Personal finance chapter 7

Open ended credit

- a form of noninstallment credit - also called revolving credit - credit os extended in advance of any transaction so that the borrower does not need to reapply each time credit is desired - credit cards - can use as long as the total owed does not exceed the credit limit - can be used to make purchases and obtain cash advances in some instances - most convenient and also most abused

Credit statement / periodic statement

- active account holders receive a monthly summary of charges, payment, financial charges, and other account activity

Calculating the APR when the add on method is used

- add on rates and APRs are not equivalent, add on calculation assumes the original debt is owed for the entire period of the loan, but of course the debt goes down as it is repaid APR= Y(95P + 9)F / 12P(P+1)(4D+F) APR= annual percentage rate Y = number of payments in one year F= finance charge in dollars (dollar cost of credit) D= debt (amount borrowed or proceeds) P= total number of scheduled payments

cosigner

- agrees to pay the debt if the original borrower fails to do so - major responsibility - legal obligation to repay

Retail credit card

- allows a customer to make purchases on credit at any of the outlets of a particular retailer or retail chain -kohls, shell oil - repayment may be required in full monthly or allowed to be spread over time

variable rate loans

- also called adjustable rate loans - when the loan rate varies, the monthly payment will go up or down, allowing the loan to be paid off by the same date originally established in the contract

Installment credit

- also called closed end credit - borrower must repay the amount owed plus interest in a specific number of equal payments, usually monthly

Unsecured loan

- also called signature loans - granted solely based on the good credit behavior of the borrower - more risk, substantially higher interest rate is charged

credit disability insurance

- also costly and can be avoided - repays the outstanding loan balance if the borrower becomes disabled - credit unemployment insurance is also unneeded

chargeback

- amount of the transaction is charged back to the business where the transaction originated in the case of a dispute or challenge by the cardholder

Fees

- annual fees - transaction fees - balance transfers

goods and services dispute

- asserts that charges were for faulty, damaged, shoddy, defective or poor quality goods and services and you made a good faith effort to correct the problem with the merchant -FCBA applies to charges of more than $50 made in your home state or within 100 miles of your current mailing address

Cash advance / convenience checks

- bank card issuers send these - check equivalent way to take a cash advance - use to make payments to yourself or others - put in safe place or destroy

cash loan

- borrower receives cash and then uses it to make purchases, pay off other loans, or make investments

penalty APR

- can be 8-10 percentage points higher than normal - assessed whenever a borrower fails to uphold certain rules of the account, such as being more than 60 days late on minimum payments or making a payment by check that is returned for insufficient funds

Consumers obtain installment credit in two ways

- cash loans - purchase loans, also called sales credits - for all consumer loans, the borrower will sign a formal promissory note spelling out the terms of the contract

Travel and entertainment cards (T&E cards_)

- charge cards often used by businesspeople for food and lodging expenses while traveling - not accepted at as many outlets as bank credit cards - higher than average incomes to qualify - annual membership fee $90+

annual fees

- charges levied against cardholders for the privelege of having an open account - not included in advertised APR

Charge card

- charges no interest but requires the user to pay balance in full upon receipt of the statement, usually on a monthly basis - much higher, often unlimited, spending limits

Purchase loan/sales credit

- consumer makes a purchase on credit with no cash transferring from the lender to the borrower - funds go directly from the lender to the seller

Cobranded credit cards

- consumer product companies contract with visa, mastercard, and a bank

Transaction date

- date on which the credit cardholder makes a purchase or receives credit - interest is charged from the posting date

Teaser or introductory rate

- entice borrowers to apply for an account - must stay in effect for 6 months after the account is opened unless the cardholder violates a rule o the account such as being late with a payment by more than 60 days

Personal line of credit

- form of open ended credit - allows the borrower access to a prearranged revolving line of credit provided by the lender - includes a credit limit and a flexible repayment schedule - borrowers can obtain a cash advance when needed and not have to reapply for a loan each time - can use home equity as collateral: referred to as a home equity line of credit

Balance transfer

- full or partial payment on the balance of one credit card using a cash advance from another

variable interest rates

- go up and down, usually monthly or annually, often according to changes in interest rates in the economy as a whole

prestige card

- gold, silver, platinum - user has high credit qualifications - enhancements such as higher credit limits - sometimes have higher annual fees

Service credit

- granted to consumers by public utilities, physicians, dentists, and other service providers that do not require full payment when services are rendered - usually carries no interest - penalty charges and interest may apply if payments are made late - service may be cut off for continued slow payment or nonpayment

Fair credit billing act (FCBA)

- helps people who wish to dispute billing errors on revolving credit accounts - permits a chargeback

Noninstallment credit

- includes single payment, open ended credit, and service credit - single payment loans are the easiest to understand

2 kinds of contracts are used when purchasing goods with an installment loan

- installment purchase agreements (also called collateral installment loans or chattel mortgage loans) - conditional sales contracts (also known as financing leases)

discount method

- interest is paid up front - sometimes used by creditors to compute the interest on an installment loan - interest calculated based on a discount rate that is multiplied times the amount borrowed and multiplied by the number of years to repay - interest is then subtracted from the amount of the loan, and only the difference is given to the borrower

Bank credit card

- issued by a financial institution that allows the cardholder to pay for goods and services based on the holders promise to pay for them - card issuer creates a revolving account and grats a line of credit to the user to make purchases or obtain a cash advance - periodically send cash advance or convenience checks to cardholders

credit receipt

- issued when you return merchandise purchased on credit - written evidence of the items returned, notes specific transaction amount

APR

- issuers must tell consumers the APR applied as well as the method used to compute finance charges - periodic rate, APR for a charge account divided by the number of billing cycles

Prime rate

- key measure of interest rates in the economy - its fluctuations drive the changes in rates for all types of variable rate credit - has ranged from 3-4 percent

statement date / billing date / closing date

- last day of the month for which any transactions are reported on the statement - statement mailed to cardholder a day or so after the statement date

Lien

- legal right to seize and dispose of property to obtain payment of a claim - when loan is repaid, the lien will be removed

collateral

- lender has a security interest in the property that is pledged as colateral

Truth in lending act

- limits cardholders credit card liability for lost or stolen cards - if u notify issuer within 2 days of loss or theft, you are not legally responsible for fraudulent uses of the card - after 2 days becomes $50

Cash advances

- may be obtained at any financial institution that issues the type of card being used - cash loan from a credit card account - can receive cash advance from ATM or funds may be electronically transferred into the cardholders checking account

periodic interest rate

- monthly rate applied to the outstanding balance of a loan

Prepayment penalty

- most installment loan contracts that use the add on method include this - special charge assessed to the borrower for paying off a loan early - take into consideration the reality that borrowers should pay more in interest early in the loan period when they have the use of more money and increasingly less interest as the debt shrinks over time

Rule of 78s method or sum of the digits method

- most widely used method of calculating a prepayment penalty - for a one year loan, the numbers between 1 and 12 for each month add up to 78 (12+11+10+9+8+7+6+5+4+3+2+1= 78) - for a 2 year loan, the numbers between 1 and 24 would be added and so on for loans with longer time periods

calculate finance charge on a consumer loan

- multiply the monthly payment by the number of months and subtract the original amount borrowed, then add any other mandatory charges

Minimum payment

- must be made each month to cover interest and a small payment on the amount owed (principle) -if the minimum payment is not received by the payment due date, the cardholder must pay a late payment fee and may be declared in default

consumer credit

- nonbusiness debt used by consumers for expenditures other than home mortgages -2 types: installment credit and noninstallment credit

dunning letters

- notices that make insistent demands for repayment

default

- occurs when a borrower has failed to make a payment of principal or interest when due or failed to meet any other requirement of a credit agreement - delinquent or default accounts are often canceled

credit life insurance

- pays the unpaid balance of a loan to the lender in the event of the borrowers death - grossly overpriced

Credit card

- plastic card identifying the holder as a participant in the charge account plan of a lender, such as a retailer or financial institution - once a credit card account is opened, it can be used at any time - allow the borrower to pay the balance in full at any time or carry a balance owed from month to month

add on method

- predominates on installment loans at banks, savings banks, and consumer finance companies when financing automobiles, furniture, electronics, and other credit requiring collateral - because it applies the periodic interest rate to the outstanding loan balance, the APR and the simple interest rate will differ only if fees boost the finance charge - favors the lender - widely used for computing interest on installment loans - interest is calculated and added to the amount borrowed to determine the total amount to be repaid - interest is calculated by applying an interest rate to the amount borrowed x the number of years - interest is spread evenly across all payments rather than declining as the loan balance falls - if paid off early, the lender will use some penalty method to compensate for the lower interest rate applied in the early months

secured loan

- requires a cosigner or collateral

Credit card accountability, responsibility, and disclosure act

- requires that your credit card statement include the number of months it will take to pay off your card balance if you only make the minimum payment with no additional charges

Visa, mastercard, discover, optima

- service providers that maintain the electronic network through which transactions are communicated - actual lender is the bank, savings bank, or credit union through which the card is offered

Credit limit

- set by the lender - maximum outstanding debt allowed on the account - vary with perceived creditworthiness

transaction fees

- small charge levied each time certain types of transactions occur, such as for cash advances and balance transfers

payment due date

- specific day by which the credit card company should receive payment from you - bills must be mailed to cardholders at least 21 days before payments are due - date must be the same each month

affinity cards

- standard bank cards but with the logo of a sponsoring organization imprinted on the card face - donates a portion of the annual fee and a small percentage of amounts charged to the sponsoring organization

acceleration clause

- stating that after a specific number of payments are unpaid (often just 1), the loan is considered in default and all remaining installments are due and payable upon demand of the creditor - protect the lenders interests but can be difficult for borrowers

average daily balance

- sum of outstanding balances owed each day during the billing period divided by the number of days in the period

billing cycle

- time period between statement dates

Grace period

- time period between the posting date of a transaction and the due date, within which any new credit card purchases made during the billing cycle will avoid finance charges - offered only if the previous months total balance was paid in full and on time

conditional sales contracts / financing leases

- title does not pass to the buer until the last installment payment has been paid - may be repossessed as soon as any payment is missed

Installment purchase agreements / collateral installment loans / chattel mortgage loans

- title of the property passes to the buyer when the contract is signed - provides a measure of protection for the borrower, creditor must follow all legal procedures required by state law when repossessing the property - some states permit the lender to take secured property back as soon as the buyer falls behind in payments

Federal law requires credit card lenders

- to disclose all the rules governing the account to borrowers before they sign up - remainder of info appears in the credit card agreement/contract

declining balance method

- widely used by credit unions to calculate interest on all loans - always used for credit cards and home mortgages - interest assessed during each payment period is based on the current outstanding balance of the installment loan - carry no prepayment penalties

Must make billing error complaint...

- within 60 days after the date on which the first bill containing the error was mailed to you - lender then has 30 days to acknowledge your notification and must correct, return, or provide evidence as to why the bill is correct within 90 days

preapproved

-means only that you will be granted credit - credit card debt limit and APR will be determined after applying for an account

3 methods can be used to calculate thge average daily balance on a credit card billing statement

1. average daily balance including new purchases with a grace period: includes balance from the previous month and any new charges made during the billing cycle, grace period allows for exclusion of new charges made during the billing cycle only if the balance from the previous billing cycle was zero, most commonly used method 2. average daily balance excluding new purchases: cardholder pays interest only on any balance left over from the previous month, good for consumers 3. average daily balance including new purchases with no grace period: balance from the previous month and any new charges made during the billing cycle are included in the balance calculation, is the worst method for consumers

three methods used to calculate interest on installment and noninstallment credit

1. declining balance method, sometimes called the simple interest method 2. add on method 3. discount method - interest accounts for the greatest portion of the finance charge

actions to take when disputing an item on a billing statement

1. notify the merchant 2. send a written error notice to the card issuer 3. provide photocopies 4. withhold payment for disputed items 5. review your credit bureau file

Add on interest method formula

I = PRT -I= interest or finance charges -P= principal amount borrowed -R= rate of interest -T= time of loan in years