1. Credit Chapter 9

2. Understanding Consumer Credit Most consumers will use some form of credit in their lifeMost consumers will use some form of credit in their life Current consumer credit debt : $2414 BILLIONCurrent consumer credit debt : $2414 BILLION Most readily available to people with a sound credit ratingMost readily available to people with a sound credit rating

3. Credit: use of future income What costs are involved?What costs are involved? Interest chargesInterest charges Lost earnings on money that could be in savingsLost earnings on money that could be in savings Losses from unpaid accountsLosses from unpaid accounts Collection costs (if unpaid)Collection costs (if unpaid) CREDIT PROVIDES THE EXTRA BUYING POWER NEEDED TO SUPPORT MASS PRODUCTION AND DISTRIBUTION

4. CREDIT COSTS AMOUNT OF CREDIT USED – THE MORE YOU BORROW THE MORE YOU PAYAMOUNT OF CREDIT USED – THE MORE YOU BORROW THE MORE YOU PAY ANNUAL % RATE CHARGEDANNUAL % RATE CHARGED LENGTH OF REPAYMENT – THE LONGER YOU TAKE TO PAY OFF, THE MORE YOU PAYLENGTH OF REPAYMENT – THE LONGER YOU TAKE TO PAY OFF, THE MORE YOU PAY AS THE % RATE INCREASES THE FINANCE CHARGE WILL ALSO INCREASE AS THE % RATE INCREASES THE FINANCE CHARGE WILL ALSO INCREASE

5. ADVANTAGES You get to use the goods and services immediatelyYou get to use the goods and services immediately You get to buy expensive items that you couldn’t buy with cashYou get to buy expensive items that you couldn’t buy with cash Cash source for emergenciesCash source for emergencies CONVENIENT!!!CONVENIENT!!!

6. DISADVANTAGES Reduces your future income (you’ve already spent it!)Reduces your future income (you’ve already spent it!) Expensive (interest)Expensive (interest) Tempting…………Tempting………… SERIOUS consequences: repossession or bankruptcySERIOUS consequences: repossession or bankruptcy

7. Process Apply for credit: application, in personApply for credit: application, in person Sign a contract – legally binding agreementSign a contract – legally binding agreement Repay with principal and interest (finance charge)Repay with principal and interest (finance charge) If fail to pay, borrower defaults and item is repossessedIf fail to pay, borrower defaults and item is repossessed

8. Sales credit Used to buy goods and servicesUsed to buy goods and services 3 forms:3 forms: Regular charge account – pay in 25 days ( American Express)Regular charge account – pay in 25 days ( American Express) Installment account – pay in set schedule of monthly payments ( car loan )Installment account – pay in set schedule of monthly payments ( car loan ) Revolving charge account – pay minimum each month plus finance charges ( VISA )Revolving charge account – pay minimum each month plus finance charges ( VISA ) You are responsible for $50 on every credit card that is stolen from you!!!!!

9. Cash credit You borrow money to useYou borrow money to use Unsecured – on name only Unsecured – on name only Secured – collateral pledged and/or cosigner Secured – collateral pledged and/or cosigner 3 types:3 types: Installment loan – regular payments Installment loan – regular payments Single payment loan – one lump payment at end Single payment loan – one lump payment at end Credit card – borrow $$$ on card Credit card – borrow $$$ on card

10. Costs APR – annual percentage rate must be disclosedAPR – annual percentage rate must be disclosed Finance charge paid on amount usedFinance charge paid on amount used Avoid balloon payments and variable rateAvoid balloon payments and variable rate Avoid annual fees – paid just to use the cardAvoid annual fees – paid just to use the card

11. Credit rating A creditor’s evaluation of your willingness and ability to payA creditor’s evaluation of your willingness and ability to pay CharacterCapacityCapital Based on a person’s reputation for honesty and financial history Based on a person’s ability to earn money and pay debts Based on a person’s financial worth Past accounts Cosigner JobSavings account Checking account investments

12. Good credit rating Credit reporting agencies keep information on the financial practices of individualsCredit reporting agencies keep information on the financial practices of individuals Get free credit report at: annualcreditreport.comGet free credit report at: annualcreditreport.com You can damage a good credit rating by ignoring bills or paying them late

13. Establish Credit Get a job!!!! Prove you can earn moneyGet a job!!!! Prove you can earn money Open a savings account – deposit in it regularlyOpen a savings account – deposit in it regularly Open a checking account – manage it wellOpen a checking account – manage it well If you must use credit, limit credit choices, make payments regularly, no balance preferredIf you must use credit, limit credit choices, make payments regularly, no balance preferred

14. Credit Scores Based on:Based on: Bill pay – pay on timeBill pay – pay on time Debt to credit limit ratio – keep it low, don’t borrow maximumDebt to credit limit ratio – keep it low, don’t borrow maximum Credit history length – manage your money well over timeCredit history length – manage your money well over time Recent credit application – too many apps have a negative effect on credit scoreRecent credit application – too many apps have a negative effect on credit score Different types of credit – mix is favoredDifferent types of credit – mix is favored

15. Credit legislation Truth in Lending Law Truth in Lending Law Requires creditors to tell you the cost of creditRequires creditors to tell you the cost of credit Equal Credit Opportunity Act Equal Credit Opportunity Act Prohibits discrimination in granting creditProhibits discrimination in granting credit Fair Credit Reporting Act Fair Credit Reporting Act Requires accurate and private credit reportsRequires accurate and private credit reports Fair Credit Billing Act Fair Credit Billing Act Protects against unfair billingProtects against unfair billing Fair Debt Collection Practices Act Fair Debt Collection Practices Act Protects against unfair debt collection practices (time, place, no threats)Protects against unfair debt collection practices (time, place, no threats)

16. Credit problems No more than 20% of your budget should be on creditNo more than 20% of your budget should be on credit No more than 1/3 of your budget should be on housingNo more than 1/3 of your budget should be on housing No money left over for savings – pay yourself first!No money left over for savings – pay yourself first! Run out of money before next paydayRun out of money before next payday Using credit cards for everyday expensesUsing credit cards for everyday expenses Paying only the minimum on your accountPaying only the minimum on your account

17. Handling problems Collection agencies – collect unpaid debtsCollection agencies – collect unpaid debts Repossession of property – take cars and homes back to bank for resaleRepossession of property – take cars and homes back to bank for resale Liens against property – placed so that outside businesses can collect unpaid billsLiens against property – placed so that outside businesses can collect unpaid bills Garnishment – legally require your wages to pay debt before you see your checkGarnishment – legally require your wages to pay debt before you see your check

18. HELP !!!! Credit counseling – helps you sort out debt and pay it down Credit counseling – helps you sort out debt and pay it down Bankruptcy – legal action used as a last resort to pay off creditors Chapter 7 and Chapter 13 Bankruptcy – legal action used as a last resort to pay off creditors Chapter 7 and Chapter 13 May have to sell property and possessionsMay have to sell property and possessions May have to pay a high % each monthMay have to pay a high % each month May have to wait to get credit againMay have to wait to get credit again Start all over on credit ratingStart all over on credit rating