1. Monday Warm-Up What is a good reason to borrow money?
Who do you think decides your borrowing limit?
What happens when you go over your limit?
When can you get credit for the first time?
What will you need to get credit the first time?

2. 5.01 Understand credit management.

3. Main Types of Credit
Credit: An agreement to obtain money, goods or services NOW in exchange for a promise to pay in the future
Main Types of Credit
Charge Accounts
Credit Cards
Installment Credit
Consumer Loans

4. Business Disadvantages for Using Credit
Overbuying by employees
Planning to buy an item, then buying more or better than what you really needed
Overusing credit
Using credit when you didn’t plan to, just because it is easy and convenient. (Shopping Sprees)

5. Charge Accounts
A charge account represents a contract between creditors and debtors. Charge accounts allow debtors (customers) to receive goods or services from suppliers (creditor) and pay for them at a later date.
Examples
Regular Accounts
Budget Accounts
Revolving Accounts

6. Charge Accounts Regular Accounts Budget Accounts
Requires the buyer to make a full payment within a stated period
Used for everyday needs and small purchases
Example: ordered items for inventory, payment is not due for 30 days (No interest)
Budget Accounts
Requires that a customer make payments of a fixed amount over several months
Example: A charge account with Duke Energy, AT&T utility company

7. Charge Accounts Revolving Accounts Most popular form of sales credit
Charge purchases at any time, but only part of the debt must be paid each month
A credit limit is set for the maximum amount to be spent
Payments are required once a month, but it doesn’t have to be the FULL payment
A finance charge is added if the total bill is not paid (total dollar amount spent plus interest)

8. Credit Cards Travel/Entertainment Pay a yearly membership fee
Expected to pay the full balance each month
Examples: American Express, Diners Club
Oil Company
Examples: BP Oil, Exxon
Retail Store
Cards offered by a particular store
Examples: Belk, Kohl’s

9. Credit Cards
Credit cards allow debtors (customers) to receive goods and services from suppliers (creditor) using credit cards and pay for them later.
Types of credit cards
Bank
A bank will pay the business (taking liability for payment)
Customers are required to pay a fee for using the credit card
Examples
MasterCard, VISA

10. Installment Credit
Installment sales credit is a contract issued by the seller that requires intermittent payments at specified times such as bi-weekly or monthly.
Customers are required to make a down payment which is a portion of the entire purchase.
Most often used for furniture and household appliances
Examples:
Rooms to Go Furniture

11. Consumer Loans
A consumer loan is when a buyer agrees to make monthly payments in specific amounts over a period of time.
The loaner receives money up front and agrees to pay the price back in full plus interest
Promissory note
Collateral (property used as security)
Cosigner

12. Business Advantages for using Credit
Establishing a favorable credit rating
Use cash for more important bills NOW
Keeping business separate from personal expenses
Keeping track of what employees are spending
Earning rewards

13. Business Disadvantages for Using Credit
Overbuying by employees
Planning to buy an item, then buying more or better than what you really needed
Overusing credit
Using credit when you didn’t plan to, just because it is easy and convenient. (Shopping Sprees)

14. Cost of Credit Interest (I) The cost of using someone else’s money
Principal (P)
Amount of the loan
Interest Rate (R)
Percent of interest charged or earned
Time (T)
The length of time for which the interest will be charged
Expressed in years

15. Cost of Credit Simple Interest I=P*R*T Time in Years
Multiply by the number of years
Time in Months
Divide the number of months by 12
Time in Days
Divide the number of days by 360

16. Cost of Credit
Installment Interest: When a loan is repaid in partial payments
Calculation:
Calculate out how much interest you owe
I = P x R x T
Calculate the total cost of the loan
Total Cost = P + I
Determine the number of payments
Based on how often you are required to make payments
Generally, you make monthly payments
# payments = # years * 12 [because there are 12 months/yr]
Calculate your payments
Payments = Total Cost / # of payments

17. How Does Interest Affect You?

18. Cost of Credit Maturity Date The date on which a loan must be repaid
Months
The maturity date is the same day of the month that the loan was made
Example: One month loan on January 15 will be due on February 15
Days
Determine the day the loan was made, and then count the exact number of days of maturity
Example: A 90-day loan made on March 4 will be due on June 2

19. Cost of Credit Decreasing Loan Payments Calculation:
Interest is calculated on the amount that is unpaid at the end of each month
Calculation:
Interest is calculated on the amount of the loan that is unpaid.
Interest = Unpaid Balance * Interest rate
Remember: The amount of interest is based on the portion of the year.
1 month is 1/12th of a year
Interest Rate for 1 month = Annual Interest Rate / 12
Monthly Payment = Interest + Loan Repayment

20. Cost of Credit Annual Percentage Rate (APR)
A disclosure required by law on all credit agreements
States the percentage cost of credit on a yearly basis
Also includes service fees

21. Credit Application
A form on which you provide information needed by a lender to make a decision about granting credit.
Credit referencesbusinesses or individuals who are able and willing to provide information about your creditworthiness
Should be filled out completely, accurately, and honestly.
Requires signature of applicant, which indicates provided information is true.

22. Three C’s of Credit Character Honesty to pay a debt when it is due.
How past debt obligations were handled
Capacity
Refers to a person’s ability to pay a debt when it is due
Capital
Current available assets that could be used to repay debt if income was to become unavailable

23. Documenting Credit Data
Credit data makes up the information that applicants provide on credit applications
Documentation of credit data may be verified by:
Employers (former and current)
Type of data: Employment dates and salary
Financial institutions
Type of data: Saving or checking accounts
Personal references
Type of data: Manner how personal business is conducted

24. Credit Bureaus
A company that gathers information on credit users (Equifax, TransUnion, Experian)
Credit bureaus sell lenders credit information about credit users such as debt records, payment history, and if any action has been taken to collect overdue bills.
Credit bureaus create a credit report to show the debts an individual owes, how often the individual uses credit, and whether the individual will pay their debts on time

25. Credit Documents Credit Contracts KWYS “Know what you’re signing”
Credit contracts are legal binding documents that allow debtors to use credit to obtain goods and services.
Debtors should know the content of the credit contract before signing such as:
Amount of finance charges
Repairs covered
Add-on features
Reduction of finance charge if contract paid in full prior to ending date
Receive the copy of the contract
Repossession conditions

26. Credit Documents Statement of Account: “The Bill”
A record of the transactions completed during the billing period
Statement includes…
Balance that was due from last statement
Amounts charged during the month
Amounts credited to your account for payments or for returned items
The current balance (old balance + finance charges +purchases – payments)
The minimum payment due

27. Credit Regulations Truth-in-Lending Law Equal Credit Opportunity Act
Requires lenders to reveal the cost of credit (APR and finance charge) and terms before signing an application or contract
Protects consumers against unauthorized use of credit cards
Equal Credit Opportunity Act
Prohibits creditors from denying a person credit because of age, race, sex, or marital status
Allows credit applications be judged on financial responsibility of credit applicants. The three areas of responsibilities are low income, large debts, and a poor payment record.

28. Credit Regulations Fair Credit Billing Act
Requires creditors to correct billing mistakes promptly.
Fair Credit Reporting Act
Allows individuals to scrutinize any information shared by credit reporting agencies with potential creditors and employers.
Individuals also may correct any incorrect credit information.
annualcreditreport.com

29. Credit Regulations Consumer Credit Reporting Reform Act
Requires that the credit reporting agency must be able to prove that credit information they provide is accurate.
Fair Debt Collections Act
Prohibits deceptive, harassing, and unfair practices for collecting debt from debtors.

30. Credit Regulations
Credit Card Accountability, Responsibility, and Disclosure Act
An amendment to the Truth in Lending Act
The act institutes fair and transparent practices of providing credit.

31. Credit Regulations Some practices are instituted by the CARD Act are:
Inform customers of increase of cost of credit not less than 45 days prior to effective date.
Provides information about how long it would take to pay off a loan if minimum payments are paid.
Protects potential credit consumers under the age of 21, who must have a cosigner with a means to repay debt of the consumer.

32. Credit Assistance Debt repayment plan Credit Counseling Bankruptcy
An agreement between a creditor and debtor that allows the debtor to pay off a debt with more manageable payment plan
Credit Counseling
Provides information on actions to take in order to manage debt (reduce spending and eliminate credit difficulties)
Bankruptcy
The legal process of reducing or eliminating an amount owed
Only should be used for extreme situations
Stays on your credit record for 10 years