Personal Finance - Ch. 7 Credit Cards and Consumer Loans

To constitute a valid dispute, you must file your complaint within__ days after the date on which ______________ , while the credit card issuer has another __ days to acknowledge your notification of the dispute. The issuer must resolve your claim within a maximum of __ days.

60 the first bill containing the error was mailed to you 30 90

Retail Credit Cards

A retail credit card allows a customer to make purchases on credit at any of the outlets of a particular retailer or retail chain.

Travel and Entertainment (T&E) Cards

A travel and entertainment (T&E) card allows the holder to make purchases at numerous businesses. However, the entire balance must usually be repaid within 30 days.

average daily balance

To compute the monthly finance charge for a credit card account, you must first calculate the average daily balance, which is the sum of the outstanding balances owed each day divided by the number of days in the billing period.

What is the monthly payment for a $20,000, three-year, 10-percent loan with the interest calculated using the add-on method?

$722

Bank Credit Cards

A bank credit card account, an open-ended account at a financial institution, allows the holder to make purchases almost anywhere. There are several types of bank credit cards, including prestige cards and affinity cards.

Average daily balance including new purchases with a grace period:

The balance calculation includes the balance from the previous month and any new charges made during the billing cycle. The grace period allows for the exclusion of new charges made during the billing cycle only if the balance from the previous billing cycle was zero.

Average daily balance including new purchases with no grace period:

The balance from the previous month and any new charges made during the billing cycle are included in the balance calculation, even if the previous month's balance was paid in full.

Average daily balance excluding new purchases:

The cardholder pays interest on any balance left over from the previous month.

Noninstallment Credit

There are three varieties of noninstallment credit: single-payment loans, open-end credit, and service credit. •A single-payment loan is a loan in which the borrower must repay the original amount borrowed plus interest in one lump sum at the end of an agreed-on time period. For example, a borrower might take out a $1,000 loan for one year at 15% interest. If so, a single payment of $1,150, consisting of the original $1,000 plus $150 interest ($1,000 x 0.15 = $150), would be due at the end of the year.•Open-end credit is also called revolving credit. With open-end credit, credit is extended in advance of any transaction or purchase so that borrowers do not need to reapply each time they need to use the credit. Open-end credit accounts usually have a credit limit, which is the maximum outstanding debt that the lender will allow for the account. Credit cards (or charge cards) are the most common form of open-end credit. Personal lines of credit (usually extended by a bank, credit union, or a brokerage firm) and home equity lines of credit are also forms of open-end credit.•Service credit is granted to consumers by public utilities, physicians, dentists, and other service providers that do not require full payment when services are rendered. Service credit often does not carry interest, although penalty fees may apply if late payments are made.

To estimate the required monthly payment amount for a fixed-rate loan

To estimate the required monthly payment amount for a fixed-rate loan, divide the borrowed amount by 1,000 and multiply the result by the appropriate figure from the table.(Monthly Installment Payments for a Loan (Principal and Interest Required to Repay $1,000))

Installment Credit

With installment credit, the borrower must repay the amount owed plus interest in a specific number of equal payments. For example, a $9,000 automobile loan for 60 months at 7% interest might require monthly payments of $178. Installment credit is also known as closed-end credit, because credit is extended once, and the borrower cannot continue to borrow from this account beyond the original extended credit.

periodic rate

You can estimate the periodic rate for a credit card account by dividing the APR by the number of billing cycles per year. There are usually 12 billing cycles per year (one for each calendar month). However, the actual periodic rate will be slightly higher because of the effects of compounding.

discount method

a method for computing interest on an installment loan. With the discount method, you calculate the interest based on a discount rate that is multiplied times the amount borrowed and by the number of years to repay the loan. The interest is then subtracted from the amount of the loan, and only the difference is given to the borrower. Thus, the interest is paid up front. For loans using the discount method, the monthly payment amount is calculated based on the entire loan amount, including the discounted interest.

The add-on method

a widely used technique for computing interest on installment loans. With the add-on method, interest is calculated by applying an interest rate to the amount borrowed times the number of years in the loan term. The following formula is used to calculate the amount of add-on interest: I = PRT

You can continue to make use of an open-ended credit account as long as a. the amount owed is below your credit limit. b. you can afford the monthly repayments. c. the amount owed is equal to or below your credit limit. d. your payments are on time.

a. the amount owed is below your credit limit.

When disputing the error in your VISA card statement, be prepared to provide the following documentation to your credit card issuer: a. The original receipt b. Photocopies of the receipt and credit card statement c. A photocopy of your credit report d. The original credit card statement

b. Photocopies of the receipt and credit card statement

In general, is it a good idea to make only minimum payments on your credit cards? a. Yes, you can invest the money saved each month to earn interest. b. Yes, this allows you more flexibility in your cash budget. c. No, the small payment requirement is mathematically guaranteed to keep you in debt for many years. d. No, it will cause your interest rate to go up.

c. No, the small payment requirement is mathematically guaranteed to keep you in debt for many years.

You have an incorrect charge on your VISA card. What is the first step you should take to resolve this error? a. Send a notice in writing to the credit card issuer. b. Pay in full the statement that contains the disputed transaction. c. Contact the credit bureau and file a complaint. d. Notify the merchant involved.

d. Notify the merchant involved.

VISA and MasterCard are examples of a. installment credit. b. travel and entertainment accounts. c. thirty-day accounts. d. bank credit card accounts.

d. bank credit card accounts.

Which type of purchase loan calls for title of the property involved to be transferred to the buyer only when the final payment has been made? a. installment purchase agreement b. second mortgage c. simple-interest loan d. conditional sales contract

d. conditional sales contract

Charging interest periodically over the course of a loan based upon the unpaid balance each period is referred to as the ______ ______ method.

declining-balance

Financial institutions that offer a variety of consumer loans from funds obtained primarily from depositors are called _____

depository institutions

The declining Balance Method

for calculating the APR on an installment loan, the interest assessed during each payment period is based on the current outstanding balance of the loan. The lender initially calculates a schedule to have the balance repaid in full after a certain number of months. The borrower may vary the repayment rate by making payments larger than those scheduled, and the borrower can repay the loan in full at any time.

With ______ credit, the borrower must repay the amount owed plus interest in a specific number of equal payments, usually monthly.

installment

Being over 60 days past-due on a credit card can result in your lender raising the APR on that card and on other credit cards you have with the lender. This new APR is referred to as a(n) _____

penalty rate

The APR for a charge account divided by the number of billing periods per year is the _____

periodic rate

A lender whose primary business is financing the sales of its parent company such as a vehicle manufacturer is called a _____

sales finance company