Skip to Main Content
CPCC Library logo

*Personal Financial Literacy Resource Guide*

Chapter 5 Introduction

This chapter defines consumer credit and analyzes its advantages and disadvantages. The importance of consumer credit in our economy is explained and uses and misuses of credit are discussed. Financial and personal opportunity costs of using credit are emphasized. Next, two types of consumer credit—closed-end credit and open-end credit—are differentiated, and major sources of consumer credit are explained. Then, general rules of measuring credit capacity such as debt payments-to-income ratio and debt-to-equity ratio are explained. This is followed by coverage of building and maintaining a credit rating. Next, in determining cost of credit, we emphasize the finance charge and the Annual Percentage Rate (APR).  Then we show how the cost of credit can be determined by calculating interest with various interest formulas. Then, the steps in avoiding and correcting credit mistakes are outlined, and consumer credit laws are explained. Finally, we explain and distinguish between the Chapter 7 and Chapter 13 bankruptcy laws to assess the choices in declaring personal bankruptcy.

LO 5.1: Analyze advantages and disadvantages of using consumer credit

LO 5.2: Assess the types and sources of consumer credit

LO 5.3: Determine whether you can afford a loan and how to apply for credit

Loan Calculator (Payment and Total Cost)

LO 5.4: Determine the cost of credit by calculating interest using various interest formulas

LO 5.5: Develop a plan to protect your credit and manage your debts

Additional Help

Step by Step Research Guide Citation Help Tutorials