1. Chapter 5
Consumer Credit: Advantages, Disadvantages, Sources, and Costs
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Consumer Credit Chapter Objectives
Analyze advantages and disadvantages of using consumer credit
Assess the types and sources of consumer credit
Determine whether you can afford a loan and how to apply for credit
Determine the cost of credit by calculating interest using various interest formulas
Develop a plan to protect your credit and manage your debts
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3. Objective 1 Analyze Advantages and Disadvantages of Using Consumer Credit
An arrangement to receive cash, goods or services now, and pay for them in the future
Based on trust in people’s ability and willingness to pay bills when due
Consumer credit
Use of credit by individuals for personal needs, except a home mortgage
A major force in our economy
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4. Uses and Misuses of Credit
Before you use credit for a major purchase, consider:
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5. Advantages of Credit
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6. Advantages of Credit
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7. Disadvantages of Consumer Credit
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8. Objective 2 Assess the Types & Sources of Consumer Credit
Two Basic Types of Consumer Credit
Closed-End Credit
One-time loans for a specific purpose paid back in a specified period of time
Open-End Credit
Use as needed until line of credit max reached
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9. Closed-End Credit
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10. Open-End Credit
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11. Sources of Consumer Credit
Loans
Inexpensive loans
Medium-priced loans
Expensive loans
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12. Sources of Consumer Credit
Home Equity Loans
Credit Cards
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13. Sources of Consumer Credit
Debit Cards
Stored Value Cards
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14. Sources of Consumer Credit
Smart Cards
Travel and Entertainment (T&E) cards
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15. Before you take out a loan, ask yourself...
Objective 3 Determine Whether You Can Afford a Loan and How to Apply for Credit
Before you take out a loan, ask yourself...
Can you meet all your essential expenses and still afford the monthly loan payments ?
What do you plan to give up in order to make the payment?
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16. General Rules of Credit Capacity
Debt Payments-to-Income Ratio
Monthly Debt Payments*
Net Monthly Income
*Not including house payment which is a long-term liability
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17. General Rules of Credit Capacity
Debt To Equity Ratio
Total Liabilities =
Should be < 1
Net Worth*
*Excluding home value
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18. The Five C’s of Credit Character - Capacity – Capital – Collateral –
Conditions-
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19. FICO & VantageScore
FICO Credit Score
VantageScore
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20. Factors of Creditworthiness
ECOA (Equal Credit Opportunity Act)
If you are denied credit, you have the right to know the reasons
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21. Your Credit Report Credit Reports Credit Bureaus
Experian, Trans Union and Equifax are the 3 major credit bureaus
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22. Your Credit Report Credit Files
Typically contain detailed credit data along with considerable personal information:
Fair Credit Reporting Act (1971)
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23. Your Credit Report Who can obtain a credit report?
Time Limits on Unfavorable Data
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24. Your Credit Report What are Your Legal Rights?
Incorrect Information in Your File
What are Your Legal Rights?
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25. It is important to shop for credit
Objective 4 Determine the Cost of Credit by Calculating Interest Using Various Interest Formulas
Finance charge
Annual Percentage Rate (APR)
It is important to shop for credit
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26. Tackling the Trade-Offs
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27. Calculating the Cost of Credit
Simple interest
Simple interest on the declining balance
Add-on interest I
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28. Calculating the Cost of Credit
Cost of Open-End Credit
Cost of Credit and Expected Inflation
Avoid the Minimum Monthly Payment Trap
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29. Declaring Personal Bankruptcy
U.S. Bankruptcy Act of 1978
Chapter 7 =
Chapter 13 =
Bankruptcy should be the last resort, because of the damage to your credit rating
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30. Chapter 7 Bankruptcy
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31. After Chapter 7
You May No Longer Owe:
You Still May Owe...
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32. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
Makes it more difficult for consumers to file a Chapter 7 bankruptcy
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33. Chapter 13 Bankruptcy
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34. Obtaining Credit after Bankruptcy
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