CHAPTER 7

Credit Cards and Consumer Loans

LEARNING OBJECTIVES
1. Distinguish among credit cards and other types of open-end credit.
2. Manage your credit card accounts wisely.
3. Distinguish among the sources of consumer installment loans.
4. Be familiar with the different types of installment loans.
5. Calculate the interest and annual percentage rate on consumer loans.

INTRODUCTION:
An understanding of the rules and costs of credit card and consumer loan accounts is essential for
maintaining a strong financial status.

To-do Soon!
1. Make a list of all your debts currently outstanding, the amounts owed, to whom, and at what
interest rates.
2. Move credit card balances you do carry to lower interest accounts and never make convenience
purchases on the accounts on which you carry a balance.
3. Pay all your credit card balances in full each month, or certainly no longer than two or three
months later.
4. Use student loans for direct education expenses only rather than to maintain a better lifestyle.
5. Choose installment loans based on the lowest annual percentage rate (APR) rather than
monthly payment and years to pay.

7.1. Credit cards and other types of open-end credit.

7.1a. Open-end credit.
7.1b. Two types of organizations issue open-end credit.
> Retail sellers and businesses
> Bank credit cards
7.1c. Revolving lines of credit.
>Unsecured personal loans
>Home equity credit lines
>Overdraft protection
Concept Check 7.1
1. What is open-ended credit and give three examples.
2. Explain the basic features of bank credit cards
3. Distinguish between an unsecured line of credit and a home equity credit line.

7.2. Managing credit cards wisely.

7.2a. Credit statements.
>Figure 7-1 gives an example of a credit card account statement
>The statement date
>The payment due date
>Transaction and posting dates
>Previous unpaid balance
>Minimum payment due
>Ten years to pay off the balance
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 Chapter 7: Credit Cards and Consumer Loans

>Transaction fees
>Credit for merchandise returns and errors
>Penalty rates on credit cards
7.2b. Computation of finance charges is typically the periodic rate times the average daily
balance for the billing period (month).
7.2c. Liability for lost or stolen cards.
7.2d. Correcting errors on your credit card statement.
>Your time limits
>Lender responsibilities
>Your action steps
-Notify the merchant involved in the error
-Send a written notice to the card issuer
-Provide photocopies of all necessary documents
-Withhold payment for disputed items and, if possible, pay off remaining
amounts
-Review your credit bureau files after the dispute is settled to ensure your file is
corrected
Concept Check 7.2
1. Distinguish between a statement date and a payment due date on a credit statement.
2. Distinguish between transaction and posting dates on a credit statement.
3. How does a penalty rate work on a credit card?
4. What is the liability for a lost or stolen credit card?
5. What are your action steps to dispute an error on a billing statement?

7.3. Sources of consumer loans.

>Depository institutions lend money to their customers
>Sales finance companies lend money to purchasers of consumer products
>Consumer finance companies make small cash loans
Concept Check 7.3
1. What is a sales finance company and how does it work?
2. Where would you go to obtain an installment loan to finance a vehicle, if had a good
credit rating and wanted to pay a low interest rate?

7.4. The important features of consumer installment loans.

7.4a. Purchase loan installment contracts.
7.4b. Unsecured and secured loans.
>Unsecured loans have no collateral
>Secured loans have collateral
>A cosigner promises to pay of the primary borrower fails to do so
>An acceleration clause can make the principal and accrued interest immediately
payable
>A deficiency clause states that if the collateral is insufficient to pay what is owed
on a defaulted loan, the lender can require payment of the remaining amount owed
>A recourse clause states what action the lender may make in the event of default
7.4c. Variable-rate or fixed-rate loans.
7.4d. Alternative lenders offer high-priced loans.
Concept Check 7.4
1. Distinguish between a single-payment and an installment loan.
2. What is the difference between a secured and an unsecured loan?
3. What reasons do some people offer for not having a relative co-sign a student loan?
4. What is an acceleration clause?
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for
use as permitted ion a license distributed with a certain product or service or otherwise on a password -protected website or school-approved
learning management system for classroom use.
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 Chapter 7: Credit Cards and Consumer Loans

5. Which alternative lender probably charges the highest interest rate?

7.5. Calculating the interest on consumer loans.

7.5a. Calculating the installment loan payment.
>Table 7-2 can be used to calculate the loan payment on loans in varying amounts over
various time periods at various interest rates
7.5b. Finance charge and APR calculations for installment loans.
>Declining balance method—amortization of loan
>Table 7-3 illustrates a repayment schedule for a declining balance loan
>Add-on method uses the formula; I = P x R x T
>Calculating the APR for the add-on method
>Rule of 78s method for calculating prepayment penalties for add-on method loans
>With the discount method, interest is paid up front
Concept Check 7.5
1. Explain how the interest is calculated on a consumer loan that uses the declining-
balance method.
2. Summarize how interest is calculated on a consumer loan that uses the add-on
method.
3. What is the effect of the rule of 78s when a borrower repays an add-on method loan
early?
4. Explain how the interest is calculated on a consumer loan that uses the discount
method.

Conclusion:
Wise financial managers understand the rules of credit contracts and how the interest and other costs
associated with borrowing are determined.

What Do You Recommend Now?

Now that you have read this chapter, what do you recommend to Zachary Cochrane regarding:
1. His approach to using credit cards, including the number of cards he has?
2. Estimating the credit card interest charges he is paying each month?
3. How he might lower his interest expense each month?
4. Consolidating his credit card debts into one installment loan?

Never Ever!
1. Fail to shop for the lowest APR on credit cards and consumer loans.
2. Regularly carry balances on your credit card accounts.
3. Use a credit card rather than lower-interest rate installment loans to make expensive purchases.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part, except for
use as permitted ion a license distributed with a certain product or service or otherwise on a password -protected website or school-approved
learning management system for classroom use.
.