1. Chapter 6 Consumer Credit
Mrs. Ferry
4/12/2017
Chapter 6 Consumer Credit
Pages 152 – 194
Chapter 6 - Consumer Credit

2. What is Consumer Credit?
Credit is an arrangement to receive cash, goods, or services now and pay for them in the future
Creditor is an entity (bank, finance company, credit union, business or individual) to which money is owed

3. Consumer Credit
Consumer credit is the use of credit for personal needs which dates back to colonial times
Installment credit allows people to pay with equal payments over a period of time
Credit can be used as an advantage but it also involves RESPONSIBILITY and risk

4. Uses and Misuses of Credit
Factors to CONSIDER before using credit
Do you have $$$ for a down payment?
Should you use your savings instead of credit?
Can you afford the item?
Could you use the credit in some better way?
Could you put off buying the item for a while?
What are the costs of using credit?
INTEREST – is a periodic charge in exchange for the use of credit

5. Advantages of Credit
Credit allows you to enjoy goods and services now and pay for them later
Discounts for paying your bills on time
Combine purchases and making one monthly payment
Credit may be the only way to pay for some services (Car rental, hotel reservations, shopping by phone or online shopping)
If you use credit wisely, lenders will view you as a good risk

6. Disadvantages of Credit
Credit costs $$$
Temptation to overspend
You could ruin your credit rating if you don’t pay your bills
You could lose your income and property to repay your debts
Use caution and avoid using credit for more than you can afford

7. Two Types of Credit
Closed-end credit – a one-time loan that you pay back over a specified time with payments of equal amounts
Examples: Mortgage, car loans, furniture, appliances
These types of loans usually carry lower interest rates than open-end credit
Open-end credit – borrow money for a variety of goods and services; usually with a credit limit
Usually a limit on the amount you can borrow
A line of credit is the maximum amount of $$$ available to you
Examples: Visa, MasterCard, bank cards or store cards

8. Loans Inexpensive loans – parents or other family; low interest
Medium priced loans– commercial banks, savings and loans, and credit unions, moderate interest
Expensive loans – easiest to obtain but most expensive by finance companies
Home equity loans – loan based on the equity (Current market value – what you owe); interest is tax deductible; use for education, home improvements, or medical bills

9. Credit Cards Convenience users Borrowers Debit cards Smart cards
Travel & Entertainment cards

10. Can You Afford a Loan?
Before you take out a loan you need to be sure you can afford it
This can be answered by subtracting totaling all your bills from your net income
Consider what you would give up to make the monthly loan payment
Debt payments-to-income is the % of debt you have in relation to your net income
Net income = take-home pay + allowance + gifts + interest, etc)
15 to 20% is the most you should spend on debt
Remember Emergency Expenses

11. Cost of Credit
Two key factors are finance charge and the Annual Percentage Rate (APR)
Finance charge is the amount you pay to use credit
Finance charge is calculated using APR
How much credit costs on a yearly basis, expressed as a percentage
18% means you pay $18 per year on each $100 you owe

12. Trade-offs Term versus interest costs
Longer term = smaller monthly payments
Higher interest rate
Lender risk versus interest rates
Minimum down payment at time of purchase
Low fixed payments with a large final payment
Variable Interest Rate – based on the changing rates of the banking system
Secured Loan – COLLATERAL (a form of security to guarantee the creditor will be repaid)
Up-Front Cash – large down payment
Shorter Term

13. Calculating the Cost of Credit
Simple interest
Simple interest on the declining balance
Add-on interest
Cost of open-end credit
Cost of Credit & Expected Inflation
Avoid the MINIMUM monthly payment trap—the smallest amount you can pay

14. Applying for Credit Character – will you repay the loan?
The Five Cs of Credit:
Character – will you repay the loan?
Capacity – Can you repay the loan?
Capital – What are your assets and net worth?
Collateral – What if you don’t repay the loan?
Credit History – What is your credit history?

15. Credit Rating
Is a measure of a person’s ability and willingness to make payments on time
The factors that determine your credit rating are income, current debt, information about character, and how debts have been paid in the past

16. Your Credit Report
The record of your complete credit history is called your credit report, or credit file
Records are collected and maintained by credit bureaus
There are three major credit bureaus:
Experian
Trans Union
Equifax
They maintain over 200 million credit files based on information from lenders

17. What’s in Your Credit File?
Name, address, social security number (SS#) and birth date; it may also include:
Employer, position, and income
Previous address
Previous employer
Spouse’s name, SS#, employer, and income
Whether you rent or own your home
Checks returned for insufficient funds
Detailed credit information about your credit purchases or any loans, any lawsuits or judgments against you

18. Fair Credit Reporting
Fair Credit Reporting – 1971 U.S. Congress enacted the Fair Credit Reporting Act
This law requires:
The deletion of out of date information
Gives consumers access to their files
Consumers the right to correct misinformation
Limits on who can obtain your credit report

19. Protecting Your Credit
Billing Errors and Disputes
Notify creditor in writing and include information to support your case
Pay portion of the bill not in question
Creditor must acknowledge your letter within 30 days and within two billing cycles they must adjust or tell why the bill is correct
Creditor cannot damage your credit rating while settling a billing dispute

20. Stolen Identity Contact the Credit Bureaus Contact the Creditors
You may not know your identity was stolen
You may get bills for credit cards you never opened or charges for items you did not purchase
Contact the Credit Bureaus
Contact the Creditors
File a Police Report

21. Protect Your Credit
SHRED any papers with personal information before you throw them out
Close bank accounts, issue stop payment on any lost or stolen checks, cancel debit card (MAC)
Keep a record of your credit card number and notify the credit card company immediately

22. Internet
Take the following steps to avoid fraud or deception on the Internet
Use a secure browser
Keeps records of online transactions
Review monthly bank and credit card statements
Read Web site privacy and security policies
Do NOT share your personal information
Never give your password to anyone online
Don’t download files sent from any stranger

23. Co-Sign a Loan
Co-signing a loan means that you agree to be responsible for loan payments if the other party fails to make them

24. Consumer Credit Protection Laws
Truth in Lending & Consumer Leasing Acts
Equal Credit Opportunity Act (ECOA)
Fair Credit Billing Act
Fair Credit Reporting Act
Consumer Credit Reporting Reform Act

25. Managing Your Debts Warning signs of debt problems:
You only make the minimum monthly payment
You have trouble making the minimum payments
Balance on credit cards increases every month
Miss loan payments or pay late
You use your savings for necessities
You receive 2nd and 3rd late payment notices
You borrow money to pay off old debts
You exceed credit limits on your credit cards
You are denied credit because of a bad credit bureau report

26. Debt Collection Practices
Federal Trade Commission enforces the Fair Debt Collection Practices Act (FDCPA)
Prohibits certain practices by debt collectors (businesses that collect debts for creditors)
It does NOT erase debts you owe, but it controls the ways collection agencies do business

27. Financial Counseling
You can contact your creditors and work out a payment plan
You can contact a nonprofit financial counseling program
Consumer Credit Counseling Service (CCCS) is a nonprofit agency which provides debt counseling
Set-up a realistic budget
Budget planning and unwise credit buying

28. Personal Bankruptcy
Bankruptcy is a legal process in which SOME or ALL of the assets of a debtor are distributed among creditors because a debtor is unable to pay their debts
Bankruptcy may also include a plan for the debtor to repay creditors on an installment basis
Should be a last RESORT because it damages your credit rating

29. Chapter 7 - Bankruptcy Chapter 7 – Straight Bankruptcy
Draw a petition listing assets and liabilities
Person who files is called a debtor
Debtor submits the petition and pays a fee
Most assets are sold to pay creditors
Protected assets: SS payments, unemployment compensation, net value of your home, vehicle, household goods, tools and books
You are not released from alimony, child support, certain taxes, fines, student loans, debts from bankruptcy court, and other crimes

30. Chapter 13 - Bankruptcy Chapter 13 – Wager Earner Plan Bankruptcy
Proposes a plan for using future earnings or assets to eliminate your debts over a period of time
Debtor keeps most of their property
Period can be as long as 5 years and the debtor makes regular payments to a trustee or represetative

31. Effects of Bankruptcy
After bankruptcy it may be difficult to obtain credit especially with a Chapter 7 Bankruptcy because no debt has been repaid
It may be easier to obtain credit with a Chapter 13 Bankruptcy because the debtor has repaid some of their debts
Bankruptcy reports are kept on file in credit bureaus for TEN years