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Introduction to Business© Thomson South-Western
ChapterChapterChapterChapter
Consumer Credit
18-118-1 Credit Fundamentals
18-218-2 Cost of Credit
18-318-3 Credit Application and Documents
18-418-4 Protection of Credit Rights
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LESSON 18-1
Credit Fundamentals
Goals Identify the types of consumer credit. Describe the benefits of using credit. Explain some disadvantages of using
credit.
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Key Terms
credit finance charge down payment installment loan
promissory note collateral cosigner credit rating
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USING CREDIT
Credit Debtor Creditor
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TYPES OF CREDIT
Trade credit Loan credit Installments Sales credit
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CHARGE ACCOUNTS
Regular accounts Budget accounts Revolving accounts
Credit limit Payments Finance charge
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CREDIT CARDS
Bank cards Travel and entertainment cards Oil company cards Retail store cards
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FEATURES OF INSTALLMENT CREDIT Signing a sales contract that shows the terms
of the purchase Receiving the purchased item at the time of
the sale Making a down payment Paying a finance charge on the amount owed Making regular payments at stated times
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CONSUMER LOANS
Installment loan Single payment loan Promissory note Collateral Secured loan Cosigner
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>> C H E C K P O I N T
What are the major types of consumer credit?
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BENEFITS OF CREDIT
Convenience Immediate possession Savings Credit rating Useful for emergencies
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>> C H E C K P O I N T
What are the main advantages of consumer credit?
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CREDIT CONCERNS
Overbuying Careless buying Higher prices Overuse of credit
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QUESTIONS TO ASK
How will you benefit from this use of credit? Is this the best buy you can make or should
you shop around? What will be the total cost of your purchase,
including the finance charges? What would you save if you paid cash? Will the payments be too high for your
income?
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>> C H E C K P O I N T
What are potential drawbacks of buying on credit?
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LESSON 18-2
Cost of Credit
Goals Calculate interest in consumer credit
situations. Explain finance charges when using
credit.
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Key Terms
interest annual percentage rate (APR)
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FINDING INTEREST
Principal, P Amount of the loan
Interest Rate, R Percent of interest charged or earned
Time, T Length of time for which interest will be charged, usually expressed in years or parts of a year
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Interest Principal Rate Time
SIMPLE INTEREST
I P R T
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SIMPLE INTEREST EXAMPLES
II PP RR TT
One year I $100 .12 1 $12
Two years I $100 .12 2 $24
One month I $100 .12 1/12 $1
60 days I $100 .12 60/360 $2
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MATURITY DATES
Maturity date is the date on which a loan must be repaid.
Time stated in months One month loan made on January 15 is due on
February 15 Two month loan made on January 15 is due on
March 15
Time stated in days 90 day loan made on March 4 is due on June 2
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90-DAY LOAN EXAMPLE Determine maturity date for a 90-day loan
made on March 4 Find the number of days remaining in March Add days until you reach 90 days Due date is June 2 March 27 days (31–4)
April 30 days
May 31 days
June 2 days
Total 90 days
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INSTALLMENT INTEREST
Decreasing loan payments Level loan payments
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DECREASING LOAN PAYMENTS
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LEVEL LOAN PAYMENTS
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>> C H E C K P O I N T
What three things are necessary to calculate interest?
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FINANCE CHARGES
Annual percentage rate (APR) Total dollar charges Compare credit costs
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>> C H E C K P O I N T
What does APR represent?
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LESSON 18-3
Credit Application and Documents
Goals Explain the credit application process. Describe the activities of a credit
bureau. Discuss commonly used credit
documents.
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Key Terms
credit application credit bureau statement of account
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CREDIT APPLICATION PROCESS The three Cs of credit
Character Capacity Capital
Credit applications Documenting credit data Actions to establish credit
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>> C H E C K P O I N T
What are the three Cs of credit?
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CREDIT BUREAU
Gathers information on credit users Sells information to businesses offering
credit, such as banks, finance companies, and retail stores
Creates a credit report showing debts owed, how often credit is used, and whether debts are paid on time
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>> C H E C K P O I N T
What is the main purpose of a credit bureau?
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CREDIT DOCUMENTS
Credit contracts Statement of account Accuracy of records Avoiding fraud
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>> C H E C K P O I N T
What are the main items reported on a statement of account?
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LESSON 18-4
Protection of Credit Rights
Goals Identify credit application regulations. Explain credit use regulations. Discuss credit problems and available
assistance.
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Key Terms
credit counselor bankruptcy
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CREDIT APPLICATION REGULATIONS Truth-in-Lending Law of 1968 Equal Credit Opportunity Act
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>> C H E C K P O I N T
How does the Truth-in-Lending Law assist consumers?
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CREDIT USE REGULATIONS Fair Credit Billing Act Fair Credit Reporting Act Consumer Credit Reporting Reform Act Fair Debt Collections Act
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>> C H E C K P O I N T
What is the purpose of the Fair Credit Reporting Act?
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CREDIT PROBLEMS AND ASSISTANCE Credit Counseling Bankruptcy
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>> C H E C K P O I N T
What actions can a person take when facing credit problems?
