have
to pay. Cancel the accounts because you are not ready
for credit.
Signed: Credit Expert
The Credit Application
• form you provide information needed by a
lender to make a decision about granting
credit
Establish Credit
• Good record of grades and attendance
• Start a checking and/or savings account
and make regular deposits
• Make small credit charges and pay on
time
• Have a steady job (part-time or full-time)
Reporting Agencies
•
Credit Bureau
– Company that gathers information on credit
users and sells the information to banks and
other lenders
•
Credit Report
– shows the debts you owe, how often you
use credit and whether you pay your debts
on time
Warm-Up
• Why is good credit important to a
landlord? Who else might request a copy
of your credit report?
Before you sign…
• finance charges
• include costs of services
• any add-ons feature so you can buy other items
later
• Pay-in full before end of contract – any discounts
• Draw a line through any blank spaces
• Make sure you will get a copy
• Repossession
Statement of Account
• Record of the transactions completed
during the billing period
How to Avoid Credit Card Fraud
•
•
•
•
Check statements very carefully for errors
Compare statements with your receipts
Verify payments and other credits
If there are errors, notify creditor
immediately
Warm-Up
• Complete the Loan Comparison
Worksheet
Credit Protection
• Truth in Lending
– Must provide the total cost of credit before
signing an agreement
• Equal Credit Opportunity Act
– Prohibits creditors from denying a person
credit because of age, race, gender, or marital
status
• Fair Credit Billing Act
– Requires prompt correction of billing mistakes
Credit Protection
• Fair Credit Reporting Act
– Gives consumers the right to know what information
credit bureaus are reporting
• Consumer Credit Reporting Reform Act
– Now the burden of proof of unfavorable credit is now
on the credit reporting agency not the consumer
• Fair Debt Collecting Act
– bans threats and other inappropriate actions when a
creditor is trying to collect debt
Warm-Up
• Read “A Question of Ethics” page 471
• Answer #1 in complete sentences
When you cannot pay
• Contact your creditor first
• Make a realistic proposal for when and
what you can pay
• Keep any promises
• Make a written copy of your agreement
Credit Counseling
• Help to reduce spending and eliminate
credit difficulties
Bankruptcy
• Legal process of reducing or eliminating an
amount owed
• Chapter 7
– Wipes out most of your debt
• you still may have to pay certain other debts such
as taxes, child support, etc.
• Chapter 13
– Repayment Plan
• you pay your debt back within a specific time
allotted
• most interest charges are stopped
Warm-Up
• What are some reasons that a loan
application would be turned down?
Warm-Up
• Create a list of questions that a credit
counselor might ask when meeting with a
person having credit problems.
Warm-up
• Before you sign a credit contract, what two
questions should you consider?