Chapter 589

Consumer CreditAnalyze advantages and disadvantages of using consumer creditAssess the types and sources of consumer creditDetermine whether you can afford a loan and how to apply for creditDetermine the cost of credit by calculating interest using various interest formulasDevelop a plan to protect your credit and manage your debtsChapter Objectives5-*

Objective 1Analyze Advantages and Disadvantages of Using Consumer CreditCredit An arrangement to receive cash, goods or services now, and pay for them in the futureBased on trust in peoples ability and willingness to pay bills when dueConsumer credit Use of credit by individuals for personal needs, except a home mortgageA major force in our economy5-*

Uses and Misuses of CreditBefore you use credit for a major purchase, consider:Do I have the cash for the down payment? Do I want to use my savings for this purchase?Does the purchase fit my budget?Could I use the credit Ill need in some better way?Can I postpone this purchase?What are the opportunity costs of postponing this purchase?What are the dollar and psychological costs of using credit for this purchase?5-*

Advantages of CreditCurrent use of goods and servicesPermits purchase even when funds are lowA cushion for financial emergenciesAdvance notice of salesEasier to return merchandiseConvenient when shoppingProvides a record of expenses5-*

Advantages of CreditOne monthly paymentSafer than carrying cashNeeded for hotel reservations, car rentals, and shopping onlineTake advantage of float time/grace periodRebates, airline miles, or other bonusesCredit indicates financial stability5-*

Disadvantages of Consumer CreditTemptation to overspendCan create long-term financial problems and slow progress toward financial goalsPotential loss of merchandise due to late or non-paymentTies up future incomeCredit costs money - more costly than paying with cash

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Objective 2Assess the Types & Sources of Consumer Credit

Two Basic Types of Consumer CreditClosed-End CreditOne-time loans for a specific purpose paid back in a specified period of timeOpen-End CreditUse as needed until line of credit max reached

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Closed-End Credit

One-time loans for a specific purpose that you pay back in a specified period of time, and in payments of equal amountsMortgage, automobile, and installment loans for furniture, appliances and electronics3 most common types of closed-end creditInstallment sales creditInstallment cash creditSingle-lump credit5-*

Open-End CreditUse as needed until line of credit max reachedCredit cardsDepartment store cardsHome equity loansYou pay interest and finance charges if you do not pay the bill in full when dueRevolving check credit Bank line of credit5-*

Sources of Consumer CreditLoansBorrowing money with an agreement to repay along with interest within a certain amount of timeInexpensive loansParents or family membersMedium-priced loansCommercial banks, savings and loan associations, and credit unionsExpensive loansFinance and check cashing companies Retailers such as car or appliance dealersBank credit cards and cash advances5-*

Sources of Consumer CreditHome Equity LoansLoan based on your home equityCurrent market value of your home minus the amount you still owe on the mortgageInterest is tax deductibleShould only be used for major purchasesCredit CardsAverage cardholder has > 9 credit cardsConvenience users vs. BorrowersFinance charge = total amount paid to use credit

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Sources of Consumer CreditDebit CardsDebit cards electronically subtract money from your savings or checking accountsMost commonly used at ATMs

Stored Value CardsGift cardsPrepaid cards

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Sources of Consumer CreditSmart CardsPlastic card equipped with a computer chip that can store 500 times as much data as a normal credit cardTravel and Entertainment (T&E) cardsNot really credit cards; balance is due in full each monthDiners Club; American ExpressYou dont pay for services or goods at the time you purchase them5-*

Objective 3 Determine Whether You Can Afford a Loan and How to Apply for CreditBefore you take out a loan, ask yourself...Can you meet all your essential expenses and still afford the monthly loan payments ?What do you plan to give up in order to make the payment?5-*

General Rules of Credit Capacity *Not including house payment which is a long-term liabilityDebt Payments-to-Income Ratio Monthly Debt Payments*Net Monthly IncomeConsumer credit payments should not exceed a maximum of 20% of your net income.5-*

General Rules of Credit CapacityDebt To Equity RatioTotal Liabilities Net Worth*=Should be < 1*Excluding home value5-*

The Five Cs of CreditCharacter - Do you pay bills on time?Capacity - Can you repay the loan?Capital - What are your assets and net worth?Collateral - What assets do you have to secure the loan?Conditions- Lenders will review how general economic conditions will affect your ability to repay your loan5-*

FICO & VantageScoreFICO Credit Score350 to 850Higher score = less riskAvailable from http://www.myfico.com for a feeVantageScoreNew scoring techniqueDeveloped collaboratively by 3 credit agenciesRange = 501 to 9905-*

Factors of CreditworthinessECOA (Equal Credit Opportunity Act) Gives all applicants the same rights. Credit providers may not discriminate based on:AgeSocial Security or public assistanceHousing loans (redlining)If you are denied credit, you have the right to know the reasons You can request a copy of your credit report within 60 days if you are denied credit based on what is in your files

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Your Credit ReportCredit ReportsRecord of your complete credit historyCredit BureausAgencies that collect information on how promptly people and businesses pay their billsExperian, Trans Union and Equifax are the 3 major credit bureausCredit Bureaus obtain information from banks, finance companies stores, credit card companies and other lenders5-*

Your Credit ReportCredit FilesTypically contain detailed credit data along with considerable personal information:Name, address, SSN, DOB (self & spouse)Employer, position and income (current & previous, self and spouse)Home owner or renterFair Credit Reporting Act (1971)Law allows out-of-date information to be deleted, as well as the right to correct misinformation5-*

Your Credit ReportWho can obtain a credit report?Only authorized persons have access to your report for approved legitimate business purposesTime Limits on Unfavorable DataAdverse data can be reported for 7 yearsBankruptcy can be reported for 10 years5-*

Your Credit ReportIncorrect Information in Your FileYou may request a copy of your credit information within 60 days of being denied creditYou may request a free copy of your credit report annuallyWhat are Your Legal Rights?You have the legal right to sue the credit bureau or the creditor that has caused you harm5-*

Objective 4Determine the Cost of Credit by Calculating Interest Using Various Interest FormulasFinance charge Total dollar amount you pay to use credit Includes interest costs and fees, such as service charges, credit-related insurance premiums, or appraisal feesAnnual Percentage Rate (APR) Percentage cost of credit on a yearly basisKey to comparing costs when shopping for ratesIt is important to shop for credit

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Tackling the Trade-OffsTerm (length of loan) versus interest costLender risk versus interest rateTo reduce the lenders risk and thus the interest rate you can:Accept a variable interest rateProvide collateral to secure a loanProvide up-front cashTake a shorter term loan

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Calculating the Cost of CreditSimple interestComputed on principal only without compoundingThe dollar cost of borrowingInterest = Principal x rate x TimeSimple interest on the declining balanceInterest is paid only on the amount of original principal not yet repaidAdd-on interestInterest calculated on full amount of principal Interest added to original principalPayment = Total divided by number of payments to be made

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Calculating the Cost of CreditCost of Open-End CreditTruth in Lending Act requires that open-end creditors inform consumers as to how the finance charge and APR will affect their costsCost of Credit and Expected InflationLenders incorporate the expected rate of inflation when deciding how much interest to chargeAvoid the Minimum Monthly Payment TrapThe longer you take to pay off the bill, the more interest you pay5-*

Objective 5Develop a Plan to Protect Your Credit and Manage Your DebtsFair Credit Billing Act (FCBA, 1975)Notify creditor of error in writing within 60 daysPay the portion of the bill not in disputeCreditor must respond within 30 daysCredit card company has two billing periods but no longer than 90 days to correct your account or tell you why they think the bill is correct5-*

Protecting Your Credit Disputed item wont affect your credit rating while in disputeCan withhold payment on damaged or shoddy goods or poor services if purchased with a credit cardMust make sincere attempt to resolve problem with creditor

Fair Credit Billing Act (FCBA, 1975)5-*

What to Do If Your Identity is Stolen?Contact the three major credit bureaus Ask the fraud department to institute a fraud alertRequest that creditors call you for permission before opening any new accounts in your nameContact creditors Check for any accounts that have been tampered with or opened fraudulentlyFile a police report Keep a copy5-*

Protecting Your Credit From Theft or LossShred any papers that contain personal information Close your accounts immediately if you suspect an identity thief has accessed the account Be sure your credit card is returned after a purchaseKeep a record of credit card numbersNotify your credit card company immediately if your card is lost or stolen5-*

Protecting Your Credit Information on The InternetUse a secure browserKeep records of online transactionsReview monthly bank and credit card statementsRead the privacy and security policies of websites you visitKeep personal information privateNever give your password to anyoneDont download files sent by strangers5-*

Co-signing a LoanCo-signing means guaranteeing the debtLender would not require a co-signer if borrower were a good riskCan you afford it if the borrower defaults?If borrower doesnt pay, cosigner is liable for the full amount plus any late or collection feesIf payment is missed, creditor can collect from the cosigner first5-*

Complaining About Consumer CreditFirst: Try to solve the problem directly with the creditorIf that fails: Use formal complaint proceduresA variety of Consumer Credit Protection Laws and Federal Agencies administer and assist with complaint procedures

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Consumer Credit Protection LawsTruth in Lending and Consumer Leasing ActsEqual Credit Opportunity Act (ECOA)Fair Credit Billing ActFair Credit Reporting ActConsumer Credit Reporting Reform Act (1977)Electronic Funds Transfer Act

Your Rights Under Consumer Credit LawsComplain to the creditorFile a complaint with the governmentIf all else fails, sue the creditor5-*

Managing Your DebtsWarning Signs of Debt Problems

Paying only the minimum balance each monthTrouble even paying the minimum balanceTotal balance increases every monthMissing loan payments or paying lateUsing savings to pay for necessities Getting second or third payment noticesBorrowing money to pay old debtsExceeding the credit limits on your credit cardsDenied credit due to a bad credit report

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Managing Your DebtsDebt Collection PracticesThe Federal Trade Commission enforces the Fair Debt Collection Practices Act (FDCPA)Prohibits certain practices by debt collectorsDoes not eliminate legitimate debts5-*

Managing Your DebtsConsumer Credit Counseling Services (CCCS)Non-profit and supported by contributions from banks, merchants, etc.Provides education about creditProvides help with spending planProvides debt counseling services for those with serious financial problemsCan develop a debt consolidation plan and negotiate reduced interest rates5-*

Other Counseling ServicesUniversities, local county extension agents, credit unions, military bases, and state and federal housing authorities provide nonprofit counseling servicesCheck with your financial institution or consumer protection office for a list of reputable, low-cost financial counseling services5-*

Declaring Personal BankruptcyU.S. Bankruptcy Act of 1978Chapter 7 = straight bankruptcyChapter 13 = wage earner plan

Bankruptcy should be the last resort, because of the damage to your credit ratingPersonal bankruptcy is a procedure to distribute some or all of your assets among creditors5-*

Chapter 7 BankruptcySubmit a petition to the court that lists assets and liabilities, and pay a filing feeMany, but not all, debts are forgivenAssets sold to pay creditorsCan keep some assets (home, vehicle,..)Intent = a fresh start Most filed are this type

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After Chapter 7You May No Longer Owe:Retail store chargesBank credit card chargesUnsecured loansUnpaid hospital or physician billsYou Still May Owe... Certain taxes and finesChild support and alimonyEducational loansDebts from willful or malicious act5-*

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005Makes it more difficult for consumers to file a Chapter 7 bankruptcyForces a Chapter 13 repayment planDebtors must wait 8 years from their last bankruptcy to file againClamps down on bankruptcy mills that seek to game the systemIncludes provisions for consumer education on debt management and financial planning5-*

Chapter 13 BankruptcyDebtor with regular income proposes a plan to eliminate his debts over timeInformation provided to the court the same as under Chapter 7Plan may last up to five yearsDebtor makes payments to a court-appointed trustee

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Obtaining Credit after BankruptcyMay be more difficultBut, creditors may consider the inability to file bankruptcy again for 8 years Could be easier for Chapter 13 filers who have repaid some debt versus Chapter 7 filers who made no effort to repay5-*

Documents

Chapter 589