Credit

When you borrow money, with the expectation of repayment over time at additional cost, to acquire a good or service now that you could not otherwise obtain

The Good of Credit Credit has enabled many people to live better by paying for goods or services as part of their regular living expenses rather than having to wait until they could afford to make a purchase. Egypt – son doesn’t marry until he has a house and furniture paid for – late 30’s or early 40’s – women marry older men

Credit Terms Interest = percentage –Cost incurred when borrowing money. The amount the borrower must pay for use of someone else’s money. It may be a bank, credit card company, or a store. Debt – –amount of money owed –Equal to the principal plus interest Principal –The amount originally borrowed

As a Consumer You Should Consider Marginal Analysis Individuals compare the marginal cost and the marginal benefit of a decision before they act upon it Estimate total costs Estimate total revenues Subtract total revenues from total costs Determine if there is enough profit (benefit – satisfaction) to justify loan costs Decide to apply for the loan or not

3 Types of Charge Accounts : Regular Charge Accounts –Known as a 30-day charge. At the end of 30-day period, the store sends a bill for the entire amount. No interest is charged, but the entire bill must be paid on time. Revolving Charge Accounts –Allows you to make additional purchases from the same store even if you have not paid the previous month’s bill in full. Don’t have to reapply like a loan. Installment Charge Accounts –Items purchased & paid for through equal payments spread over a period of time. Part of the payment is applied to the principal and part to interest. Ex: furniture, appliances, etc.

Installment Debt Consumers use installment debt to buy consumer durables such as automobiles, refrigerators, washers, and other appliances. First credit became available in 1916 in the form of installment loans Secured Loan – have to put up collateral to secure or guarantee the loan Unsecured loan – solely on the promise you will repay or we break your legs

Credit Cards –Allows a person to make purchases without paying cash. –May be used at a variety of locations: stores, restaurants, hotels, etc. –85% of the adult population have credit cards –Simple bill paying with one check for lots of purchases –Take advantage of sales if you don’t have enough money now –Shop on line or by phone

Problems with Credit Cards Regularly charge more than they can afford to pay Finance charges can add substantially to your expenses and purchases ends up costing lots more Can drive you into debt or bankruptcy Might lose property entirely Plastic was introduced in 1959

Credit Card Terms to Know Credit LimitsTravel Insurance Annual FeesExtended Warranty Grace PeriodFinance Charge Over limit FeesCollision on rentals Late payment FeesDiscounts Cash Advance FeesCash back Year-end SummariesFloat on payment

Canceling Your Card 40 days before annual renewal date to avoid annual fee Not your purchase – 60 days to notify card company in writing – 90 days to resolve problem Defective merchandise – you can legally refuse to pay if it costs more than $50 Lost or Stolen – report IMMEDIATELY –$50 is the most you are responsible for

Three C’s of Credit Character – payment history of individual Capacity – earnings and current debt the individual has or their ability to take on new debt Collateral – Capital – ability to put property or assets up to secure credit – security for loan if you default

Co-signer Parents or person with an acceptable credit rating who guarantees to repay the loan if you default DEFAULT – not making payments on your loan – usually from days delinquent

Substance of a Loan How much to borrow? – specific request How much will it cost? – lender offers rate When will you have to repay it – prepayment penalty? What if you don’t pay on time –Late Fees – payment arrives late –Default – failing to live up to the agreement

Finance Charge It is the cost of credit expressed in dollars and cents. It takes into account interest costs plus any other charges connected with the credit. Computing can vary from creditor to creditor. –Previous Balance –Average Daily Balance –Adjusted Balance –Past Due Balance

Annual Percentage Rates Also known as the APR It is the cost of credit expressed as a yearly percentage rate. Must take into account any non-interest costs of credit such as membership fees.

Government Regulation of Credit Truth in Lending Act (1968) –Ensures that consumers are fully informed about the costs and conditions of borrowing. Equal Credit Opportunity Act (1974) –Prohibits discrimination in giving credit on the basis of sex, race, color, religion, national origin, gender, marital status, age or receipt of public assistance.

Miscellaneous Credit Information State Usury Laws –A law restricting the amount of interest that can be charged for credit Personal Bankruptcy –When an individual(s) take too many loans, use to many credit cards, and pile up debts that cannot be paid off they may need to file for personal bankruptcy. –In Bankruptcy, a debtors give most of what they own to be distributed to their creditors. Taxes and Student Loans cannot be discharged. It is very difficult to reestablish credit after declaring bankruptcy. Bankruptcy should be your last resort!

Chapter 13 Bankruptcy Chapter 13 of the Bankruptcy Code is the opportunity to repay some or all the debts in their name, in better terms, i.e. lower or no interest.. While debtors are allowed to keep all of their property, the court approves a new interest-free plan for repayment within a 5 year limit. If you are successful they discharge the bankruptcy.

Chapter 7 Bankruptcy “Liquidation" bankruptcy It cancels your debts, but you might have to let the bankruptcy court liquidate (sell) some of your property for the benefit of your creditors. "Chapter 7" refers to the chapter of the federal Bankruptcy Code that contains the bankruptcy law.