2. Chapter 6 Consumer Credit

3. What is Consumer Credit? Section 6.1

4. What is Credit? Credit*—“buy now pay later” Consumer credit*—for personal use Creditor*—lender Debtor—borrower Credit—an arrangement to receive cash, goods, or services now and pay for them in the future Consumer credit—the use of credit for personal needs Creditor—an entity that lends money

5. Advantages of Credit Enjoy goods and services now (even if funds are low) Combine several purchases into one monthly payment Keep a record of your expenses Safer than carrying cash Can develop a reputation for responsible credit use

6. Disadvantages of Credit Costs money (must be paid back PLUS interest) Does not increase purchasing power Temptation to buy more than you can afford May have difficulty paying bills If you fail to repay, you lose your good credit reputation

7. Types of Credit Closed-End Credit* Loan; Ex. car, mortgage Open-End Credit* Line of credit*; Ex. Credit card Closed-end credit—a one-time loan that you will pay back over a specified period of time in payments of equal amounts Open-end credit—credit with a certain limit on the amount of money you can borrow for a variety of goods and services Line of credit—the maximum amount of money a creditor will allow a credit user to borrow

8. Loans (Closed-End Credit) Inexpensive loans—from family (Can complicate relationships) Medium-priced loans—from commercial banks Expensive loans—from finance companies and retail stores Home equity loan—aka second mortgage

9. Credit Cards (Open-End Credit) Aka “revolving credit” No finance charge* if paid off within the grace period* Borrowers who carry over a balance will pay the finance charge Travel & Entertainment cards—like credit but MUST be paid off in full each month Ex. American Express Finance charge—the total dollar amount you pay to use credit Grace period—a time period during which no finances charges will be added to your account

10. Money Rules #26

11. The Costs and Methods of Obtaining Credit Section 6.2

12. Can You Afford A Loan? Net income—the income you receive (take-home pay, allowance, gifts, and interest)

13. DPR Example

14. The Cost of Credit Finance Charge—total dollar amount you pay to use credit Calculated by using APR* Use APR to compare the cost of credit across different borrowing options Annual Percentage Rate (APR)—the cost of credit on a yearly basis, expressed as a percentage

15. Term vs. Interest Rate Term—period of time of a loan Longer Term = Lower Payments :) BUT Longer Term=More Interest :\ Ex:

16. The Cost of Credit Avoid the minimum monthly payment* trap Takes you longer to pay back Lender makes more money off of your interest Minimum monthly payment—the smallest amount you can pay and remain a borrower in good standing

17. 5 C’s of Credit When deciding whether to approve you for a loan, lenders consider: Character—Will you repay? Capacity—Can you repay? Capital—Net worth (Assets-Liabilities) Collateral—Property that can be taken Credit History—borrower reputation (based on credit rating* aka credit score) Credit Rating—a measure of a person’s ability and willingness to make credit payments on time

18. Credit Report 3 LEGIT Credit Bureaus: Experian TransUnion Equifax NOT Freecreditreport.com etc. Collect information from banks, finance companies, stores, credit card companies, and other lenders

19. Your File Contains: Name, address, social, birthdate Employer, position, income Previous addresses and employers Spouse’s info Homeowner/renter status Bounced checks ALL credit info—loans, dates, amounts, terms, types of credit

20. Money Rules #30

21. Protecting Your Credit/Managing Your Debt Section 6.3-6.4

22. Credit Theft/Loss Keep track of your account and be aware of suspicious activity If your card gets lost/stolen, notify company immediately Consumer Credit Protection Act—if someone uses your card illegally, the maximum you must pay is $50

23. Identity Theft If your identity has been stolen: 1.Contact Credit Bureaus 2.Contact Creditors 3.File a Police Report

24. Protect Your Credit Online Use a secure browser Keep records of online transactions Review bank and credit statements Read privacy policies Keep personal information private Never give your password out Do not download files that are not trustworthy

25. Cosigning* a Loan Cosigning—you agree to be responsible for the payments if the other person fails to make them Money Rules # Money Rules #90

26. Warning Signs of Debt X You only make minimum payments (or can’t even make minimum) X Credit card balance increases each month X Miss loan payments, or often pay late X Use savings for necessities X Receive 2 nd or 3 rd payment due notices from creditors X Borrow more to pay off old debts X “Max out” or exceed limits on credit cards X Denied credit based on bad credit report

27. Declaring Personal Bankruptcy* Chapter 7—”Straight Bankruptcy” Many (but not all) debts are forgiven Assets are sold off to pay creditors Some assets protected (ex. house, vehicle, household goods/appliances, tools for work, etc. ) Bankruptcy—the 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

28. Declaring Personal Bankruptcy Chapter 13—”Wage-Earner Plan Bankruptcy” Debtor with regular income agrees to a payment plan to pay off debts Makes payment to trustee (court representative) who pays creditors Assets are not sold off Bankruptcy Lawyer—expensive option to represent you in your case

29. Effects of Bankruptcy Difficult to obtain credit Cannot file again for a certain period of time Harder to get new credit with Chapter 7 than with Chapter 13 Kept on credit report for 10 years Bankruptcy=Last Resort