1. Consumer Credit

2. Consumer Credit: borrowing money to make a purchase now and pay for it at some future time.
Examples of Consumer credit include:
Home mortgages
Car loan
Personal bank loan
Credit card purchases
Utilities and telephone payments
Note: Credit card loans usually carry the highest interest rates.

3. Generally, apart from emergencies, you should borrow money only to acquire something that will do one of two things:
Appreciate (go up in value)
Earn income
You should not borrow for things that
Depreciate (go down in value)
Run up a lot of extra expenses

4. Advantages of Consumer Credit
Convenience
Investments or Capital Improvements (borrow to purchase RRSP GIC or make a home improvement)
Emergencies
Forced Savings (large expenditures)
Collateral (ex, car rental)
Disadvantages of Consumer Credit
Cost of credit (interest payments)
Impulse buying
Credit rating

5. Sources of Credit
Sales Credit: used by consumers and businesses. A purchase is made and payment is differed to a future date. Typically the consumer makes the purchase using a credit card or makes direct arrangements with the retailer.
Cash Credit: A cash loan that is used to buy goods or services, pay off other debts or expenses, or purchase an investment. Typically, the consumer will get a cash loan from a financial institution (ex bank, trust company, credit union). Note: you can get a cash loan from your credit card, but this is very expensive.

6. Types of Credit and Loans
Credit Cards
A lot of competition ex, MasterCard, Visa, American Express, and retailers own credit cards such as HBC, Petro Canada, etc.
Various types (ex, gold card, air miles, etc)
Credit limit established for each individual (ex, $1000 or up to $50 000)
No interest charged if payment made within statement period
Minimum payment required (ex 10% of balance) and interest charges are very high on outstanding balance (ex 36% per year)
Retailer pays credit card company, 4 - 7%, for you using credit card. Retailers pass this cost on to the consumers. (some retailers provide incentive for cash transactions – ex Canadian Tire)

7. Types of Credit and Loans
Mortgage Loans
A long term loan for home purchases or property purchase (5 – 30 years)
Fixed monthly payments that include interest charges and payment towards the principal of the loan
Requires that a down payment be made ex 25% of property value
The purchaser owns the property, though it is used as the collateral for the loan.

8. Types of Credit and Loans
Instalment Loans
Loans provided by banks and other finance institutions
Used for major item purchases such as cars, home appliances and furniture.
Lender and borrower agree to terms of payment, ex payment dates, amount, and loan interest rate
The purchased item usually serves as the collateral
Loan terms are fixed and usually are 1 – 3 years duration

9. Types of Credit and Loans
Demand Loans
Short term loan
No collateral needed but financial status of borrower is considered
Used for various things, ex bridge a payment
Payments are made monthly or in lump sums
Lender can call in loan at any time

10. Types of Credit and Loans
Line of Credit
Pre determined and arrange with lender (ex banks)
Common example is an over draft on your chequing account

11. Getting And Keeping Credit
Credit rating is your reputation for paying back money you owe. A good credit rating is important for managing personal finances.
Credit Bureaus are companies that gather and provide information on the credit history of potential customers.
Credit history is the information that is maintained on your personal credit behaviour and payment of debts. Financial institutions provide this information to the credit bureau, which in turn shares it with other financial institutions for a fee.
Note: You will want to establish a good credit rating as early as possible (ex. as a college or university student). Apply for and obtain a credit card or a retail card but make sure to use it sparingly and pay off your balance each month.

12. Establishing a Credit Rating
Three factors are used to evaluate an initial credit application: character, capacity, and capital.
Character
Is capable of getting and holding on to a job
Is reliable at work
Has specific job skills, vocation, or career
Demonstrated financial responsibility
Has a bank account
Capacity
How much income is earned
How secure your job is
What expenses and other financial commitments do you have
May require someone else to co-sign
Capital
What you are worth (monetary) based on assets you own
Assets may be used as collateral

13. Getting Into Credit Trouble
Credit Counselling
A counselling service may help you plan your finances and repayment of debt. For example consolidate or renegotiate with the lender
A Collection Agency is a company hired to collect overdue accounts from customer. The agency may resort to annoying, persistent, embarrassing calls and letters to get the money paid.
The retailer may repossess the purchased item (ex. car)
A bank may take money directly from your bank account if you owe them
Wages can be garnished from your pay cheque

14. Personal Bankrupcy
The last resort is to declare personal bankruptcy. You must
Owe at least $1 000
Be unable to meet regular payments
Owe more than what your assets are worth
Personal bankruptcy requires that you sell all your assets. Furthermore, you will be unable to obtain credit for 7 years.

15. Activity #1
Visit and explore the home page of 2 Canadian banks. Examine how they promote credit and credit use specifically targeted towards youth (students).
Create a table that compares your banks.
Comparison Criteria
Bank 1
Bank 2
Credit application & requirements
Terms of credit
Help and advice
Other ?????