THE COST OF CREDIT

THE COST OF CREDIT



Shopping is the First Step


You get credit by promising to pay in the future for
something you receive in the present.

Credit is a convenience. It lets you charge a meal on your
credit card, pay for an appliance on the installment plan, take
out a loan to buy a house, or pay for schooling or vacations.
With credit, you can enjoy your purchase while you're paying
for it--or you can make a purchase when you're lacking ready
cash.

But there are strings attached to credit too. It usually
costs something. And of course what is borrowed must be paid
back.

If you are thinking of borrowing or opening a credit
account, your first step should be to figure out how much it
will cost you and whether you can afford it. Then you should
shop around for the best terms.


What Laws Apply?


Two laws help you compare costs:

TRUTH IN LENDING requires creditors to give you certain
basic information about the cost of buying on credit or taking
out a loan. These "disclosures" can help you shop around for
the best deal.

CONSUMER LEASING disclosures can help you compare the cost
and terms of one lease with another and with the cost and terms
of buying for cash or on credit.


The Finance Charge and Annual Percentage Rate (APR)


Credit costs vary. By remembering two terms, you can
compare credit prices from different sources. Under Truth in
Lending, the creditor must tell you--in writing and before you
sign any agreement--the finance charge and the annual
percentage rate.

The finance charge is the total dollar amount you pay to
use credit. It includes interest costs, and other costs, such
as service charges and some credit--related insurance premiums.

For example, borrowing $100 for a year might cost you $10
in interest. If there were also a service charge of $1, the
finance charge would be $11.

The annual percentage rate (APR)is the percentage cost (or
relative cost) of credit on a yearly basis. This is your key to
comparing costs, regardless of the amount of credit or how long
you have to repay it:

Again, suppose you borrow $100 for one year and pay a
finance charge of $10. If you can keep the entire $100 for the
whole year and then pay back $110 at the end of the year, you
are paying an APR of 10 percent. But, if you repay the $100 and
finance charge (a total of $110) in twelve equal monthly
installments, you don't really get to use $100 for the whole
year. In fact, you get to use less and less of that $100 each
month. In this case, the $10 charge for credit amounts to an
APR of 18 percent.

All creditors--banks, stores, car dealers, credit card
companies, finance companies-must state the cost of their
credit in terms of the finance charge and the APR. Federal law
does not set interest rates or other credit charges. But it
does require their disclosure so that you can compare credit
costs. The law says these two pieces of information must be
shown to you before you sign a credit contract or before you
use a credit card.