Consumer Credit Chapter 6

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

Creditor An entity to which money is owed An entity to which money is owed Agrees to advance an individual the money, goods, or services Agrees to advance an individual the money, goods, or services Bank, finance company, credit union, business, or individual Bank, finance company, credit union, business, 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 be allowed to have credit cards? Do you think high school students should be allowed to have credit cards? Have you ever used credit to purchase something that you couldn ’ t really afford? Have you ever used credit to purchase something that you couldn ’ t really afford?

History of Consumer Credit Originally a privilege of the rich Originally a privilege of the rich Farmers began using extensively Farmers began using extensively Introduction of the automobile made installment credit acceptable form of payment (equal payments over a period of time) Introduction of the automobile made installment credit acceptable form of payment (equal payments over a period of time)

Consumer Credit Now Major force in today ’ s economy A fact of life in personal and family financial planning Often necessary Involves responsibility and 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 payment? Do you have the cash you need for the down 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 costs Make sure benefits outweigh the possible costs

Advantages of Credit Lets you enjoy services now Lets you enjoy services now Might get special discounts Might get special discounts Credit cards make shopping more convenient Credit cards make shopping more convenient Electrical & phone bills paid on credit Electrical & phone bills paid on credit Hotel Reservations, Car rental, Online Purchases-need credit cards Hotel Reservations, Car rental, Online Purchases-need credit cards Safer than cash Safer than cash Lenders will view you as a responsible person Lenders will view you as a responsible person

Disadvantages of Credit Temptation to overspend Could lead to serious trouble Could lose some of your income and property Using credit does not increase purchasing power

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 payment in full, you’ll be charged interest for the amount still owed. Example – If you don’t pay your credit card payment in full, you’ll be charged interest 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 loan that you will pay back over a specified period of time and in payments of equal amounts You receive a one-time loan that you will pay back over a specified period of time and in payments of equal amounts Homes, cars, furniture Homes, cars, furniture Usually carry lower interest rates than open-end credit Usually carry lower interest rates than open-end credit

Closed-End Credit Examples Buying a house  Written agreement that indicated their monthly payments, how many payments, cost of credit over the life of the loan  Bank holds title to the house until payments are completed

Open-End Credit You borrow money for a variety of goods and services You borrow money for a variety of goods and services Line of Credit-Maximum amount of money the creditor has made available to you Line of Credit-Maximum amount of money the creditor has made available to you Department store credit cards, VISA, MasterCard Department store credit cards, VISA, MasterCard Billed periodically for at least partial payment Billed periodically for at least partial payment

Sources of Consumer Credit

Loans Inexpensive Loans Inexpensive Loans  Family or friends Medium-Priced Loans Medium-Priced Loans  Commercial Banks or credit unions Expensive Loans Expensive Loans  Finance Companies, retail stores (12-25%) Home Equity Loans Home Equity Loans  Loan based on the difference between the current market value of your home and the amount you still owe.  Interest is tax deductible  Used for big purchases

Credit Cards Average-9 cards per holder Average-9 cards per holder Pay off your card each month-convenience users Pay off your card each month-convenience users Don ’ t pay off your card each month- borrowers Don ’ t pay off your card each month- borrowers

Credit Cards (cont.) Grace Period - a time period during which no finance charges will be added to your account Finance charge - the total dollar amount you pay to use credit Way to avoid finance charge - Pay entire balance before the due date

Credit Card Costs Depends on the card Depends on the card Some charge an annual fee - $20 Some charge an annual fee - $20 Interest Rates Interest Rates Other Fees and Charges Other Fees and Charges Annual Percentage Rate Annual Percentage Rate

Debit Cards Looks the same as a credit card but isn’t Debit card subtracts money from your checking or saving account Used at ATMs and to make purchases

Smart Cards Combination of credit card, drivers license, health care identification, medical history all in one place Use of a Microprocessor Probably the future

Assignment Credit Card Comparison Section 6.1 Assessment Page 163

Measuring the Cost of Credit and Obtaining Credit Section 6.2

Can You Afford a Loan? Can be a substantial financial burden Can be a substantial financial burden Will you be able to meet all of your usual expenses plus the monthly loan payments? Will you be able to meet all of your usual expenses plus the monthly loan payments?

Debt Payments-to-Income Ratio Percentage of debt you have in relation to your net income Percentage of debt you have in relation to your net income Net income-Income you receive (take-home pay, gifts, interest on bank accounts) Net income-Income you receive (take-home pay, gifts, interest on bank accounts) Experts suggest you spend no more than 20% of net income on debt payments Experts suggest you spend no more than 20% of net income on debt payments Total Debt Payments(Not including house Payments)/monthly net income=Debt Payments- to-Income ratio Total Debt Payments(Not including house Payments)/monthly net income=Debt Payments- to-Income ratio

The Cost of Credit

Finance Charge and The Annual Percentage Rate (APR) APR-Shows how much credit costs you on a yearly basis, expressed in a percentage APR-Shows how much credit costs you on a yearly basis, expressed in a percentage

Tackling the Trade-offs Term Versus Interest Cost Term Versus Interest Cost  Longer the loan, the smaller the payment, the more you pay Lender Risk Versus Interest Rate Lender Risk Versus Interest Rate  Variable Interest Rate  Secured Loan-(Collateral)  Up-Front Cash  A Shorter Term

Calculating the Cost of Credit Simple Interest (PxRxT=I) Simple Interest (PxRxT=I) Simple interest on the Declining Balance Simple interest on the Declining Balance  Pay interest only on the amount that is not paid Add-On Interest Add-On Interest  The longer it takes to repay the loan the more you pay

Calculating the Cost of Credit Cost of Open-End Credit Avoid the Minimum monthly payment trap Minimum Monthly Payment-Smallest amount you can pay and remain a borrower in good standing

Applying for Credit

The Five Cs of Credit 1. Character  Will you repay the loan?  How long have you  Lived at your present address  Held your current job

The Five Cs of Credit 2. Capacity  Can you repay the loan?  How much money do you make?  What are your current debts?

The Five Cs of Credit 3. Capital What are your assets and net worth? What are your assets and net worth? 4. Collateral What if you don ’ t pay back the loan? What if you don ’ t pay back the loan?

The Five Cs of Credit 5. Credit History  What is your credit history?  Do you pay your bills on time?  Have you ever filed bankruptcy? Credit History-A measure of a person ’ s ability and willingness to make credit payments on time

The Five Cs of Credit Creditors use different combinations of the 5 Cs and rating systems Creditors use different combinations of the 5 Cs and rating systems

The Equal Credit Opportunity Act (ECOA) A creditor may not decline your loan based on:  Age-(legal to sign a legal contract)  Public Assistance  Race or Nationality  Marital status  Gender

What if Your Application is Denied? You have the right to know why You have the right to know why Ask to see your credit report within 60 days notice of your denied application Ask to see your credit report within 60 days notice of your denied application

Your Credit Report

Credit Reports Your complete credit history Your complete credit history Collected by credit bureaus Collected by credit bureaus Most lenders rely heavily on credit reports Most lenders rely heavily on credit reports

Credit Bureaus Agency that collects information on how promptly people and businesses pay their bills Three major credit bureaus  Experian  Trans Union  Equifax Get info from anywhere that grants credit or loans

What ’ s in Your Credit Files Name, address, SS#, Birth date Name, address, SS#, Birth date Your employer, position and income Your employer, position and income Previous address Previous address Previous employer Previous employer Spouse ’ s name, SS#, employer, income Spouse ’ s name, SS#, employer, income Whether you rent or own a home Whether you rent or own a home Checks returned for insufficient funds Checks returned for insufficient funds

More on Credit Reports Fair Credit Reporting Fair Credit Reporting  1971-Fair Credit Reporting Act Most information can only be reported for seven years Most information can only be reported for seven years Bankruptcy-10 years Bankruptcy-10 years

Incorrect Information in Your Credit File Mistakes can and do occur Contact the bureau and dispute the incorrect info They must remove the item unless the lender can verify info is correct

Chapter 6.2 Assessment Section 6.2 Assessment Page 179 Section 6.2 Assessment Page 179  1-6 Know Your Rights Assignment Know Your Rights Assignment

Assignment Chapter 6 Questions

Protecting Your Credit Section 6.3

Billing Errors and Disputes Ever received a bill for something you didn ’ t buy? Ever received a bill for something you didn ’ t buy? Ever make a payment that wasn ’ t credited to your account? Ever make a payment that wasn ’ t credited to your account?

Steps to follow if your bill is wrong 1. Notify your creditor in writing Include any info. that might support your case 2. Pay the portion of the bill that is not in question Creditor must acknowledge your letter within 30 days Within 2 billing periods, the creditor must adjust your account

Protecting Your Credit Rating Creditors may not threaten your credit rating or do anything to damage your credit reputation during dispute Creditors may not threaten your credit rating or do anything to damage your credit reputation during dispute Creditor cannot take any action to collect amount until complaint is answered Creditor cannot take any action to collect amount until complaint is answered

Defective Goods and Services If you receive damaged goods purchased on a credit card Make attempt to resolve the problem with the store You may tell your credit card company to stop payment for the item

Identity Crisis: What to do if your identity is stolen? You may not know your identity has been stolen until something is wrong You may not know your identity has been stolen until something is wrong Take action fast Take action fast 1. Contact Credit Bureaus-Flag your account 2. Contact the creditors 3. File a police report

Protecting Your Credit from Theft or Loss People look through trash  Tear or shred any papers that contain personal information If you believe a thief has Accessed your bank account  Close accounts immediately  Get new PIN

Ways to Protect Your Credit Card 1. Make sure card is returned to you after making purchases 2. Keep record of your credit card number 3. Notify credit card company immediately if your card is lost or stolen Max you have to pay is $50 Max you have to pay is $50

Ways to Protect Credit Info. On the Internet Use a secure browser Use a secure browser Keep records of your online transactions Keep records of your online transactions Review monthly bank and credit card statements Review monthly bank and credit card statements Read privacy & security policies of web sites you visit Read privacy & security policies of web sites you visit Keep personal info. private Keep personal info. private Never give your password to anyone online Never give your password to anyone online Don ’ t download files sent from strangers Don ’ t download files sent from strangers

Co-signing a Loan Co-signing-You agree to be responsible for loan payments if the other party fails to make them Co-signing-You agree to be responsible for loan payments if the other party fails to make them Might have to pay late fees or collection costs Might have to pay late fees or collection costs If debt is not repaid it will show up on your credit report as well If debt is not repaid it will show up on your credit report as well

Complaining About Consumer Credit First try resolving the problem with the lender First try resolving the problem with the lender If that fails-Use more formal complaint procedures If that fails-Use more formal complaint procedures

Assignment Phishing Phishing Section 6.3 Assessment Page 186 Section 6.3 Assessment Page 186  1-6

Managing Your Debts 6.4

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

Debt Collection Practices FTC enforces the Fair Debt Collection Practices Act (FDCPA) FTC enforces the Fair Debt Collection Practices Act (FDCPA) Debt Collectors- Business that collect debts for creditors Debt Collectors- Business that collect debts for creditors

Financial Counseling Services Consumer Credit Counseling Service (CCCS)  Usually free, sometimes requires a small fee Helping people who want to clear up their unmanageable indebtedness-the condition of being deeply in dept. Universities, credit unions, military bases sometimes offer non-profit counseling

Declaring Personal Bankruptcy Bankruptcy-a legal process in which some or all of the assets of a debtor are distributed among the creditors because the debtor is unable to pay his or her debts Bankruptcy-a legal process in which some or all of the assets of a debtor are distributed among the creditors because the debtor is unable to pay his or her debts Last Resort-Severely damages your credit rating Last Resort-Severely damages your credit rating

Declaring Personal Bankruptcy Health bills can quickly get people into financial trouble Can become impossible to pay back

The U.S. Bankruptcy Act of About 175,000 Bankruptcies 1961-About 175,000 Bankruptcies ,250,000 Bankruptcies ,250,000 Bankruptcies Why? Why? Two types of Bankruptcy Two types of Bankruptcy

Chapter 7 Bankruptcy Individual must draw a petition listing their debts and liabilities Individual must draw a petition listing their debts and liabilities Many, but not all debts are forgiven Many, but not all debts are forgiven Assets are sold off to pay off creditors Assets are sold off to pay off creditors Protected assets include SS Payments, Unemployment compensation, the net value of your home, vehicle, household goods and appliances, tools used in your work, books Protected assets include SS Payments, Unemployment compensation, the net value of your home, vehicle, household goods and appliances, tools used in your work, books Alimony, child support, certain taxes, fines, debts from educational loans do not go away Alimony, child support, certain taxes, fines, debts from educational loans do not go away

Chapter 13 Bankruptcy Debtor with regular income proposes a plan for using future earnings or assets to eliminate his or her debts over a period of time. Debtor with regular income proposes a plan for using future earnings or assets to eliminate his or her debts over a period of time. Debtor normally keeps all or most of his or her property Debtor normally keeps all or most of his or her property Could be a 5 year plan, Debtor makes regular payments to a chapter 13 trustee, who then distributes money to the creditors Could be a 5 year plan, Debtor makes regular payments to a chapter 13 trustee, who then distributes money to the creditors

Effects of Bankruptcy Varying experiences Varying experiences  Hard to get credit  Easier to get credit May be easier for people who file chapter 13 than for people who file chapter 7 May be easier for people who file chapter 13 than for people who file chapter 7 Remember! This should be your last course of action Remember! This should be your last course of action

Assignment Chapter 6 Review Chapter 6 Review Section 6.4 Assessment Page 193 Section 6.4 Assessment Page 193  1-6