CHAPTER 18 CONSUMER CREDIT

18-1 Credit Fundamentals USING CREDIT Credit – the privilege of using someone else’s money for a period of time. Debtor – anyone who buys on credit or receives a loan. Creditor – the one who sells on credit or makes a loan.

18-1 Credit Fundamentals USING CREDIT Types of Credit Trade Credit – occurs when a company receives goods from a supplier and pays for them later. Loan Credit – borrowing money to use for some special purpose (home, car, school) Installments – repay the loan in specified amount over a period of time. Sales Credit – the use of charge accounts and credit cards by consumers.

18-1 Credit Fundamentals USING CREDIT Charge Accounts Regular Accounts – requires the buyer to make full payments within a stated period (25-30 days) Used by service providers (doctors, lawyers) Budget Accounts – requires the customer to make fixed payments over several months. Utilities, some stores

18-1 Credit Fundamentals USING CREDIT Charge Accounts Revolving Accounts – allows users to charge purchases at any time, but only part of the debt must be paid each month. Credit limit – a maximum amount may be owed at one time. Finance charge – the total dollar cost of credit (includes interest)

18-1 Credit Fundamentals USING CREDIT Credit Cards Bank Cards - Most processing is done through an ISO, VISA and MasterCard are the most popular. Charge Cards - Widely used cards, subscribers pay a yearly membership fee. (American Express) Affinity Cards -These cards are co-branded with an issuing bank. Retail Cards - Customers can only use these cards at the issuing stores.

18-1 Credit Fundamentals USING CREDIT Installment Credit Requires periodic payments at specified times. A contractual agreement between the buyer and the seller. The seller has the right to repossess an item if payments are not made on time. Making a down payment is usually required.

18-1 Credit Fundamentals USING CREDIT Consumer Loans Installment loan – you agree to make monthly payments in specific amounts over a period of time. Single payment loan – pay nothing until the end of the loan period (60-90 days)

18-1 Credit Fundamentals USING CREDIT Consumer Loans Promissory note – a written promise to repay based on a debtor’s excellent credit history. Principal Time Date of maturity Payee Interest rate maker

18-1 Credit Fundamentals USING CREDIT Consumer Loans Collateral – property that is used as security Cosigner – someone responsible for payment if you do not pay as promised.

18-1 Credit Fundamentals BENEFITS OF CREDIT Convenience Immediate Possession Savings Credit Rating Useful for Emergencies

18-1 Credit Fundamentals CREDIT CONCERNS Overbuying Careless buying Higher prices Overuse of credit

18-2 Cost of Credit FINDING INTEREST Interest – The cost of borrowing money Principal, P – Amount of the loan Interest Rate, R – percent of interest charged (can also be a decimal or fraction) Time, T – length of time for which interest will be charged (years or months)

18-2 Cost of Credit FINDING INTEREST Simple Interest Simple Interest – used for single payment loans. Interest = Principal x Rate x Time I = P x R x T

18-2 Cost of Credit FINDING INTEREST Simple Interest If you Borrow $100 (P) at 12 percent (R) for one year (T) I = $100 x 0.12 x 1 = $12

18-2 Cost of Credit FINDING INTEREST Simple Interest Time in months – one month = 1/12 of a year I = $100 x 0.12 x 1/12 = $1

18-2 Cost of Credit FINDING INTEREST Simple Interest Time in days – one year is considered 360 days I = $100 x 0.12 x 60/360 = $2

The date on which a loan must be repaid 18-2 Cost of Credit FINDING INTEREST Maturity Dates The date on which a loan must be repaid When the time of the loan is stated in months, the date of maturity is the same day of the month as the date on which the loan was made. When the time is in days, you must count the exact number of days to find the date of maturity.

18-2 Cost of Credit FINDING INTEREST Installment Interest Borrow: $100 Promissory Note: $110 Repayment: 12 months ($10/$100=0.10%)

18-2 Cost of Credit FINDING INTEREST Installment Interest Amortization Schedules: interest is calculated n the amount that is unpaid at the end of each month.

FINDING INTEREST Installment Interest Amortization Schedules 18-2 Cost of Credit FINDING INTEREST Installment Interest Amortization Schedules $1,047.82

18-2 Cost of Credit FINANCE CHARGES Annual Percentage Rate Annual Percentage Rate (APR): a disclosure required by law. It states the percentage cost of credit on a yearly basis. Service Fees: the time and money it tales a creditor to investigate credit history, process a loan or charge account application, keeps records of payments and balances.

18-2 Cost of Credit FINANCE CHARGES Total Dollar Charges To make you aware of the total cost of credit, federal law requires that the lender must tell you the finance charge. ( the total dollar cost of credit, including interest and all other charges)

18-2 Cost of Credit FINANCE CHARGES Compare Credit Costs Check with several lenders to compare APR When using a credit card, know which card has the lowest APR When getting a loan, shop around

18-3 Credit Application & Documents CREDIT APPLICATION PROCESS The Three Cs of Credit Character – your honesty and willingness to pay a debt when it is due. (credit history) Capacity – a person’s ability to pay a debt when it is due. (income) Capital – the value of the borrower’s possessions. (cash & Property)

18-3 Credit Application & Documents

18-3 Credit Application & Documents CREDIT APPLICATION PROCESS Documenting Credit Data Banks – report whether the applicants have the accounts listed. Employers – verify employment dates and salary figures. Landlords – verify how long tenants have been renting and if they pay rent on time.

18-3 Credit Application & Documents CREDIT APPLICATION PROCESS Actions to Establish Credit Keep good grades and attendance Start a checking and savings account Open a credit card and make small purchases and pay them off on time Have a good (steady) part-time job

18-3 Credit Application & Documents CREDIT BUREAU Credit Bureau – a company that gathers information on credit users. It sell this information to businesses offering credit.

18-3 Credit Application & Documents CREDIT BUREAU Credit Report Shows the debt you owe How often you use credit Whether you pay your debts on time Length of your credit use

18-3 Credit Application & Documents

18-3 Credit Application & Documents

18-3 Credit Application & Documents CREDIT DOCUMENTS Credit Contracts “KWYS” – Know What You are Signing What questions should you ask before signing?

18-3 Credit Application & Documents CREDIT DOCUMENTS Statement of Accounts Statement: a record of the transactions completed during the billing period The balance that was due when the last statement was mailed The amount charged during the month The amount credited to your account for payments or for returned items The current balance (old balance + finance charges + purchases – payments) The minimum amount of your next payment and when it is due

18-3 Credit Application & Documents CREDIT DOCUMENTS Avoiding Fraud Check all records for accuracy Verify payments and other credits

18-4 Protection of Credit Rights CREDIT APPLICATOIN REGULATIONS Truth in Lending Act Requires that you be told the cost of credit before signing the agreement The lender must clearly state the APR and total finance charge Protects consumers against unauthorized use of credit cards The law limits your liability to $50 for unauthorized credit card purchases made prior to notifying the card issuer

18-4 Protection of Credit Rights CREDIT APPLICATOIN REGULATIONS Credit Card Act of 2009 Designed to establish fair and transparent credit card practices Keeps credit card companies from changing fees and interest rates without cardholder approval Cardholders control their credit limit Requires a credit card statement to show how long it would take to pay off the balance if only the minimum due is paid

18-4 Protection of Credit Rights CREDIT APPLICATOIN REGULATIONS Equal Credit Opportunity Act Prohibits its creditors from denying a person credit because of age, race, sex, or marital status. A creditor must give any person who is denied credit a written statement of the reasons for denial.

18-4 Protection of Credit Rights CREDIT USE REGULATIONS Fair Credit Billing Act Requires prompt correction of billing mistakes You must notify your creditor in writing within 60 days after your statements was mailed. Requires that credit bureaus must delete any information dealing with a personal bankruptcy that is more than 10 years old.

18-4 Protection of Credit Rights CREDIT USE REGULATIONS Fair Credit Reporting Act Gives the consumer the right to know what information credit bureaus are giving to potential creditors, employers, and insurers. If credit is denied based on information in a credit report, the applicant must be given name, address and phone number of the credit bureau that provided the information.

18-4 Protection of Credit Rights CREDIT USE REGULATIONS Consumer Credit Reporting Reform Act Places the burden of proof for accurate credit information on the credit reporting agency rather than on you. The creditor must certify that disputed data is accurate. If a creditor or the credit bureau verifies incorrect data, you can sue for damages.

18-4 Protection of Credit Rights CREDIT USE REGULATIONS Fair Debt Collection Practices Act A debt collection agency attempts to obtain money that is past due. A debt collector may contact you in person, by mail, telephone, telegram or fax. A debt collector may not contact you before 8 a.m. or after 9 p.m.

18-4 Protection of Credit Rights CREDIT PROBLEMS AND ASSISTANCE Credit Counseling Credit Counselor – discusses and suggests actions to take to reduce spending and eliminate credit difficulties.

18-4 Protection of Credit Rights CREDIT PROBLEMS AND ASSISTANCE Bankruptcy Bankruptcy – the legal process of reducing or eliminating an amount owned. This should be the final option for extreme situations only. This process is costly and requires legal assistance.