1. Essential Standard 5.00 Objective 5.01
Understand credit management

2. Topics Main types of credit
Common advantages and disadvantages of businesses using credit
Cost of credit
Main factors examined for granting credit
Credit documents
Credit regulations
Credit assistance

3. What is credit?
An agreement to obtain money, goods, or services now in exchange for a promise to pay in the future.
When buying on credit, you are delaying the payment for an item.
“Buy now and Pay Later”

4. Who Uses Credit? 1. Consumer Credit Credit used by people for personal reasons consumer loans, mortgage loans, credit cards, charge cards 2. Commercial Credit Credit used by businesses commercial loans, corporate bonds 3. Government Credit credit used by local, state, federal municipal bonds, treasury bonds, T-bills, T-notes

5. Terms Usury Laws Creditor Promissory Note Debtor
One who sells on credit or makes a loan
Debtor
Anyone who buys on credit or receives a loan
Obligated to pay back the loan
Promissory Note
Legal loan document
Written promise to repay with interest
Usury Laws
State law that restricts the amount of interest that can be charged.

6. Closed vs. Open Ended Credit
Closed-end credit
Used for a specific purpose
Loan of a definite amount of money
Loan balance reduced with each payment
Example: car loan for $20,000 is a specific, one time amount of money
String examples
Open-end credit
Gives a credit limit - maximum $ you can borrow
Loan balance varies for purchases/payments made
Example: credit card with $500 limit. You might spend $50 and pay $10, spend 30 and pay $25. The loan amount “revolves” as you spend and pay back.

7. Secured vs. Unsecured Secured loans:
Backed by collateral (help guarantee the repayment of a loan)
Backed by a cosigner who agrees to pay
Collateral-asset used as security on a loan
Can be taken by creditor if loan payments are not made to creditor
Mortgage loans- real estate
Subject to Foreclosure if not paid
Personal loans- car, motorcycle, boat
Subject to Repossession if not paid

8. Responsible for the repayment of a loan if the original party does not pay
Party who signs with applicant for a loan
Who might co-sign a loan for you?
Cosigner

9. Credit Document- The contract
Credit contracts are legal binding documents that allow debtors to use credit to obtain goods and services.
Know what you are signing!
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 a copy of the contract
Repossession conditions

10. Credit Document – Statement of Account
What kind of information may be found on the statement of account?
Previous balance
Transactions:
Purchases
Returns
Payments
Finance charges
Late fees
Rebates or bonuses earned
Current Balance
Minimum payment due
Due date
Comes once credit is granted and purchases are made on credit.
Mailed monthly and includes summary of transactions completed during the billing period
May also view online or access info by phone

11. Types of Credit Charge Accounts Credit Cards Installment Credit
Consumer Loans
Payroll Advance Loans
Pawn Shop Loans
Life Insurance Loans
Retirement Plan Loans
Small Business Administration
Business only

12. Charge Accounts
Allows debtors to receive goods or services from suppliers and pay for them at a later date
Regular Charge Accounts
Require that you pay for purchases in full within a certain period of time
EX: charge account with an electrician who wired your house
Revolving Charge Accounts
Allows you to borrow or charge up to a certain amount of money (credit limit) and pay back a part or the entire balance each month
EX: home equity line of credit
Budget Charge Accounts
Allows you to pay for costly items in equal payments spread out over a period of time
EX: a charge account with Progress Energy utility company

13. Credit Cards Retail store, Single Purpose – aka charge cards
*Unsecured Loans
Retail store, Single Purpose
– aka charge cards
Balance and payments vary
Can only be used to buy goods or services at the business that issued the card
Examples: JC Penney, Sears, BP
Multipurpose, Bank cards
Revolving credit accounts
May be used at different locations
Examples: Visa, Master Card
Travel and Entertainment
Similar to charge accounts
Must be paid in full each month
Example: American Express, Diner’s Club
compare credit cards

14. Credit Card Terminology
Grace Period
Time period during which no finance charges will be added to an account. From monthly statement cutoff until payment is due!
Maturity (due) date is at least 14 days from statement date. If you pay account in full by due date, you will not usually owe interest.
Cash Advance
Borrow money on a credit card
Costs more than regular credit card purchases
*read your contract before signing application or taking a cash advance!

15. Seller-Provided Credit
Many stores provide revolving charge to their customers
Users may earn points, bonuses, rebates or get special unadvertised specials
Examples: Kohls, Sears, Best Buy, Belk

16. Installment Loans Used for: Student, mortgage, automobile loans
Installment loan - contract issued by the seller that requires payments at specified times such as bi-weekly or monthly until loan is paid in full
Used for: Student, mortgage, automobile loans
Ex: Buy furniture – pay monthly to Rooms To Go Furniture Store
Ex: borrowing $1000 from a bank and agreeing to make payments $105 for 10 months.

17. Consumer Finance Companies
Specialize in loans to people with poor credit ratings
Cost of credit is higher than other institutions 

18. Payroll Advance Services  
Short-term loan
“Borrow Until Payday” Loan
Cost is extremely high
includes flat fees, high interest rate
You get cash ahead of getting your paycheck.
Secured Loan- secured by promise of paycheck

19. PAWNING A short term loan Secured Loan Give up an asset (ring, watch)
Pawnshop gives you cash
Usually less than 50% of value
You can get property back
Time limit
Pay amount & interest charged
Pawn shop can sell your item
Secured Loan

20. Life Insurance Plans Cash Value Insurance – whole life
Provides both savings and death benefits
You cannot borrow against term life insurance policies…no cash value
*Secured Loan-collateral is $ in cash value

21. Retirement Plans
Can legally borrow from them but not recommended since the purpose is to have money when you retire
*Secured Loan- collateral is $ in retirement plan

22. Other Sources of Credit for Businesses
Small Business Administration (SBA)
Offers a number of financial, technical, and management programs to help businesses
Loan funds available
Info available at local
Community colleges

23. Review : Who Uses Credit?
Consumers
Businesses
Government
Local
State
Federal

24. Government Credit Federal government - uses credit to pay for:
Public services and programs provided for its citizens
Examples-military, foreign aid, roads, courts, prisons
Loan sources include: Federal savings bonds, treasury bills, bonds, notes
State & local governments-use credit to pay for:
highways, water systems, public housing , and stadiums, airports
Loan sources : municipal bonds, school bonds

25. Government Credit Municipal Bonds Savings Bonds
State and local governments use to finance projects
Savings Bonds
Sold by federal government
T-bills, T-notes, T-bonds

26. Bonds
Bonds – written promise to repay a loan with interest on a specific date
Buyer of the bond is the creditor
Corporate Bonds
Usually used to finance buildings and equipment
Blue chip companies vs. junk bonds
Part of investment portfolio
Bond is an investment for creditor

27. Consumer Loan Example
Marty borrowed $450 for 12 months from First Federal Bank to buy a bike at 8% APR.
Who is the creditor?
Who is the debtor?
What is the interest rate?
What does APR stand for?
How much will his monthly payment be?

28. Famous Quotation
“Creditors have better memories than debtors.” -Benjamin Franklin Do you agree or disagree with this quote and why?

29. Why Use Credit? Convenience Immediate Possession Emergencies
Shop without carrying cash
Immediate Possession
Allows possession of goods or services now
Especially BIG TICKET ITEMS
Homes, business expansion
Buy now, pay later
Emergencies
Helps in case
of a serious situation

30. Common Advantages of Businesses Using Credit
Establishing favorable credit rating
Keeping business separate from personal expenses
Earning rewards/points
Minimizing record-keeping and receipts
Keeping track of what employees are spending
Saving Money –Buy item when it is on sale without cash
Growth of the Economy-Buying goods & services helps stimulate the economy

31. Common Disadvantages of Businesses Using Credit
Theft of customer records/databases
Overbuying by employees
Overusing Credit
Credit Fees - Interest paid on balance

32. Results of Overuse Bad Credit Rating Repossession/Foreclosure
Higher interest rates in future
Inability to get loan in future
Repossession/Foreclosure
Loss of property because of failure to repay loan
Bankruptcy
Can’t qualify for credit for seven years

33. Cost of Credit Using someone else’s money has a cost.
Interest is the cost of using someone else’s money.
Factors for computing interest include:
Principal, P = Amount of the loan
Interest Rate, R = Percent of interest charged or earned.
Time, T = Length of time for which interest will be charged, usually expressed in years or parts of a year.
Formula for computing simple interest:
I = P x R x T

34. Cost of Credit – Time Calculation
How is time determined for a loan for each of the following lengths?
Years – multiply by # of years
Months – ex 2/12
Days 24/365
How is the maturity date calculated?
Months-the maturity date is the same day of the month that the loan was made.
Days-Determine the day the loan was made, and then count the exact number of days of maturity.
How is a decreasing loan payment calculated?
Interest is calculated on the amount of the loan that is unpaid.
What is disclosed in APR?
% cost of credit, service fees

35. Process of Obtaining Credit
Credit Application
Documentation
Processing
Underwriting
Closing
Funding

36. Credit Application
Form used to provide information needed by a lender to make a decision about granting credit (approving a loan).
Fill out completely, accurately, & honestly
Requires signature of applicant, which indicates provided information is true
Credit decision must be based on your ability to repay a loan, Other discrimination is illegal.

37. Application Information
Provide the following information:
Salary, Employer,
Outstanding Credit (Debt), Credit References
Assets, Checking and Savings Accounts, Stock Portfolio, etc.
Disclose every piece of information about your financial background to obtain loan
Be honest!

38. Documentation
Creditor will collect and verify necessary documentation for the extension of credit.
Examples: Bank statements, credit card statements, past W-2’s, etc.
Verify using phone, mail, documents

39. Main Factors Examined for Granting Credit
Credit data make 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

40. Main Factors Examined for Granting Credit
Information provided by Credit Bureaus
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

41. Processing Lender builds loan file Evaluates credit worthiness
Creditors examine factors about potential debtors when deciding whether to grant them credit
The C’s of Credit Worthiness

42. Processing – The C’s of Credit Worthiness
Capacity
How much debt can comfortably be handled?
Considers current income and debt levels
Character
Honesty to pay debt when due
Earned by paying bills on time and being a trustworthy, reliable, stable person financially
References – people you have borrowed from in the past who indicate you paid on time
Capital (money)
How much you have beyond what you owe
Current available assets that could be used to repay debt if income was unavailable

43. Underwriting Review loan info for soundness, creditworthiness
Make decision about granting credit
Consumer Reporting Agencies
Company that compiles and keeps records on consumer payment habits.
Used to evaluate creditworthiness
Examples: Equifax, Experian, and TransUnion

44. Closing Representative explains terms of credit- usually loan officer
Attorney may be present at closing, especially real property
Debtor/creditor sign contract
Contract is binding on signing parties

45. Closing KWYS – know what you’re signing
READ and UNDERSTAND BEFORE signing any contract
Contract – legally binding agreement between two parties

46. Funding
Creditor issues money/funds to the debtor for the item purchased
Example: mortgage company pays seller in full, debtor then pays mortgage company monthly installments to repay the loan

47. Credit Documents Understand loan features and credit activities to minimize potential credit problems. Two commonly used credit documents that assist with minimizing credit problems are: *Credit Contract *Statement of Account Read and understand all documents before you sign.

48. Credit Contract
Legally 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

49. Statement of Account
Printed monthly once credit is granted and purchases are made on credit (also online)
Includes summary of transactions completed during the billing period
What kind of information may be found on the statement of account?
Balance due
Amounts charged during the billing period
Amounts paid during the billing period
Current balance
Minimum amount of next payment
Late fees, interest charges

50. Review Steps to Get Loan
Steps in Order: 1.___credit application 2.___documentation 3.___processing 4.___underwriting 5.___closing 6.___funding
Description of Activity
A. loan officer builds a loan file
B. borrower completes form info for lender to review
C. creditor issues money to the debtor
D. debtor/creditor sign contract
E. creditor collects and verifies information
F. loan officer reviews loan for creditworthiness

51. Denial of Credit
Fair Credit Opportunity Act requires that credit denial cannot be based on sex, family, religion, etc.
Loan decision must be based on ability to pay back loan.

52. Credit Reporting Credit Bureau
Credit Bureau
An agency that collects information & calculates a score/rating on how promptly people/businesses pay their bills
Information retrieved from banks, finance companies, landlords, retail stores, utility companies, stores, credit card companies
Corporations: Standard & Poors, Fitch Rating, Moody’s
Individuals: Equifax, Experian, TransUnion

53. How to Build Credit Open a checking or savings account
Apply for a local department store charge card
Apply for a multipurpose credit card
Take out a small loan from local bank
PAY ALL LOANS, BILLS, AND CREDIT CARDS ON TIME!!!

54. Example: Calculations The 4-wheeler
Nick wants to buy a four wheeler. It costs $ He has $500 for a down payment. He qualifies for a bank loan for 5% simple interest. The bank sets up payment terms of monthly installment for 2 years beginning on the 10th of next month.
Questions
What is Nick’s principle?
What is the interest rate?
What is the time?
When is maturity date?
How many payments will Nick make?
How much interest will Nick pay in 2 years?
What is the total cost of the 4-wheeler?

55. Calculate Interest
Use Interest formula to calculate Nick’s finance cost.
I= Interest (finance charges/fees)
P= Principle
R= Rate (APR % charged)
T= Time (year or portion of year)

56. Calculate Interest Answer
I=P*R*T
I=2000*5%*2
I=$200
What is the total cost to Nick for purchasing the four wheeler?
$ interest paid=$2700

57. Recalculate Interest
What would happen to the interest fees if Nick paid off the loan in 6 months?
I=2000*5%*6/12 (6 out of 12 months)
I=$50

58. Credit Regulations (Laws)
Protect rights of credit applicants & rights of credit users from fraudulent & unfair practices
Truth in Lending Law (TILA) requires lenders to reveal the cost of credit (APR & $ amount of finance charge) & terms before signing an application or contract
Federal Trade Commission (FTC) enforces laws on credit

59. Equal Credit Opportunity Act
allows credit applications be judged on financial responsibility of credit applicants.
Cannot discriminate based on gender, age, ethnicity, or religion
Credit can be denied due to these areas of responsibility:
Income too low
Other large debts compared to income
Poor payment record in past

60. Fair Credit Billing Act Fair Credit Reporting Act
Fair Credit Acts
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.

61. Fair Debt Collections Act
prohibits deceptive, harassing, and unfair practices for collecting debt from debtors.
Collectors:
Must identify themselves
Cannot tell others about debt
Cannot harass debtor
Consumer Credit Reporting Reform Act
requires that credit reporting agency must be able to prove that credit information they provide is accurate.

62. Credit Card Accountability, Responsibility, and Disclosure Act (CARD Act)
Amendment to the Truth in Lending Act
Institutes fair and transparent practices of providing credit

63. CARD ACT Practices 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.

64. Credit Assistance Available to minimize or eliminate the credit problems of debtors

65. Credit Assistance Debt repayment plan Credit counseling Bankruptcy
Is 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, one on one with debtor.
Bankruptcy
May be used by debtors to reduce debt or amount owed to creditors. Legal process in which some or all of the assets of a debtor are distributed among the creditors because the debtor is unable to pay his or her debts.

66. Types of Bankruptcy Chapter 7 (Liquidation)
List assets and liabilities
Most of the debtor’s assets are sold to pay off creditors (liquidation)
Cannot release debt on alimony, child support, taxes, fines, educational loans, or court fees
Chapter 13
Propose a plan for using future earnings and assets to eliminate debts over a period of time

67. Chapter 11 Bankruptcy
Reorganization of debt, re-negotiating terms of debt to stay in business
For Businesses Only
Creditors often accept terms to get partial payment, or an extended period to get paid, rather than not get repaid at all!
Chapter 11 bankruptcy reorganization: what is it and how does it work