Consumer Credit

Chapter 6Chapter 6

Credit

An arrangement to receive cash, goods, or An arrangement to receive cash, goods, or services now and pay for them in the future.services now and pay for them in the future.

Creditor

An entity to which money is owedAn entity to which money is owed Agrees to advance an individual the money, Agrees to advance an individual the money,

goods, or servicesgoods, or services Bank, finance company, credit union, Bank, finance company, credit union,

business, or individualbusiness, or individual

Experience with Credit

Do you have a credit card? Do you have a credit card? What do you use it for?What do you use it for? Do you think high school students should Do you think high school students should

be allowed to have credit cards?be allowed to have credit cards? Have you ever used credit to purchase Have you ever used credit to purchase

something that you couldnsomething that you couldn ’’t really afford?t really afford?

History of Consumer Credit Originally a privilege of Originally a privilege of

the richthe rich Farmers began using Farmers began using

extensivelyextensively Introduction of the Introduction of the

automobile made automobile made installment credit installment credit acceptable form of acceptable form of payment (equal payments payment (equal payments over a period of time)over a period of time)

Consumer Credit Now Major force in todayMajor force in today’’s s

economyeconomy A fact of life in A fact of life in

personal and family personal and family financial planningfinancial planning

Often necessaryOften necessary Involves responsibility Involves responsibility

and certain risksand certain risks

Assignment

Credit Timeline

Uses and Misuses of Credit

Factors to Consider Before making a purchase Do you have the cash you need for the down Do you have the cash you need for the down

payment?payment? Do you want to use your savings instead of credit?Do you want to use your savings instead of credit? Can you afford the item?Can you afford the item? Could you use the credit in some better way?Could you use the credit in some better way? Could you put off buying the item for a while?Could you put off buying the item for a while? What are the costs of using credit?What are the costs of using credit? Make sure benefits outweigh the possible costsMake sure benefits outweigh the possible costs

Advantages of Credit Lets you enjoy services nowLets you enjoy services now Might get special discountsMight get special discounts Credit cards make shopping more Credit cards make shopping more

convenientconvenient Electrical & phone bills paid on Electrical & phone bills paid on

creditcredit Hotel Reservations, Car rental, Hotel Reservations, Car rental,

Online Purchases-need credit cardsOnline Purchases-need credit cards Safer than cashSafer than cash Lenders will view you as a Lenders will view you as a

responsible personresponsible person

Disadvantages of Credit Temptation to Temptation to

overspendoverspend Could lead to serious Could lead to serious

troubletrouble Could lose some of your Could lose some of your

income and propertyincome and property Using credit does not Using credit does not

increase purchasing increase purchasing powerpower

Interest

A charge in exchange for the use of credit. A charge in exchange for the use of credit.

Example – If you don’t pay your credit card Example – If you don’t pay your credit card payment in full, you’ll be charged interest payment in full, you’ll be charged interest for the amount still owed.for the amount still owed.

Annual Percentage Rate

Annual percentage rates include the monthly interest rate, but also add in up-front costs and any annual fees associated with the account.

The APR is the true cost of that loan or credit line

Types of Credit

Closed-End Credit You receive a one-time You receive a one-time

loan that you will pay loan that you will pay back over a specified back over a specified period of time and in period of time and in payments of equal payments of equal amountsamounts

Homes, cars, furnitureHomes, cars, furniture Usually carry lower Usually carry lower

interest rates than interest rates than open-end creditopen-end credit

Closed-End Credit Examples Buying a houseBuying a house

Written agreement that Written agreement that indicated their monthly indicated their monthly payments, how many payments, how many payments, cost of payments, cost of credit over the life of credit over the life of the loanthe loan

Bank holds title to the Bank holds title to the house until payments house until payments are completedare completed

Open-End Credit You borrow money for a You borrow money for a

variety of goods and variety of goods and servicesservices

Line of Credit-Maximum Line of Credit-Maximum amount of money the amount of money the creditor has made creditor has made available to youavailable to you

Department store credit Department store credit cards, VISA, MasterCardcards, VISA, MasterCard

Billed periodically for at Billed periodically for at least partial paymentleast partial payment

Sources of Consumer Credit

Loans Inexpensive LoansInexpensive Loans

Family or friendsFamily or friends Medium-Priced LoansMedium-Priced Loans

Commercial Banks or credit unionsCommercial Banks or credit unions Expensive LoansExpensive Loans

Finance Companies, retail stores (12-25%)Finance Companies, retail stores (12-25%) Home Equity LoansHome Equity Loans

Loan based on the difference between the current market Loan based on the difference between the current market value of your home and the amount you still owe.value of your home and the amount you still owe.

Interest is tax deductibleInterest is tax deductible Used for big purchasesUsed for big purchases

Credit Cards Average-9 cards per Average-9 cards per

holderholder Pay off your card each Pay off your card each

month-convenience month-convenience usersusers

DonDon’’t pay off your t pay off your card each month-card each month-borrowersborrowers

Credit Cards (cont.) Grace Period - a time period during which no Grace Period - a time period during which no

finance charges will be added to your accountfinance charges will be added to your account Finance charge - the total dollar amount you pay Finance charge - the total dollar amount you pay

to use creditto use credit Way to avoid finance charge - Pay entire balance Way to avoid finance charge - Pay entire balance

before the due datebefore the due date

Credit Card Costs Depends on the cardDepends on the card Some charge an Some charge an

annual fee - $20annual fee - $20 Interest RatesInterest Rates Other Fees and Other Fees and

ChargesCharges Annual Percentage Annual Percentage

RateRate

Debit Cards Looks the same as a Looks the same as a

credit card but isn’tcredit card but isn’t Debit card subtracts Debit card subtracts

money from your money from your checking or saving checking or saving accountaccount

Used at ATMs and to Used at ATMs and to make purchasesmake purchases

Smart Cards Combination of credit Combination of credit

card, drivers license, card, drivers license, health care health care identification, medical identification, medical history all in one placehistory all in one place

Use of a Use of a MicroprocessorMicroprocessor

Probably the futureProbably the future

Assignment

Credit Card Comparison Section 6.1 Assessment Page 163

Measuring the Cost of Credit and Obtaining Credit

Section 6.2Section 6.2

Can You Afford a Loan? Can be a substantial Can be a substantial

financial burdenfinancial burden Will you be able to Will you be able to

meet all of your usual meet all of your usual expenses plus the expenses plus the monthly loan monthly loan payments?payments?

Debt Payments-to-Income Ratio Percentage of debt you have in relation to your net Percentage of debt you have in relation to your net

incomeincome Net income-Income you receive (take-home pay, Net income-Income you receive (take-home pay,

gifts, interest on bank accounts)gifts, interest on bank accounts) Experts suggest you spend no more than 20% of Experts suggest you spend no more than 20% of

net income on debt paymentsnet income on debt payments Total Debt Payments(Not including house Total Debt Payments(Not including house

Payments)/monthly net income=Debt Payments-Payments)/monthly net income=Debt Payments-to-Income ratioto-Income ratio

The Cost of Credit

Finance Charge and The Annual Percentage Rate (APR) APR-Shows how much APR-Shows how much

credit costs you on a credit costs you on a yearly basis, yearly basis, expressed in a expressed in a percentagepercentage

Tackling the Trade-offs Term Versus Interest CostTerm Versus Interest Cost

Longer the loan, the smaller the payment, the Longer the loan, the smaller the payment, the more you paymore you pay

Lender Risk Versus Interest RateLender Risk Versus Interest Rate Variable Interest RateVariable Interest Rate Secured Loan-(Secured Loan-(Collateral)Collateral) Up-Front CashUp-Front Cash A Shorter TermA Shorter Term

Calculating the Cost of Credit Simple Interest (PxRxT=I)Simple Interest (PxRxT=I) Simple interest on the Simple interest on the

Declining BalanceDeclining Balance Pay interest only on the Pay interest only on the

amount that is not paidamount that is not paid Add-On InterestAdd-On Interest

The longer it takes to The longer it takes to repay the loan the more repay the loan the more you payyou pay

Calculating the Cost of Credit Cost of Open-End Cost of Open-End

CreditCredit Avoid the Minimum Avoid the Minimum

monthly payment trapmonthly payment trap Minimum Monthly Minimum Monthly

Payment-Smallest Payment-Smallest amount you can pay amount you can pay and remain a and remain a borrower in good borrower in good standingstanding

Applying for Credit

The Five Cs of Credit

1.1. CharacterCharacter Will you repay Will you repay

the loan?the loan? How long have How long have

youyou Lived at your Lived at your

present present addressaddress

Held your Held your current jobcurrent job

The Five Cs of Credit

2.2. CapacityCapacity Can you repay the Can you repay the

loan?loan? How much money How much money

do you make?do you make? What are your What are your

current debts?current debts?

The Five Cs of Credit

3.3. CapitalCapital What are your What are your

assets and net assets and net worth?worth?

4.4. CollateralCollateral What if you donWhat if you don’’t t

pay back the pay back the loan?loan?

The Five Cs of Credit5.5. Credit HistoryCredit History

What is your credit What is your credit history?history?

Do you pay your bills Do you pay your bills on time?on time?

Have you ever filed Have you ever filed bankruptcy?bankruptcy?

Credit History-A measure Credit History-A measure of a personof a person’’s ability and s ability and willingness to make credit willingness to make credit payments on timepayments on time

The Five Cs of Credit Creditors use different Creditors use different

combinations of the 5 combinations of the 5 Cs and rating systemsCs and rating systems

The Equal Credit Opportunity Act (ECOA)

A creditor may not A creditor may not decline your loan decline your loan based on:based on: Age-(legal to sign a Age-(legal to sign a

legal contract)legal contract) Public AssistancePublic Assistance Race or NationalityRace or Nationality Marital statusMarital status GenderGender

What if Your Application is Denied? You have the right to You have the right to

know whyknow why Ask to see your credit Ask to see your credit

report within 60 days report within 60 days notice of your denied notice of your denied applicationapplication

Your Credit Report

Credit Reports Your complete credit Your complete credit

historyhistory Collected by credit Collected by credit

bureausbureaus Most lenders rely Most lenders rely

heavily on credit heavily on credit reportsreports

Credit Bureaus Agency that collects Agency that collects

information on how information on how promptly people and promptly people and businesses pay their billsbusinesses pay their bills

Three major credit Three major credit bureausbureaus ExperianExperian Trans UnionTrans Union EquifaxEquifax

Get info from anywhere Get info from anywhere that grants credit or loansthat grants credit or loans

What’s in Your Credit Files Name, address, SS#, Birth Name, address, SS#, Birth

datedate Your employer, position and Your employer, position and

incomeincome Previous addressPrevious address Previous employerPrevious employer SpouseSpouse’’s name, SS#, s name, SS#,

employer, incomeemployer, income Whether you rent or own a Whether you rent or own a

homehome Checks returned for Checks returned for

insufficient fundsinsufficient funds

More on Credit Reports Fair Credit ReportingFair Credit Reporting

1971-Fair Credit 1971-Fair Credit Reporting ActReporting Act

Most information can Most information can only be reported for only be reported for seven yearsseven years

Bankruptcy-10 yearsBankruptcy-10 years

Incorrect Information in Your Credit File

Mistakes can and do Mistakes can and do occuroccur

Contact the bureau Contact the bureau and dispute the and dispute the incorrect infoincorrect info

They must remove the They must remove the item unless the lender item unless the lender can verify info is can verify info is correctcorrect

Chapter 6.2 Assessment

Section 6.2 Assessment Page 179Section 6.2 Assessment Page 179 1-61-6

Know Your Rights AssignmentKnow Your Rights Assignment

Assignment

Chapter 6 QuestionsChapter 6 Questions

Protecting Your Credit

Section 6.3Section 6.3

Billing Errors and Disputes Ever received a bill for Ever received a bill for

something you didnsomething you didn’’t t buy?buy?

Ever make a payment Ever make a payment that wasnthat wasn’’t credited to t credited to your account?your account?

Steps to follow if your bill is wrong

1.1. Notify your creditor in Notify your creditor in writingwriting

Include any info. that Include any info. that might support your casemight support your case

2.2. Pay the portion of the bill Pay the portion of the bill that is not in questionthat is not in question

Creditor must acknowledge Creditor must acknowledge your letter within 30 daysyour letter within 30 days

Within 2 billing periods, Within 2 billing periods, the creditor must adjust the creditor must adjust your accountyour account

Protecting Your Credit Rating Creditors may not Creditors may not

threaten your credit threaten your credit rating or do anything rating or do anything to damage your credit to damage your credit reputation during reputation during disputedispute

Creditor cannot take Creditor cannot take any action to collect any action to collect amount until amount until complaint is answeredcomplaint is answered

Defective Goods and Services If you receive If you receive

damaged goods damaged goods purchased on a credit purchased on a credit cardcard

Make attempt to Make attempt to resolve the problem resolve the problem with the storewith the store

You may tell your You may tell your credit card company to credit card company to stop payment for the stop payment for the itemitem

Identity Crisis: What to do if your identity is stolen? You may not know your You may not know your

identity has been stolen identity has been stolen until something is wronguntil something is wrong

Take action fastTake action fast1.1. Contact Credit Contact Credit

Bureaus-Flag your Bureaus-Flag your accountaccount

2.2. Contact the creditorsContact the creditors3.3. File a police reportFile a police report

Protecting Your Credit from Theft or Loss

People look through trashPeople look through trash Tear or shred any papers Tear or shred any papers

that contain personal that contain personal informationinformation

If you believe a thief has If you believe a thief has Accessed Accessed your bank account your bank account Close accounts Close accounts

immediately immediately Get new PINGet new PIN

Ways to Protect Your Credit Card1.1. Make sure card is Make sure card is

returned to you after returned to you after making purchasesmaking purchases

2.2. Keep record of your Keep record of your credit card numbercredit card number

3.3. Notify credit card Notify credit card company immediately if company immediately if your card is lost or stolenyour card is lost or stolen

Max you have to pay is Max you have to pay is $50$50

Ways to Protect Credit Info. On the Internet Use a secure browserUse a secure browser Keep records of your online transactionsKeep records of your online transactions Review monthly bank and credit card statementsReview monthly bank and credit card statements Read privacy & security policies of web sites you Read privacy & security policies of web sites you

visitvisit Keep personal info. privateKeep personal info. private Never give your password to anyone onlineNever give your password to anyone online DonDon’’t download files sent from strangerst download files sent from strangers

Co-signing a Loan Co-signing-You agree Co-signing-You agree

to be responsible for to be responsible for loan payments if the loan payments if the other party fails to other party fails to make themmake them

Might have to pay late Might have to pay late fees or collection costsfees or collection costs

If debt is not repaid it If debt is not repaid it will show up on your will show up on your credit report as wellcredit report as well

Complaining About Consumer Credit First try resolving the problem with the First try resolving the problem with the

lenderlender If that fails-Use more formal complaint If that fails-Use more formal complaint

proceduresprocedures

Assignment

Phishing Phishing Section 6.3 Assessment Page 186Section 6.3 Assessment Page 186

1-61-6

Managing Your Debts

6.46.4

Warning Signs of Debt Problems You make only the minimum monthly payment on credit cardsYou make only the minimum monthly payment on credit cards Having trouble making the minimum monthly paymentHaving trouble making the minimum monthly payment Balance increases on credit cards each monthBalance increases on credit cards each month You miss loan payments or often pay lateYou miss loan payments or often pay late You use savings to pay for necessitiesYou use savings to pay for necessities You receive second or third payment due noticesYou receive second or third payment due notices You borrow money to pay off old debtsYou borrow money to pay off old debts You exceed the credit limits on your credit cardsYou exceed the credit limits on your credit cards YouYou’’ve been denied credit because of a bad credit bureau ve been denied credit because of a bad credit bureau

report.report.

Debt Collection Practices FTC enforces the Fair FTC enforces the Fair

Debt Collection Debt Collection Practices Act (FDCPA)Practices Act (FDCPA)

Debt Collectors-Debt Collectors-Business that collect Business that collect debts for creditorsdebts for creditors

Financial Counseling Services Consumer Credit Consumer Credit

Counseling Service (CCCS)Counseling Service (CCCS) Usually free, sometimes Usually free, sometimes

requires a small feerequires a small fee Helping people who want to Helping people who want to

clear up their unmanageable clear up their unmanageable indebtedness-the condition indebtedness-the condition of being deeply in deptof being deeply in dept. .

Universities, credit unions, Universities, credit unions, military bases sometimes military bases sometimes offer non-profit counselingoffer non-profit counseling

Declaring Personal Bankruptcy Bankruptcy-a legal Bankruptcy-a legal

process in which some process in which some or all of the assets of a or all of the assets of a debtor are distributed debtor are distributed among the creditors among the creditors because the debtor is because the debtor is unable to pay his or unable to pay his or her debtsher debts

Last Resort-Severely Last Resort-Severely damages your credit damages your credit ratingrating

Declaring Personal Bankruptcy Health bills can Health bills can

quickly get people into quickly get people into financial troublefinancial trouble

Can become Can become impossible to pay backimpossible to pay back

The U.S. Bankruptcy Act of 1978 1961-About 175,000 1961-About 175,000

BankruptciesBankruptcies 2000-1,250,000 2000-1,250,000

BankruptciesBankruptcies Why?Why? Two types of Two types of

BankruptcyBankruptcy

Chapter 7 Bankruptcy Individual must draw a petition listing their debts Individual must draw a petition listing their debts

and liabilitiesand liabilities Many, but not all debts are forgivenMany, but not all debts are forgiven Assets are sold off to pay off creditorsAssets are sold off to pay off creditors Protected assets include SS Payments, Protected assets include SS Payments,

Unemployment compensation, the net value of your Unemployment compensation, the net value of your home, vehicle, household goods and appliances, home, vehicle, household goods and appliances, tools used in your work, bookstools used in your work, books

Alimony, child support, certain taxes, fines, debts Alimony, child support, certain taxes, fines, debts from educational loans do not go awayfrom educational loans do not go away

Chapter 13 Bankruptcy Debtor with regular income proposes a plan for Debtor with regular income proposes a plan for

using future earnings or assets to eliminate his or using future earnings or assets to eliminate his or her debts over a period of time.her debts over a period of time.

Debtor normally keeps all or most of his or her Debtor normally keeps all or most of his or her propertyproperty

Could be a 5 year plan, Debtor makes regular Could be a 5 year plan, Debtor makes regular payments to a chapter 13 trustee, who then payments to a chapter 13 trustee, who then distributes money to the creditorsdistributes money to the creditors

Effects of Bankruptcy Varying experiencesVarying experiences

Hard to get creditHard to get credit Easier to get creditEasier to get credit

May be easier for people May be easier for people who file chapter 13 than who file chapter 13 than for people who file for people who file chapter 7chapter 7

Remember! This should Remember! This should be your last course of be your last course of actionaction

Assignment

Chapter 6 ReviewChapter 6 Review Section 6.4 Assessment Page 193Section 6.4 Assessment Page 193

1-61-6