Credit Cards and Consumer Loans

Flashcards for review.

What is the Annual Percentage Rate (APR)?

The cost of credit on a yearly basis as a percentage rate.

What is open-end credit?

An account opened in advance of any transaction, allowing borrowing up to a specified credit limit with a minimum payment due monthly.

What is service credit?

Credit granted to consumers by public utilities, physicians, dentists, and similar service providers.

What are examples of organizations that issue open-end credit?

Retail sellers, businesses (e.g., Lowe’s and ExxonMobil), and banks (e.g., JP Morgan Chase).

What are Revolving lines of credit used for?

To access funds rather than buy products, typically not accessed via a credit card. Examples: unsecured personal loans, home equity credit lines or overdraft protection

What is the statement date on a credit card statement?

The last day of the month for which transactions are reported.

What is the payment due date on a credit card statement?

The specific day by which the credit card company should receive payment from the cardholder.

What is the posting date on a credit card statement?

The month, day, and year when a credit card issuer processes a transaction and adds it to the cardholder's account balance.

What does credit limit represent on a credit card?

Maximum outstanding debt allowed on the credit account

What is the danger of paying the minimum payment due on credit card?

Reducing the amount owed only slightly, and perhaps not at all if charges have been made since the billing date.

What is the periodic rate for finance charges?

The annual rate divided by the number of billing cycles per year (usually 12).

What is the average daily balance for finance charges?

The sum of the outstanding balances owed on a credit card each day during the billing period divided by the number of days in the period.

What is the Penalty rate (default rate)?

Very high interest rate charged by the credit card issuer when a borrower violates the card's terms and conditions.

Credit Card costs can include:

Annual fees, interest, transaction fees and late fees

What is the liability for fraudulent use of lost or stolen credit cards?

Limited to $50 for any fraudulent use after two business days, assuming the lender is notified of the loss or theft.

What are the steps to correct errors on a credit statement?

Notify the merchant, send a written notice to the card issuer with photocopies of necessary documents within 60 days of being mailed the statement. Lender has 30 days to acknowledge notification and 90 days to respond with a correction or affirmation that there was no error.

What do sales finance companies do?

Lend money to purchasers of consumer products.

What do consumer finance companies do?

Make small cash loans.

What is an installment loan?

Also called a closed-end credit arrangement is where the full amount owed must be paid back by the borrower by a set point in time. The repayment amounts include all the interest and finance charges agreed to at the signing of the credit agreement.

What is Single payment loan?

A loan paid back in a lump sum at the end of the loan period

What is a promissory note?

The loan contract. It includes rules of the account, type of repayment pattern, interest rate and fees, and collateral pledged.

What is the difference between an unsecured loan versus secured loans?

Unsecured Loan (or Signature Loan) is based solely on the borrower’s good credit worthiness (have no collateral). Secured Loan is backed by collateral.

What is a cosigner?

A person who promises to pay if the primary borrower fails to do so.

What is an Acceleration Clause?

Part of a credit contract stating that after a specific number of payments are unpaid the loan is considered in default and all remaining installments are due and payable upon demand of the creditor

What is 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.

What is a recourse clause?

States what action the lender may make in the event of default.

What is the Truth in Lending Act (or TIL)?

It requires disclosure of the annual percentage rate of interest (APR) and the finance charge in dollars.

What is Declining Balance Method?

Interest calculation method in which interest is assessed during each billing period (usually each month) based on the outstanding balance of the installment loan.

What is Add-On Interest Method?

Interest is calculated by applying an interest rate to the amount borrowed times the number of years to arrive at the total interest to be charged (will often have a prepayment penalty).

What is the discount interest method?

The borrower must repay the full amount of the debt but only receives the amount remaining after the interest is subtracted. Thus, the interest is prepaid.