Costs of Using CreditAnd

Types of Credit

Credit

Costs of Using CreditAnnual Percentage

Rate (APR)Annual feeCredit limitFinance chargeOrigination feeLoan termGrace period

Over-the-limit feeUniversal defaultMinimum monthly

paymentClosed-end creditOpen-end creditLine of credit

Cost of Using CreditAnnual Percentage Rate Example

Total amount of what it costs you to use credit in a given year.

It is expressed as a percentage of the amount borrowed

An APR of 18 percent means that you pay $18 per year on each $100 you owe.

Cost of Using CreditAnnual Fee

Usually charged by credit card companiesA yearly charge you pay for the privilege of

using credit

Cost of Using CreditCredit Limit or line of credit

Maximum amount of credit a lender will extend to a customer

Finance chargeUsually seen on credit card statementsRepresents the actual dollar cost of using

credit to maintain a balanceOrigination fee

Usually associated with home loansCharge for setting up the loan

Cost of Using CreditLoan term

Length of time you have to pay off the loanGrace period

Length of time you have before you start accumulating interest

Over-the-limit feeThis usually applies to credit cardsSpending more than your credit limit

Cost of Using CreditLate fee

A penalty for making a payment after the due date

Universal defaultA growing number of credit card companies

are now including thisThey can hike up your interest rate if you

make just one late paymentMinimum monthly payment

Smallest amount you can pay and remain a borrower in good standing

Cost of Using CreditClosed-end credit

Credit as a one-time loan that you will pay back over a specified period of time in payments of equal amounts

A mortgage – a long term loan extended to someone who buys property is a common use of closed-end credit

Vehicle loansInstallment loans for purchasing furniture or

large appliancesThese type of loans usually carry lower

interest rates than open-end credit.

Cost of Using CreditOpen-end credit

Credit as a loan with a certain limit on the amount of money you can borrow for a variety of goods and services

Department store credit cardsBank credit cards such as Visa or Mastercard

$6000 loanAPR Term of

LoanMonthly Payment

Total Finance Charge

Total Cost

Creditor A

14% 3 years $205.07 $1,382.52

$7382.52

Creditor B

14% 4 years $163.96 $1,870.08

$7,870.08

Lower cost

loan from Creditor A

Creditor B

provides smaller monthly payments

but adds

$488 to your total finance charge