Laws Regulations

apr credit problems

What is APR?

APR is the acronym for annual percentage rate. The APR is a reference to a federally required calculation of the yearly cost of a loan that includes interest rates and other fees.

The requirement for APR disclosure was intended to help consumers compare loans. Unfortunately, the requirements for what is included in the calculation of APR are not sufficiently standardized to create a reliable comparison guide. Some fees are included, such as processing and underwriting fees, but other fees may or may not be in the APR calculation. For example, fees for title or abstract, notaries, inspections, and so on, may or may not be included. So be sure you ask what is included in an APR before you use it to compare loans or credit.

An APR on a credit card will not include late fees, over-the-limit fees, or finance charges you may incur by not paying off your balance each month. So the APR may not reflect the entire cost of the credit.

(Reviewed 10.31.2008)

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consumer credit credit problems

What types of consumer credit are available?

There at least three basic types of consumer credit:

Noninstallment credit is the simplest form of credit and is usually for a very short term, such as 30 days. The buyer makes one payment at or before the end of the credit period. This kind of credit enables consumers to take possession of property immediately and pay for it within a short time. Many department stores offer noninstallment credit to their regular customers; this enables the store to make sales and get the money in the near future, thus generating better cash flow for the business than might otherwise occur.

Installment closed-end credit is another form, where only a specified amount of money is lent to the consumer, typically the total purchase price of the goods. This kind of credit is also used by department stores for the sale of large items and by auto dealers for the sale of automobiles. For example, if you purchase a sofa and chairs at a furniture store, the store might give you credit up to the full amount of the sale, which will be repaid with interest, but the store does not make further credit available to you under that agreement. The full amount of the principal and interest must be paid within a pre-determined time period. In this kind of credit the lender usually retains title to the purchased goods until all the payments have been made. If the purchaser defaults on payments, the seller can repossess the property.

Revolving open-end credit is found with most credit cards. In this kind of credit the lender extends credit for use by the consumer, with an outside limit that depends on the debtor’s credit history and ability to handle the debt repayment. The financial institution gives the debtor a credit card with a credit limit, such as $1,000, $5,000, or $10,000, and the debtor can choose how much of the available credit s/he will use at any given time. The debtor makes periodic (usually monthly) payments, and continues to use the available credit as needed, as long as each periodic payment meets pre-determined minimum amounts.

Revolving open-end credit requires active management by the debtor. The debtor can decide to pay off the entire outstanding debt when the statement is presented, pay off more than the required minimum payment (but not the entire amount), or simply make the minimum required payment. The debtor thus can determine how much credit will be available to him/her at any given time.

Other credit cards, like travel and entertainment accounts with American Express or Diners Club, may have an open ended amount of credit, but the card holder is expected to pay the balance off each time period, usually each month.

(Reviewed 10.31.2008)

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what credit credit problems

What is credit?

Credit is money a creditor or lender makes available for you to borrow with a deferred repayment. In exchange for the credit, the lender gets back the money, usually paid on a monthly basis, plus interest. The debtor gets the use of the money to pay for and take possession of goods and services immediately. Modern society is dependent upon credit to generate sales; it enables people to have the things they want and need, but can’t afford to pay for right away.

Interest is the compensation that the creditor demands for the use of his/her money. Money has a “time value” to it. Over time the value of money decreases (due to inflation): what a dollar will buy today is much less than what a dollar could purchase 20 years ago. Since a creditor pays out money today in exchange for a repayment of it in the future, the creditor loses the time value of that money. In order to make credit available, creditors are allowed to charge interest, often referred to as a finance charge. For example, if a lender gives you $10 worth of credit, s/he might expect to be repaid $11 within the next two months; the extra dollar is the interest charged for the loan.

Interest on credit can be either simple or compound.

Simple interest is interest charged only on the principal amount borrowed. Simple interest does not add the interest charge back to the outstanding loan during the length of the loan. Compound interest is interest charged not only on the principal, but on the interest accrued during the length of the loan. Thus, simple interest charges are less than compound interest charges.

Credit is extended pursuant to a written contract. The written contract sets forth the respective rights and responsibilities of the creditor and the debtor. Credit can be used by both businesses and individuals. When an individual uses credit, it is referred to as “consumer credit.”

(Reviewed 11.3.08)

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