Consumer Credit

Consumer Credit: borrowing money to make a purchase now and pay for it at some future time. Examples of Consumer credit include: Home mortgages Car loan Personal bank loan Credit card purchases Utilities and telephone payments Note: Credit card loans usually carry the highest interest rates.

Generally, apart from emergencies, you should borrow money only to acquire something that will do one of two things: Appreciate (go up in value) Earn income You should not borrow for things that Depreciate (go down in value) Run up a lot of extra expenses

Advantages of Consumer Credit Convenience Investments or Capital Improvements (borrow to purchase RRSP GIC or make a home improvement) Emergencies Forced Savings (large expenditures) Collateral (ex, car rental) Disadvantages of Consumer Credit Cost of credit (interest payments) Impulse buying Credit rating

Sources of Credit Sales Credit: used by consumers and businesses. A purchase is made and payment is differed to a future date. Typically the consumer makes the purchase using a credit card or makes direct arrangements with the retailer. Cash Credit: A cash loan that is used to buy goods or services, pay off other debts or expenses, or purchase an investment. Typically, the consumer will get a cash loan from a financial institution (ex bank, trust company, credit union). Note: you can get a cash loan from your credit card, but this is very expensive.

Types of Credit and Loans Credit Cards A lot of competition ex, MasterCard, Visa, American Express, and retailers own credit cards such as HBC, Petro Canada, etc. Various types (ex, gold card, air miles, etc) Credit limit established for each individual (ex, $1000 or up to $50 000) No interest charged if payment made within statement period Minimum payment required (ex 10% of balance) and interest charges are very high on outstanding balance (ex 36% per year) Retailer pays credit card company, 4 - 7%, for you using credit card. Retailers pass this cost on to the consumers. (some retailers provide incentive for cash transactions – ex Canadian Tire)

Types of Credit and Loans Mortgage Loans A long term loan for home purchases or property purchase (5 – 30 years) Fixed monthly payments that include interest charges and payment towards the principal of the loan Requires that a down payment be made ex 25% of property value The purchaser owns the property, though it is used as the collateral for the loan.

Types of Credit and Loans Instalment Loans Loans provided by banks and other finance institutions Used for major item purchases such as cars, home appliances and furniture. Lender and borrower agree to terms of payment, ex payment dates, amount, and loan interest rate The purchased item usually serves as the collateral Loan terms are fixed and usually are 1 – 3 years duration

Types of Credit and Loans Demand Loans Short term loan No collateral needed but financial status of borrower is considered Used for various things, ex bridge a payment Payments are made monthly or in lump sums Lender can call in loan at any time

Types of Credit and Loans Line of Credit Pre determined and arrange with lender (ex banks) Common example is an over draft on your chequing account

Getting And Keeping Credit Credit rating is your reputation for paying back money you owe. A good credit rating is important for managing personal finances. Credit Bureaus are companies that gather and provide information on the credit history of potential customers. Credit history is the information that is maintained on your personal credit behaviour and payment of debts. Financial institutions provide this information to the credit bureau, which in turn shares it with other financial institutions for a fee. Note: You will want to establish a good credit rating as early as possible (ex. as a college or university student). Apply for and obtain a credit card or a retail card but make sure to use it sparingly and pay off your balance each month.

Establishing a Credit Rating Three factors are used to evaluate an initial credit application: character, capacity, and capital. Character Is capable of getting and holding on to a job Is reliable at work Has specific job skills, vocation, or career Demonstrated financial responsibility Has a bank account Capacity How much income is earned How secure your job is What expenses and other financial commitments do you have May require someone else to co-sign Capital What you are worth (monetary) based on assets you own Assets may be used as collateral

Getting Into Credit Trouble Credit Counselling A counselling service may help you plan your finances and repayment of debt. For example consolidate or renegotiate with the lender A Collection Agency is a company hired to collect overdue accounts from customer. The agency may resort to annoying, persistent, embarrassing calls and letters to get the money paid. The retailer may repossess the purchased item (ex. car) A bank may take money directly from your bank account if you owe them Wages can be garnished from your pay cheque

Personal Bankrupcy The last resort is to declare personal bankruptcy. You must Owe at least $1 000 Be unable to meet regular payments Owe more than what your assets are worth Personal bankruptcy requires that you sell all your assets. Furthermore, you will be unable to obtain credit for 7 years.

Activity #1 Visit and explore the home page of 2 Canadian banks. Examine how they promote credit and credit use specifically targeted towards youth (students). Create a table that compares your banks. Comparison Criteria Bank 1 Bank 2 Credit application & requirements Terms of credit Help and advice Other ?????