Business and Consumer Loans Overview

Business Mathematics - Chapter 12: Business and Consumer Loans

Section 12.1 Open-End Credit and Charge Cards

Objectives

  • Define open-end credit.
  • Understand revolving charge accounts.
  • Apply the unpaid balance method.
  • Apply the average daily balance method.
  • Define loan consolidation.

Open-End Credit

  • Definition: Credit without fixed payments; payments made until balance is settled (includes store charge accounts, charge cards, and major credit cards like Mastercard and Visa).
  • Credit Limit: Maximum charge allowed based on income, assets, debts, and credit history.

Debit Card

  • Authorizes immediate debit from checking account upon purchase.
  • Does not involve credit as funds are withdrawn immediately.

Revolving Charge Accounts

  • Allow multiple purchases with minimum monthly payments; full balances may never be paid off.
  • Itemized Billing: Includes details on purchases, payments, refunds, and finance charges.
  • Finance Charges: Interest on the unpaid balance or incurred charges.
  • Grace Period: Timeframes where no interest is charged if paid in full.
  • Fees: Late fees for overdue payments; over-the-limit fees for exceeding credit limits.

Unpaid Balance Method

  • Calculates finance charges based on the unpaid balance from the previous month.
  • New purchases or returns during the current month do not affect this charge calculation.

Average Daily Balance Method

  • Commonly used by revolving charge plans to calculate finance charges.
  • Calculation: Track daily balance throughout the month, sum total, then divide by the number of days in the month.

Loan Consolidation

  • Combining multiple loans into one with potentially lower payments or interest rates.
  • Risks of Default: Missing payments can lead to loss of assets, eviction, or damage to credit history.

Example Scenarios

  1. Peter Brinkman’s Credit Card Usage: Tracks monthly payments, purchases and calculates the finance charges and unpaid balance using the unpaid balance method.
  2. Beth Hogan’s Visa Card: Uses the average daily balance to determine finance charges and final balance.
  3. Bill and Jane Smith’s Financial Management: Implementation of a strict budget and consolidation to manage debts effectively, avoiding further borrowing to prevent bankruptcy.