Chapter 13
Consumer and Business Credit
Student Performance Objectives:
Section I Open-End Credit – Charge Accounts, Credit Cards, and Lines of Credit
13-1 Calculating Finance Charge and New Balance by the Unpaid or Previous Month’s
Balance Method
Section II Closed-End Credit – Installment Loans
13-4 Calculating the Total Deferred Payment Price and the Amount of the Finance Charge of
an Installment Loan
13-5 Calculating the Amount of the Regular Monthly Payments of an Installment Loan by the
Add-on Interest Method
Chapter Notes, Teaching Tips and Lecture Launchers
• “Buy now, pay later” is a concept that has become an everyday part of the way individuals
and businesses purchase goods and services.
• Point out to students that the material in this chapter is important to all individuals
who use credit, not just businesses.
• Lecture Launcher – Ask students what is meant by the phrase, “Get interest working for you,
not against you.”
• Lecture Launcher – Talk about credit reports and the fact that bad credit stays on a person’s
record for 7 years. Ask students to consider and discuss:
• The “responsibility” of having credit.
• If they were the lender, what factors would they consider important in granting
credit?
• Collaborative Learning Activities: In groups of two’s, have students contact a credit
reporting company, such as Experian (formerly TRW) (1-888-397-3742), Equifax Credit
• Invite a credit manager of a bank or local department store to speak to the class about
consumer and business credit.
• The Collaborative Learning Activity for this chapter, “Plastic Choices,” at the end of the
chapter gives students some first-hand experience contacting local banks, credit unions, and
• This chapter’s Business Decision, “Purchase vs. Lease” at the end of the chapter gives
students a chance to compare the seemingly more expensive purchase of a vehicle versus the
apparently cheaper lease of a vehicle.
• Point out that the terms of the lease in this problem are more favorable than most
leases, as there are no termination fees or charges.
• Remind students that the Finance Charge includes not just interest, but also fees and other
charges. This is to prevent financing companies from disguising high interest rates as fees,
and to allow consumers to compare apples to apples.
Section I Open-End Credit – Charge Accounts, Credit Cards, Lines of Credit
• Use Exhibits Transparencies 13-1 and 13-2 to illustrate the parts of a credit card and a typical
monthly statement.
• Collaborative Learning Activity: Ask students who have their own credit cards to read the
“fine print” (See Exhibit 13-3) on the back of one of their statements or on the credit card
• Spotlight: Be sure students understand the difference between:
• Point out that one month’s ending balance on a credit card statement is the next month’s
beginning balance.
• Make students aware that revolving credit is the most popular type of open-end credit. The
consumer has a prearranged credit limit and two payment options:
• Spotlight: When discussing the calculation of periodic rate,
Annual rate
12
, students
sometimes get confused converting small percents such as .75%, 1.25% or 1.5% to decimals.
A little review here goes a long way.
• When discussing the average daily balance method:
• Point out to students this method is actually an application of “weighted averages.”
(Unpaid balance times the number of days that balance existed)
• Collaborative Learning Activity: In groups of two’s, have students work Try-It Exercise 2.
Determining the finance charge and new balance on a credit card account requires a number
of calculations. Splitting up the work, at first, makes learning this procedure easier.
• Collaborative Learning Activities: Have students research and report on the following:
• The current prime rate, and the source of information.
Section II Closed-End Credit – Installment Loans
• Explain to students that installment loans are a form of closed-end credit. These loans are
made for a specified number of equal monthly payments.
• A down payment is a percentage of the purchase price of an item that the buyer must
pay in a lump sum at the time of purchase.
• Collaborative Learning Activity: Have students bring to class advertisements for:
• Loans that state the Annual Percentage Rate, APR
Interest = Principal x Rate x Time
• Spotlight: One of the most important concepts for students to learn in this chapter is APR,
annual percentage rate. They should understand that the finance charge on installment
loans is calculated in the same way as promissory notes, covered in Chapter 10.
• With promissory notes, the borrower has use of all the funds for the full period of
• Remind students that they can find the APR of an installment loan by using Table 13-1 or by
the APR formula.
• Remind students that when a fraction contains an equation in the denominator, it is best to
• Collaborative Learning Activity: Have students break into groups of two’s. Have one
student in each group work Try-It Exercise 6 using the APR tables, while the other works the
same problem using the APR formula. Then, have them compare their results.
• Spotlight: Call attention to the fact that when the annual percentage rate and number of
months of an installment loan are known, the APR tables can be used in reverse to find the
• The Rule of 78, or sum-of-the-digits method is the most widely used method for
calculating this rebate.
• The Rebate Fraction is established based on when a loan is paid off. The numerator
is the sum of the digits of the number of remaining payments, the denominator is the
• Collaborative Learning Activity: In groups of two’s or three’s have students bring to class
newspaper advertisements for automobiles or boats, that display the down payment, price,
monthly payment, and number of months of the loan. From this information, have each
group calculate:
• The amount financed
Questions Students Always Ask
“Why divide the annual rate by 12?”
• Many students don’t realize that “annual rate” means “yearly rate”. Draw a time line on
“ When calculating the Finance Charge using the APR tables, why divide by 100?”
• Because the table is based on loans of $100.
“When calculating the average daily balance, do I count the first day?”
• No. When calculating dates, the last day is counted, but not the first. Some students do
“Why do I multiply the balance times the number of days that balance exists?”
• Remind students how to find averages: Add all the values in a set, then divide the sum
“Why do we have to calculate the Rebate Fraction to determine the payoff amount?”
• Students often don’t understand that the Finance Charge on an installment loan is based
on the entire amount of the loan for the entire term of the loan. In other words, such