Chapter 7

Buying Decisions

Slide 2

How Is Interest Computed on Credit?• Finance charges are interest and fees

you pay on the credit card balance.

• A fixed interest rate is set.

• A variable interest rate can change.

• Interest can be computed using theo adjusted balance method,o previous balance method,o or average daily balance method.

7-3 Computing the Costs of Credit

Slide 3

Credit Card Statement (partial)

7-3 Computing the Costs of Credit

Slide 4

What Are Common Credit Policies?

7-3 Computing the Costs of Credit

• Minimum payment

• Penalties and feeso Over-the-limit feeo Cancellation fee

• Interest rate increases

• Lowered credit limit

Slide 5

How Can You Make Wise Credit Choices?• Be cautious about special offers, such as low

introductory rates and balance transfers.• Be wary of easy access credit.

o It is quick and easy but has high or hidden fees.

• Be careful when applying for credit online. o Avoid credit offers that come in e-mails or pop-up

ads; use a secure site.

• Examine your credit card statement.o Make sure charges, credits, and fees are correct.

7-3 Computing the Costs of Credit

Slide 6

Payday Loan

7-3 Computing the Costs of Credit

• A payday loan is a short-term loan to cover expenses until your next payday.

• Interest and fees can be substantial.The formula for computing the annual percentage rate of a payday loan is:

Loan fee ÷ Loan amount × Number of days in the year ÷ Loan term in days

If you borrow $350 for two weeks (14 days) and pay a loan fee of $50, the annual percentage rate would be calculated as follows:

$50 ÷ $350 × 360 ÷ 14 = 3.67, or 367% APR