1. Section 6.1 – What is Consumer Credit
Chapter 6
Section 6.1 – What is Consumer Credit
Introduction Clip

2. Credit…. What is it and why is it important?
Credit – is an arrangement to receive cash, goods, or services now to pay for them in the future.

4. Consumer Credit Most common type of consumer credit is credit cards.
Creditor – is the bank
Or person loaning the money to you.

5. Credit uses and misuses
Total consumer credit: $1.7 trillion.
Credit card debt carried by the average American: $8,562.
Total finance charges Americans paid in 2001: $50 billion.
Percent of U.S. households deemed credit worthy by the lending industry: 78%.
Number of credit card holders who declared bankruptcy last year: 1.3 million.
Why do we use credit?
Can purchase a good or service now instead of later, even maybe at a lower price.
When not to use it, when you can’t make high monthly payments

6. Types of Credit
Closed-end Credit – is a one-time loan that you will pay back over a specified period of time (a.k.a. installment credit).
Home mortgage
Loan for furniture
Open-Ended Credit
is credit as a loan with a certain limit on the amount of money you can borrow for a variety of goods and services. A credit card – REVOLVING CREDIT.
Line of Credit – is the maximum amount of money a creditor will allow a credit user to borrow.

7. Types of Loans Inexpensive Loans Medium Priced Loans
Loaned by friends, family, or relatives. Sometimes these are worse than other types. Look at Judge Judy !!!!
Medium Priced Loans
Loans from commercial banks, savings and loans associations, and credit unions.
Some of these organizations you must be members of in order to get loans from.

8. Types of Loans Expensive Loans
Loans that charge a high interest rate, but are very easy to get loans from.
Rent-A-Center
Check into Cash

9. Types of Loans con’t Home Equity Loans
Based on the Equity of your home..
What does equity mean?
The value that you have paid into your home.
The interest on the home is tax-deductible
What does that mean
You will get a large portion of that back when you figure your taxes.
You can take the value of the money you invested into the home and use that money to purchase other things.
Downside if you miss a payment they can take make you pay back most of the loan plus the difference that you still owe.

10. Types of Credit (Cards)
Credit Card vs Debit Card Discussion
Schumer Box..
Credit Card Worksheet

11. A few more terms
Grace Period – a time period during which no finance charges will be added to your account.
Finance charge – is the total dollar amount you pay to use credit.
Annual Credit Cards – American Express charges $50 a year to use their credit card.
Why would I pay $50 a year to use their card?
Credit Card Menu . Com

12. 6.2 The Cost and Methods of Obtaining Credit….
Chapter 6
6.2 The Cost and Methods of Obtaining Credit….

13. Debt Payments to Income Ratio
Sounds difficult but what we are looking at is the relationship to how much money you make to how much money you owe.
Terms that you need to know:
Net Income – is the income you take home.
Experts say that you should spend no more than 20% of your net income on debt.
Example if you make $1000 per month in net income. You should spend no more than $200 on debt.

14. Debt to Income Ratio
Monthly Debt Payments Formula Monthly Net Income If Bob spends $180 on debt and he makes $1200 a month what is his Ratio. $180/$1200 = .15 or 15% if you stay below 20% then things should be fine.

15. Lets Practice a couple
Sally makes 60 a month babysitting, 20 a month cutting grass, and has to pay her parents 40 a month for the car accident she had. What is her ratio? (Back)
Bill makes 10 a week allowance, 80 a month working at Taco Bell and spends 15 on her MasterCard every month.

16. The Calculations
Monthly Debt Payment
Monthly Net Income
Debt to Income Ratio 40 80
.5 or 50%
Back
We would say that this ratio is bad because it is higher than the 20% it should be.
The second on is a little bit harder…… Remember that this is based on per month not per week.
Monthly Debt Payment
Monthly Net Income
Debt to Income Ratio
$15
$120
.13 or 13%
$10 a week for 4 weeks = $ $80 = $120
We would say this is a good ratio because it is under the 20% experts say we need to be under.

17. Finance Charges and Annual percentage rate
We have discussed this in the previous part of the chapter with Rent-A-Center.
Finance Charges is the total dollar amount you pay to use credit in one year.
In most cases you will have to pay finance charges to the creditor on the amount that is unpaid.
A.P.R. – is the cost of credit on a yearly basis expressed as a percentage.

18. Finance Charges and Annual percentage rate
We have discussed this in the previous part of the chapter with Rent-A-Center.
Finance Charges is the total dollar amount you pay to use credit.
In most cases you will have to pay finance charges to the creditor on the amount that is unpaid.
A.P.R. – is the cost of credit on a yearly basis expressed as a percentage.

20. WHEN YOU BUY “STUFF” Your APR is 18%.
You bought “STUFF” with your credit card.
In fact, you bought $500 worth of “STUFF” with your credit card.
Your APR is 18%.
You plan to pay $10 a month to pay it off.
You will pay $431 in interest
Final cost of your purchases = $931.40
And it will take SEVEN YEARS and NINE MONTHS

21. How Long Will It Take??? And it will take nearly 11 YEARS to pay off!
You owe $3,000.
And it will take nearly
11 YEARS to pay off!
APR = 18%
Payment: 4% of current balance
Finance Charge $
Total cost of original $3,000 loan = $
After you’ve made the last payment, will what you purchased still be around???

22. The Cost of Using Credit
$700 for a Game System
And it will take over
7 years
to pay off!
APR = 24%
Payment: 4% of current balance
Finance Charge $550.04
Your CD player REALLY cost $1,250.04
After you’ve made the last payment, will your CD player still be around???

23. What do we mean……
Lets pretend that you have a MasterCard. You go on a shopping spree for spring break. At the end of the month you get the bill from MasterCard that says you owe them $900. (OUCH!!!!!)
You can not afford to pay the total amount this month. So you see in the credit card statement that you can pay the minimum amount of $20.
Credit Card Balance Payoff
Payoff Calculator

24. Tackling the trade-offs
Terms versus Interest Costs
Many people take the longer terms…
It spreads the payments out over a longer time, but the payments per time are less.
HOWEVER you end up paying more in the long run.
Creditor
APR
Term of Loan
Monthly Payment
Total Finance Charge
Total Cost
Creditor A
14%
3 years
$205.07
$1,382.52
$7,382.52
Creditor B
4 years
$163.96
$1,870.08
$7,870.08

25. More Trade-Offs Lender Risk Versus Interest Rate
Things that would give you a lower interest rate..
Variable interest rate
This means that the interest rate may be low now, but if interest rates increase you will have higher monthly payments
Secured Loan
Pledge Collateral – you put something up of value – Car, house etc… so if you default on the loan the bank or lender will have something of value to sell to recover their loss.
UP-Front-Cash
You may have to put a large down payment in order to receive a lower interest rate.
Shorter Term
If you can pay off the loan in a shorter time chances are that you will receive a lower interest payment.

26. Types of interest continued
Add-On Interest
Interest is calculated on the full amount of the original principal, no water how often you make payments.
So if you owe $1000 and you pay $100 you are still paying the interest on the $1000
Open-end Credit
Credit Card companies must give you certain criteria before they lend money to you.
How much is the finance charge
When does it start to accrue (when is the grace period over?)

27. Even more on interest…. Cost of credit with Expected inflation
If you were to borrow money from your parents…. Lets say $100 and they charged you 5% interest and then the cost of things went up 4% then actually your parents would be only getting a 1% return on their money…
Banks are much more sneakier than that. Most banks would realize that the cost of things would increase(inflation) and charge you something more like 9% , so in actuality they would still be making about 5%.

28. Applying for Credit 5 C’s of Credit
Character
Will you repay the loan
Capacity
Can you repay the loan.
Capital
What are your Assets and your Net Worth
Collateral
What if you do not repay the loan, do you have something the bank can take.
Credit History
What is your credit history?
What is your credit rating?

29. Credit and Equal Opportunity
ECOA
Equal Credit Opportunity Act
Gives all credit applicants the same basic rights.
A lender may not use race nationality, age, sex marital status, and certain other factors to discriminate against you.
You must be legal age to sign a contract in Missouri (18)
Must not be denied because of social security or public assistance.

31. Understanding Credit Reports
Family Economics & Financial Education

32. Credit Reports Credit report - a record of a consumer’s credit history
Credit history - a record of transactions involving credit use
Individuals do not have a credit report if they have not previously used credit
Affects one’s ability to acquire credit

33. Credit Report HIGHEST 850 Detail record of payment history
Includes all money borrowed from lenders, financial institutions, and stores
If payment is not received within 30 days, account is flagged delinquent with a code of “2”
Alerts creditors that payments were missed/ or slow
Rates- 1 (slow payment) to 9 (seriously delinquent/bad debt)
Creditors use ratings to determine to extend credit
AVERAGE
680

34. Watch the two videos about credit…
Video #1 – Credit 101
Video #2 – Parts of the Pie

35. Information in a Credit Report
Information can be divided into 4 categories:
Personal Information
Accounts Summary
Negative Items
Credit Inquiries

36. Personal Information Name and aliases Current and past addresses
Isabella’s Personal Information
Name and aliases
Current and past addresses
Social security number
Date of birth
Employment history
Name – Isabella G. Langley
Date of birth – 05/04/86
Telephone numbers – &
Employers – Lucky’s Restaurant & Jane’s Daycare
Addresses – 101 Hopeful Ave. & 695 Parent Street

37. Accounts Summary Types of accounts Date the account was opened
Isabella’s Accounts
Sam’s Electronic World
City of Anywhere
U.S. Department of Education
Financial Institution School Loan
Shop ‘Til You Drop Store Credit Card
Love to Read Store Credit Card
The Free Money Credit Card
Types of accounts
Date the account was opened
Credit limit or loan amount
Account balance
Payment history

38. Negative Items Missed payments Collection agencies Public records
Isabella’s Negative Items
Missed payments
Collection agencies
Public records
Bankruptcy
Tax liens
Legal suits
Foreclosures
Sam’s Electronic World
Past due
City of Anywhere
In Collection
Shop ‘Til You Drop
Occasional late payments
The Free Money
Over the credit limit

39. Credit Inquiries Requests for an individual’s credit report
Completed by:
Insurance agencies
Potential credit companies
Financial institutions
Landlords
Potential employers, etc.

40. Credit Inquiries Not all credit inquiries are the same!
Type of inquiry
Soft check
Hard check
Do they impact your credit score?
Not usually
Yes
Examples
Individuals checking their credit reports
Credit card companies pre-approving individuals
Pre-employment checks
Permission given by the individual when seeking credit
Credit card
Automobile loan
Insurance
Individuals should avoid too many hard credit checks at one time!

41. Isabella’s Report Inquiries Type of inquiry Soft checks Hard checks
Examples
A Very Big Bank
Need More Credit
Keeping You Insured
The Dream Sales Job
Shop ‘Til You Drop

42. Equal Credit Opportunity Act
Prohibits credit discrimination the basis of:
Race
Religion
Marital status
Nationality
Gender
Age
Creditors may ask for this information (except religion) in certain situations, but may not use it to discriminate when deciding whether to grant you credit

44. Credit reporting agency
Credit Scores
Consumer
Lender
Credit reporting agency
Credit report
(individual’s credit history)
Credit score
(based upon information in the credit report)
Mathematical tool created to help a lender evaluate the risk associated with lending a consumer money
Based upon information in the credit report
At a particular point in time

45. How are Credit score’s reported?
Numeric “grade” of a consumer’s financial reliability
Most common scoring system is FICO (Fair Issac Corporation)
Credit scores range from , with 850 being the best score

46. This is based upon a 30 year fixed mortgage rate for a $300,000 loan
Credit Score Impact
This is based upon a 30 year fixed mortgage rate for a $300,000 loan
FICO Score
Interest Rate
Monthly Payment
30 Year Amount
760
5.9%
$1,787
$643,320
650
7.2%
$2,047
$736,920
590
9.3%
$2,500
$900,000
$256,680 saved over the lifetime of this loan because of a good credit score!

47. Positive Credit Practice good banking techniques
Being responsible with credit and finances can lead to good credit
A consumer may develop and keep good credit by:
Practice good banking techniques
Keep checkbook balanced, do not bounce checks
Pay bills consistently and on time
Keep public records free of bankruptcy
Have no criminal record
Keep a reasonable or small amount of debt
Apply for credit sparingly, keeping credit inquiries low
Hold a low number or credit/store cards
Check credit report annually to remove errors
Maintain reasonable amount of unused credit

48. Negative Credit Bouncing checks
Being irresponsible with credit and finances can lead to poor credit
A consumer may develop or keep poor credit by:
Bouncing checks
Routinely paying bills late
Having a criminal record
Holding a large amount of debt
Holding an unreasonable amount of unused credit
Not paying utility or cell phone accounts consistently and on time
Obtaining a high number of credit inquiries
Carrying many credit/store cards
Having a public record of bankruptcy
Defaulting on a loan
Having cards over the limit

49. Who Reports to CRA’s? Store accounts Credit card companies
Mortgage and other loan lenders
Financial institutions
Landlords
Courts
Utility accounts
Cellular phone companies
Delinquent accounts

50. Section 6.3 Protecting your Credit
Chapter 6

51. Credit and Stolen Identity
Identity Theft #1
Identity Theft #2
Identity Theft #3
ID Theft Report

52. What do you do if you get your identity stolen.
Contact your credit card company.
Contact the police.
Contact the Credit Agencies.

53. Laws that Protect Consumers
Truth in Lending and Leasing Act
Must disclose all information about the Loan or Lease
Interest Rate
Length of Loan
Also allows for class-action lawsuits
If many people were hurt from a product (cigarettes) then a legal action can be brought on behalf of all of the people.

54. Fair Credit Opporuntiy Act
If a creditor that fails to follow the rules that apply to correcting any billing errors will automatically give up- the amount owed on the item in question

55. Fair credit reporting act
If a company does not or fails to report changes to your credit report you can sue them.

56. Consumer Credit Reporting Act
Places the burden of proof for accurate credit information on the credit bureau rather than on you.
If there is a dispute the creditor must probe that the information is inaccurate.

57. Cosigning???? To have someone else sign the loan with you.
If you have a bad credit rating, and the bank will not loan you money. Then you can have someone else sign the loan with you to say that they will pay if you default on the loan. Then they become legally responsible as well…
Judge Judy

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