1. Chapter 6: Credit Use and Credit Cards

2. Objectives Compare and contrast installment and non-installment credit and discuss the costs of credit. Discuss reasons for and against using credit. Describe the types of charge accounts.

3. Objectives Describe the process of opening a credit account and the procedures lenders use to evaluate credit applicants. Manage your credit card and charge accounts properly.

4. What is Consumer Credit?  Receiving products, services or cash now, and paying for them in the future.  Before you use credit, think about... Could I pay cash or make a down payment? Do I want to use savings for this purchase? Does purchase fit with my goals and budget? 6-2

5. What is Consumer Credit? Does purchase fit with my goals and budget? Could I use the credit I’ll need another way? Can I wait to buy it? What are the opportunity costs of postponing the purchase? What are the economic & psychological costs of using credit for the purchase? 6-3 (continued)

6. Credit Use and Credit Cards Consumer Installment Non-installment Open-ended

7. http://bcove.me/kxdg9zc4 Jean Chatzky talks about Millenials and credit cards

9. While the study found that just 12 percent of mobile phone users take advantage of mobile payment services, this number has quadrupled since 2009. The survey also asked those who didn't use mobile payments why they haven't adopted the technology. Here's what they said: 42 percent are concerned about security. 37 percent said they didn't see any benefit from using mobile payments. 36 percent said it was easier to pay with another method, such as cash or credit card. 31 percent said they didn't have the necessary feature on their phones.

10. Closed vs. Open-End Credit

11. Advantages of Credit Current use of goods and services Demonstrates financial stability Use for financial emergencies Convenience when shopping Safer than cash

12. Convenience Emergencies Identification Reservations Reasons For Using Credit

13. Consume expensive products earlier Enjoy the good life Take advantage of free credit Consolidate debts Protection against ripoffs and frauds Reasons For Using Credit

14. Charting the Economy

15. Consumer Credit – Student Loans

16. Total Consumer Credit

17. Disadvantages of Consumer Credit Purchases are more expensive Temptation to overspend Possible financial difficulties Possible loss of merchandise due to late or non-payment Ties up future income

18. Payment Information Account Summary (Interest Rate = 14.50%) New Balance Total.....................................................................$2,113.28 Current Payment Due......................................................................$46.00 Total Minimum Payment Due............................................................$46.00 Payment Due Date........................................................................10/1/14 Late Payment Warning: If we do not receive your Total Minimum Payment by the date listed above, you may have to pay a late fee of up to $35.00 and your APRs may be increased up to the Penalty APR of 27.24%. Minimum Payment Warning: If you make only the Total Minimum Payment each period, you will pay more in interest and it will take you longer to pay off your balance. For example: If you make no You will payoff And you will end additional charges the balance up paying an estimated using this card shown on this total of And each month you pay statement in about Only the Total Minimum Payment 8 years $3,483 $73 3 years $2,620 (Savings = $863) Example of Credit Card Payoff

19. Example of Credit Card Payoff (cont.) Payment Information Account Summary (Interest Rate = 21.24%) New Balance Total.....................................................................$3,041,.89 Current Payment Due......................................................................$85.00 Total Minimum Payment Due............................................................$85.00 Payment Due Date........................................................................10/1/14 Late Payment Warning: If we do not receive your Total Minimum Payment by the date listed above, you may have to pay a late fee of up to $35.00 and your APRs may be increased up to the Penalty APR of 29.99%. Minimum Payment Warning: If you make only the Total Minimum Payment each period, you will pay more in interest and it will take you longer to pay off your balance. For example: If you make no You will payoff And you will end additional charges the balance up paying an estimated using this card shown on this total of And each month you pay statement in about Only the Total Minimum Payment 15 years $7,530.04 $115.26 3 years $4,149.36 (Savings = $3,380.68)

20. Debt-payments-to-income method Ratio of debt-to-equity method Continuous-debt method Establishing a Debt Limit

21. How to Calculate Debt Payments-to-Income Ratio

22. Credit Capacity Indicators Debt To Equity Ratio total liabilities net worth* = Should be < 1 *Excluding home value 6-10

23. Fair Credit Reporting Act  Is your credit report accurate? If you are denied credit based on your report, you can get a copy of your credit report free within 60 days of your request Obsolete information must be deleted Only authorized persons have access to your report Adverse data can be reported for seven years or bankruptcy for ten

24. Sample Dispute Letter

25. Open-Ended Charge Accounts Application Investigation Credit ratings and risk scoring PROCESS FOR OPENING:

26. Avoiding and Correcting Credit Mistakes Notify creditor of error in writing in 60 days Send it to the correct address They must respond within 30 days Credit card company has 90 days to resolve the problem Won’t affect your credit rating while in dispute You can withhold payment on shoddy goods Fair Credit Billing Act

27. Billing date/Due date Transaction/Posting dates Grace period/Minimum payments Credit for merchandise returns/Errors/ Correcting errors Managing a Charge Account CREDIT STATEMENTS:

28. Annual Percentage Rate (APR) Periodic Rate Average Daily Balance Managing a Charge Account COMPUTATION OF FINANCE CHARGES:

29. What Should You Do If You are Denied Credit? You have the right to know the specific reason why Ask yourself if you can afford the item Check your credit report You are entitled to have errors in your credit report corrected You have the right to provide a 100 word explanation

30. Protecting Against Credit/Debit Card Fraud Sign new cards as soon as they arrive Treat the cards like money Shred anything with your account number on it Don’t give your number over the phone unless you make the call Get a receipt after every transaction Check your statements for errors

31. Measuring Your Credit Capacity Ask yourself..... can you afford the loan? what do you plan to give up in order to make the payment? Cosigning a loan if the person doesn’t pay, you will have to co-signers often have to pay it can affect your credit report

32. Character Capital Capacity Collateral Conditions Criteria Used to Grant Credit 5 C’s of Credit

33. What Creditors Look For Character - do you pay bills on time? Capacity - can you repay the loan? Capital - what are your assets and net worth? Collateral - what if you don’t repay? Conditions - what economic conditions would affect your repayment of the loan?

34. Five Primary Areas of Interest in Calculating FICO Score

35. What Your FICO Score Looks At Payment History (35%) Do you pay your bills on time. Amount Owed (30%) Debt ratio (Below 30%) Length of Credit History (15%) How long have your accounts been established? Types of Credit (10%) Credit cards, retail accounts, installment loans, mortgage loans, etc. New Credit (10%) Opening several accounts in a short period of time represents a greater risk. It’s OK to request and check your own credit report.

36. Credit Score Breakdown Credit Score Percentage 499 and Below 2% 500-549 5% 550-599 8% 600-649 12% 650-699 15% 700-749 18% 750-799 27% 800+ 13%