2. Consumer Credit Section 6.1What is Consumer Credit Section 6.2Measuring the Cost of Credit and Obtaining Credit Section 6.3 Protecting Your Credit Section 6.4 Managing Your Debts

3. Objectives How to analyze the advantages and disadvantages of consumer credit. How to distinguish among the various types of consumer credit How to determine whether you can afford a loan How to describe what creditors look for in a credit applicant How to develop an effective strategy to build and maintain your credit How to identify ways to protect your credit How to discuss ways to manage your debts

4. Top Ten Questions to Ask Yourself Before You Sign on the Dotted Line 1. Do you really need this item right now or can you wait? 2. Can I qualify for credit? 3. What is the interest rate (APR)? 4. Are there additional fees? 5. How much is the monthly payment and when is it due?

5. Top Ten Questions to Ask Yourself Before You Sign on the Dotted Line 6. Can I afford to pay the monthly payment? 7. What will happen if I don’t make the payments on time? 8. What will be the extra cost of using credit? 9. What will I have to give up to pay for it? (Opportunity Cost) 10. All things considered, is using credit worth it?

6. Vocabulary 6.1 CreditCreditorInterest Consumer Credit Closed-end Credit Closed-end Credit Open-end Credit Line of Credit Grace Period Finance Charge

7. What Is Consumer Credit? The Importance of Consumer Credit to the U. S. Economy –Credit –Creditor –Consumer Credit

8. What Is Consumer Credit? Uses and Misuses of Credit –Factors to Consider Before Using Credit Do you have the cash you need for the down payment? Do you want to use your savings instead of credit? Can you afford the item? Could you use the credit in some better way? Could you put off buying the item for a while? What are the costs of using credit?

9. What Is Consumer Credit? Uses and Misuses of Credit –Advantages of Credit Utilities – only method Travel – reservations, records Reputation – credit history –Disadvantages of Credit Costs – it is always more $ Bad Habits – Immediate Satisfaction

10. What Is Consumer Credit? Types of Credit –Closed-End Credit Fixed Term – Determined at the begining Fixed Cost – Usually lower rates –Open-End Credit Limits – only a maximum is specified Line of Credit

11. What Is Consumer Credit? Sources of Consumer Credit –Loans Inexpensive Loans –Parents, Family Members Medium-Priced Loans –Banks, S&L, Credit Unions Expensive Loans –Finance Companies Home Equity Loans –Tax issues…but be careful

12. What Is Consumer Credit? Sources of Consumer Credit –Credit Cards Interest Rates Grace Period –Debit Cards –Smart Cards –Travel and Entertainment Cards

13. Choosing A Credit Card

15. Video

16. Vocabulary 6.2 Net Income Annual Percentage Rate (APR) Collateral Simple Interest Principal Minimum Monthly Payment Credit Rating

17. Measuring the Cost of Credit and Obtaining Credit Can You Afford a Loan? –Is there enough cash available to pay the loan and meet all your regular expenses? –Debt Payments-to-Income Ratio Net Income –Maximum – 20% for Debt –Better – 15 % - Room for emergencies –Av. Family carries $5,800 in credit card debt

18. Measuring the Cost of Credit and Obtaining Credit The Cost of Credit –The Finance Charge and the Annual Percentage Rate (APR) –Tackling the Trade-Offs Term v. Interest Costs ($6,000 loan) –APR Term Mo. Pmt. Total Fin. Total Cost –14% 3 Years $205.07 $1,382.52 $7,382.52 –14% 4 Years $163.96 $1,870.08 $7,870.08

19. Measuring the Cost of Credit and Obtaining Credit Tackling the Trade-Offs (con’t) –Lender Risk v. Interest Rate Variable Interest Rate A Secured Loan Up-Front Cash A Shorter Term

20. Measuring the Cost of Credit and Obtaining Credit Calculating the Cost of Credit –Simple Interest –Simple Interest on the Declining Balance (Credit Unions) –Add-On Interest (Scary) –Cost of Open-End Credit Truth In Lending Act

21. Measuring the Cost of Credit and Obtaining Credit Calculating the Cost of Credit n (Con’t) –Cost of Credit and Expected Inflation Loan at 5% and Inflation of 4% = 1% Loan –Avoid the Minimum Monthly Payment Trap Minimum is the best for the Lender In the past you could go forever without paying a loan off

22. Measuring the Cost of Credit and Obtaining Credit Applying for Credit –The Five C’s of Credit Character: Will you repay the loan? –Have you used credit before? –How long have you lived at your present address? –How long have you held your current job?

23. Measuring the Cost of Credit and Obtaining Credit Applying for Credit –The Five C’s of Credit Capacity: Can you repay the loan? –What is your job, and how much is your salary? –Do you have any other sources of income? –What are your current debts?

24. Measuring the Cost of Credit and Obtaining Credit Applying for Credit –The Five C’s of Credit Capital: What are your assets and net worth? –What are your assets? –What are your liabilities?

25. Measuring the Cost of Credit and Obtaining Credit Applying for Credit –The Five C’s of Credit Collateral: What if you don’t repay the loan? –What assets do you have to secure the loan (such as a car, your home, furniture)? –Do you have any other valuable assets (such as bonds or savings)?

26. Measuring the Cost of Credit and Obtaining Credit Applying for Credit –The Five C’s of Credit Credit History: What is your credit history? –Do you pay your bills on time? –Have you filed for bankruptcy?

27. Measuring the Cost of Credit and Obtaining Credit Applying for Credit –ECOA – Equal Credit Opportunity Act Age – 18+ but no effect for retirement etc. Public Assistance –Can not deny because of Public Assistance or Social Security Housing Loans

28. Measuring the Cost of Credit and Obtaining Credit Applying for Credit –What if Your Application is Denied? Reasons must be specific A free copy of your credit report –Within 60 days of a rejection –Request an investigation of any errors –Provide a statement for any item

29. Measuring the Cost of Credit and Obtaining Credit

31. Your Credit Report –Credit Bureaus Experian Information Systems (TRW) –www.experian.com www.experian.com Trans Union Information Company –www.tuc.com www.tuc.com Equifax Services. Inc. –www.equifax.com www.equifax.com Several thousand other small bureaus Approximately 200 million files

32. Measuring the Cost of Credit and Obtaining Credit Your Credit Report –What’s in Your Credit Report? Your Name and Address Your Social Security Number Your Birth Date Your Employer, position, Income Your previous address Your previous employer

33. Measuring the Cost of Credit and Obtaining Credit Your Credit Report –What’s in Your Credit Report? (con’t) Your spouse’s name and Social Security Number, employer and income Whether you rent or own your home Checks returned for insufficient funds

34. Measuring the Cost of Credit and Obtaining Credit Your Credit Report –What’s in Your Credit Report? (con’t) Information about each time you use credit to make a purchase, or take out a loan –Account #, Date, Amount, Terms and Type of credit Updated to show payments, if they were late or missed, and how much you still owe Judgments

35. Measuring the Cost of Credit and Obtaining Credit Fair Credit Reporting Act –All out of date data must be deleted Who can obtain a Credit Report? Time Limits on Unfavorable Data –7 years –Except: loan > $15,000 Ins. > $150,000 Incorrect Information in Your Credit File –You can get a free copy of your report if denied credit (within 60 days) What are your legal rights?

36. Vocabulary 6.3 & 6.4 Co-signing Debt Collectors IndebtednessBankruptcy

37. Protecting Your Credit Billing Errors and Disputes –Protecting Your Credit Rating A creditor can not threaten your credit rating, or do any damage while you are negotiating a billing dispute –Defective Goods and Services Stop the payment on a credit purchase –Notify in writing and an answer in 30-90 days –Only after sincere efforts to solve a problem –The creditor can not make efforts to collect until answered

38. Protecting Your Credit Identity Crisis: What to do if Your Identity is Stolen 1- Contact the Credit Bureaus to flag your account with a fraud alert Creditors must call you for permission to open any new accounts 2- Contact any accounts opened by others and have them closed 3- File a Police Report 4- Still having a problem Privacy Rights Clearing House 619.298.3396

39. Protecting Your Credit Protecting Your Credit Information on the Internet –Use a secure browser –Keep records of your online transactions –Review your monthly bank and credit card transactions –Review the privacy and security policies on Web sites you visit –Keep your personal information private –Never give your password to anyone online –Don’t download files sent to you by strangers

40. Protecting Your Credit Co-Signing a Loan –Don’t sign unless you are willing and able to pay the debt –It will impact your credit rating, even if you pay the loan off –They can collect from you first, if they desire.

41. Protecting Your Credit Consumer Credit Protection Laws –Truth in Lending and Consumer Leasing Act All information must be disclosed –Equal Credit Opportunity Act (ECOA) Sue for actual and punitive damages (up to $10,000) –Fair Credit Billing Act Fail to follow billing rules –Loss of cost of item and interest (up to $50) –Can be sued for damages and 2x interest

42. Protecting Your Credit Consumer Credit Protection Laws (con’t) –Fair Credit Reporting Act Sue for damages if Bureau fails to follow security rules regarding access to your account –Consumer Credit Reporting Reform Act Credit Bureau is responsible for accurate info. They must prove you are wrong

43. Protecting Your Credit Your Rights Under Consumer Credit Laws –Complain to the Creditor –File a Complaint with the Government –If all else fails, sue the creditor Actual Damages Punitive Damages Max. $10,000

44. Protecting Your Credit

45. Managing Your Debts Warning Signs of Debt Problems –You make only the minimum monthly payments on credit cards –You’re having trouble making even the minimum monthly payment on your credit card bills –The total balance on your credit cards increases every month –You miss loan payments or often pay late –You use savings to pay for necessities such as food and utilities

46. Managing Your Debts Warning Signs of Debt Problems (con’t) –You receive second or third payment due notices from creditors –You borrow money to pay off old debts –You exceed credit limits on your credit cards –You’ve been denied credit because of bad credit bureau report

47. Managing Your Debts Warning Signs of Debt Problems (con’t) –If you are experiencing two (2) or more of these signs, it’s time for you to rethink your priorities before it is too late!

48. Managing Your Debts Debt Collections Practices –Fair Debt Collection Practices Act (FDCPA) Means of communication –8 AM TO 9 PM, Not at the consumer’s place of work –Communication with third parties Harassment –Threats of violence, profanity, publishing names, repeated phone calls, calls without identification False Representation –Threatening action that can not be legally accomplished Unfair Practices –Post dated checks (>5days), collect calls, threats to seize property

49. Managing Your Debts Financial Counseling Services –First contact your creditors to work out a plan –Consumer Credit Counseling Services Nonprofit, Local No cost unless they supervise a debt payment plan 1.800.388.CCCSFocus: –Help people in serious debt –Educate people to prevent debt problems –Other Counseling Services Universities, Credit Unions, Military, Local & State Gov.

50. Managing Your Debts Declaring Personal Bankruptcy –Chapter 7 – liquidation of assets Exemptions: –Home, Car, Household goods, tools, books Does not release from: –Alimony, child support, taxes, fines, educational loans –Debts if you fail to disclose all assets

51. Managing Your Debts Declaring Personal Bankruptcy –Chapter 13 – Reorganization of debts Develop a plan to repay debts –Keep all assets –Payments to a Chapter 13 Trustee –Can span up to 5 years –Amounts of the debts may be reduced

52. Managing Your Debts Effects of Bankruptcy –Can solve a situation that has been allowed to get out of control –You may be able to obtain credit again… Easier if you filed Chapter 13 –On your record for 10 years –Can not be repeated for a specific period 7 years in Virginia

53. Managing Your Debts U.S. Bankruptcies 1961-1998

55. Consumer Installment Credit