1. Credit Management Chapter 16 - Credit in America
Chapter 17 - Credit Records & Laws
Chapter 18 - Responsibilities and
Costs of Credit
Chapter 19 - Problems with Credit

2. Credit in America The History of Credit Early Years The 1900s Today
Accounts at the general store
Banks were reluctant to loan, charged high interest
The 1900s
Began to understand advantages of credit
Laws enacted to protect consumers
Today
Easier to use

3. Vocabulary of Credit Debtor - person who borrows money
Creditor - person/company who loans money
Capital - property you possess that is worth more than your debts
Collateral - property pledged to assure repayment of a loan
Finance change - the interest you pay for the use of credit (handling charge, service charge, carrying charge)

4. More Vocabulary Minimum payment - least amount you can pay that month
Due date - date payment is due
Late fee - amount charged if payment is not made on time
Installment agreement - contract you sign for an expensive purchase wherein you agree to make regular payments for a period of time
Secured loan - loan that uses the goods being purchased as collateral

5. Advantages of Credit If used correctly, credit can:
Expand your purchasing power
Raise your standard of living
Purchase expensive items earlier than if you had to pay cash
Can provide emergency funds
Convenient
Provides proof of purchase

6. Disadvantages of Credit
Credit purchases may cost more than cash purchases.
You tie up future income.
Can lead to overspending.

7. Video

8. Kinds of Credit Open-Ended Credit Closed End Credit Service Credit
An agreement to lend the borrower an amount up to a stated limit and to allow borrowing up to that limit again whenever the balance falls below it
Closed End Credit
A loan for a specific amount that must be repaid in full by a stated due date
Service Credit
An agreement to have a service performed and pay for it later

9. Open-Ended Credit Open 30-day accounts Revolving Credit Accounts
A credit agreement that must be paid in full every 30 days.
Revolving Credit Accounts
A credit agreement that allows you the option of paying a minimum amount each month (credit cards)

10. Shopping for a Credit Card
Need to consider and compare:
Annual percentage rate (APR)
Free Period - (grace period) allows you to avoid finance charges if balance paid in full by certain date
Annual Fees
Transaction Fees and Late Fees
Method of Calculating the Finance Charge

11. Closed-End Credit Does not allow for continuous borrowing
Set payments (installments)
Sometimes called an installment loan
Must include: amount loaned, total finance charge, amount of each payment
Usually requires a down payment
Items bought serve as collateral

12. Service Credit
An agreement to have a service performed now and paid for later
Almost everyone uses some form of service credit
Examples: phone, utilities, doctors, etc.
Most do not charge a finance charge

13. Sources of Credit Retail Stores Banks and Credit Unions
Finance Companies
Pawnbrokers
Private Lenders
Other sources
Life insurance policies
Certificates of deposit

14. Establishing Good Credit
Credit Records
Credit History is the complete record of your borrowing and repayment performance
Credit File
On file with a credit bureau (a company that gathers, stores, and sells credit information to business subscribers)
Three major U.S. Credit Bureaus - Experian, Equifax, and Trans Union

15. Credit Report A written statement of a consumer’s credit history
You can request a copy of your credit report at any time
Normally there is a small fee ($5 - $15)
If you are denied credit, you can get a FREE credit report if you ask within 30 days of being denied credit

16. Credit Report Information
Any public information becomes a part of your credit report
Bankruptcy, marriage, divorce, paying property taxes, job promotions, lawsuits, etc.
Subscribers pay a monthly fee to the credit bureaus and provide the information to the bureau

17. Creditworthiness Are you a good risk for credit?
Creditors will look at five basic qualifications:
Character
Capacity
Capital
Conditions
Collateral

18. Character A responsible attitude toward living up to agreements.
Will you repay the debt?
Credit history will show if you pay your bills on time which shows good character.
Creditors also look for stability. How often do you move or change jobs?

19. Capacity The financial ability to repay a loan with present income.
Can you repay the debt?
Creditors will want to know if you have the financial resources to add another bill to your monthly expenses.

20. Capital
The property that you possess that is worth more than your debts.
Is the creditor fully protected if you fail to repay?
If the credit is unsecured, do you have enough to cover the debt?

21. Conditions The state of the economy can affect your ability to repay.
What general economic conditions can affect your repayment of debt?
Will look at your job stability - do you work in an industry that is struggling? do you live in an area that is struggling?

22. Collateral Property pledged to assure repayment of a loan.
Similar to capital
What assets back up your promise to pay?

23. Questions a Creditor May Legally Ask
Personal Information (Name, age, number of dependents, phone #)
Employment Information (place and length of employment, history)
Obligations (alimony, child support, outstanding debts and accounts)
Residence (own or rent, immigration status, how long there, history)

24. Getting Started Establish a Savings Account Open a Checking Account
Shows that you can handle money
Open a Store Credit Account
Get a Small Loan
Apply for a Credit Card

25. Assignment
Chapter 17 worksheets are due on Wednesday at the BEGINNING of class
Have them complete BEFORE you come to class
YES THEY WILL BE GRADED!!!

26. Credit Ratings A measure of creditworthiness
Excellent (A rating): pay bills before due date, well established, has not missed any payments, paid more than the minimum
Good (B rating): pay bills on due date or within grace period, does not miss payments
Fair credit rating: usually pays within grace period but may be late occasionally
Poor credit rating: payments not regular, may miss a payment, frequently reminded to make a payment

27. What’s in a Credit Report?
Summary of Information
Public Record Information
Credit Information
Account Detail
Requests for Credit History
Personal Information

28. Fair Credit Reporting Act
If you are denied credit:
You have the right to know what is in your credit file and who has seen your file
Can see your file at no charge if requested within 30 days of denial
A small fee will be charged any other time
You have the right to have inaccurate information investigated and removed; or write a statement re: the information giving your side of the story

29. Fair Credit Billing Act
Creditors must resolve billing errors within a specified period of time
You have to notify the creditor of the error - must be in writing and mailed within 60 days after you receive the statement
Creditor must acknowledge your complaint within 30 days and correct (or show why you owe) error within 90 days

30. Equal Credit Opportunity Act
Designed to prevent discrimination in judgment of creditworthiness
Credit may not be denied:
solely because your are a woman, single, married divorced, separated, or widowed
Because of religion, nationality, race, color, or age.
Because you receive public assistance, unemployment, social security, or retirement benefits

31. Credit applications can be oral or written (creditors are prohibited from asking certain questions)
Creditor may not discourage you from applying for credit for any reason prohibited by the act
A denial must be sent to you in writing and a specific reason must be listed
New accounts must list both spouses as responsible for payments

32. Fair Debt Collection Practices Act
Designed to eliminate abusive collection practices by debt collectors
Cannot use threats, obscenities, and false or misleading statements
Restricts time and frequency of contacts
Must verify accuracy of bills and allow the consumer the opportunity to clarify

33. Using Credit Responsibly
Responsibilities of Consumer Credit
To Yourself
To Creditors
Creditors’ Responsibility to You

34. Responsibilities to Yourself
Use credit wisely
Don’t live beyond your means
Check out the businesses where you make credit purchases
Comparison shop
Have the right attitude about using credit

35. Responsibilities to Creditors
Limit your spending to amounts you can repay according to contract terms
Read and understand all terms of the agreement
Contact the creditor immediately if you find an error
If you can’t make a payment, contact the creditor

36. Creditors’ Responsibilities to Yourself
Assist consumers in making wise decisions
Inform customers about all rules and regulations, and fees
Cooperate with established credit reporting agencies
Establish and carry out sound lending and credit policies
Establish and maintain fair and reasonable methods of contacting customers

37. Protecting Yourself from Credit Card Fraud
Costs businesses and consumers millions of dollars a year
Most common type of fraud is illegal use or a lost or stolen credit card
Card holder’s liability is limited to $50
Businesses may lose money

38. Safeguard Your Cards Sign as soon as you receive it
Carry only the cards you need
Keep card information in a safe place
Notify creditor IMMEDIATELY if card is lost or stolen
Watch your card during transactions
Continued

39. More Safeguarding Tear up any carbons or extra copies
Do not lend your card to anyone
Destroy expired cards
Don’t give credit card information by phone to people or business you don’t know
Keep your receipts and verify with your statement

40. Protect Your Cards Online
Deal only with companies you know and trust
Look for the secure site symbol
All legitimate online merchants should clearly state their privacy policy

41. Avoiding Unnecessary Credit Costs
Accept only the amount of credit that you need.
Do not increase credit spending when your income increases.
Keep the number of credit cards to a minimum.
Pay cash for purchases under $25.
Understand the cost of credit.
Shop for loans.
Use credit to beat inflation.
Time your credit card purchases carefully.
Take full advantage of rebate programs.

42. Factors Affecting Credit Costs
Method used to compute finance charges.
Source of credit
Total amount financed
Length of time you are making payments
Ability to repay debt
Type of credit selected
Collateral or security offered
Interest rates
Economic Conditions
The business’s costs of providing credit

43. Computing Costs of Credit
Simple Interest Formula
I = P x R x T
Annual Percentage Rate Formula
(2 x n x f)/P(N+1)
Credit Card Billings
Adjusted Balance Method
Previous Balance Method
Average Daily Balance Method

44. Solving Credit Problems
Major disadvantage to credit is it can lead to overspending
Usually does not happen suddenly
Years of poor planning
Impulse buying
Careless budgeting

45. The 20/10 Rule Credit counselors suggest 20/10 Rule
Total borrowing should not exceed 20% of your yearly take-home pay
Don’t take on monthly payment that total more than 10% of your monthly take home pay
Does not apply to mortgages

46. Credit Counseling Private or government-sponsored services
Fees usually based on ability to pay
Help set up budgets and show you best way to use your income
Cannot get loans from them

47. Debt Adjustment
For people who need stricter discipline that advice from a counselor
Charge fees and require contracts
They take over
Contact creditors to work out payment plan
Control your accounts and pay your bills

48. Credit Repair Need to repair your credit rating
Obtain copies of your credit reports
Challenge any incorrect information
Take steps to assure the information reported about you is correct
Clear up debts responsibly
Make payment arrangements
Request that corrected information be supplied to credit bureaus

49. Legal Recourse
When debtors are in severe debt trouble and cannot meet their bills, final most serious step is bankruptcy
Legal process that relives debtors of the responsibility of paying their debts or protects them while they try to repay
Bankruptcy is a second chance but carries serious consequences

50. Purpose of Bankruptcy Laws
Two goals of bankruptcy law:
Protect debtors by giving them a fresh start
Give fair treatment to creditors competing for debtors’ assets
Original federal Bankruptcy Act was 1898
Bankruptcy Reform Act of 1994 tightened rules for bankruptcy

51. Types of Bankruptcy Voluntary and Involuntary Voluntary Involuntary
Most common kind
Occurs when you file a petition with a federal court asking to be declared bankrupt
Involuntary
Occurs when creditors file a petition with the court, asking the court to declare you bankrupt
Does not occur often because creditors prefer to be repaid in full

52. Voluntary Bankruptcy: How it Works
Court notifies newspapers and creditors
Creditors may file claims
Court collects your assets & sells your property as needed
If assets do not cover all liabilities, each creditor is given a proportional share
Remainder of debt is discharged
Some debts cannot be discharged: taxes, child support, and alimony
Once declared bankrupt, cannot file again for six years

53. Types of Bankruptcy Liquidation or Reorganization Chapter 11 Chapter 7
Reorganization for businesses that allows them to continue operating under supervision
Chapter 7
Commonly called straight bankruptcy
Wipes out most debt for giving up most assets
See next slide for exempted items
Chapter 13
Reorganization form for individuals that allows them to pay off their debts over three to five years

54. Federally Exempted Items (as of January 1, 2001)
$15,000 equity in a home or burial plot ($30,000 on joint bankruptcy)
$2,400 interest in a motor vehicle
Items worth up to $400 for a single item for household goods and furnishings, appliances, clothing, and personal items, for a total of not more than $8,000
$1,000 in jewelry
$1,500 in tools, books, and other items used in a trade or business
Other property worth up to $800, plus up to $7,500 of the unused part of the $15,000 exemption for equity in a home or burial plot

55. More About Bankruptcy If considering bankruptcy, seek legal advice
Legal fees range from $150 to $1,500
Can help you protect some of your assets
Creditors may ask debtor to repay debt even after bankruptcy has discharge them (reaffirmation)

56. Reaffirmation
May wish to reaffirm a loan that someone co-signed for you
May choose to reaffirm rather than allow the collateral to be repossessed
Requires a court hearing and debtors have 30 days to change their minds
Creditors may NOT harass debtors

57. Major Causes of Bankruptcy
Business Failure
As a sole proprietor, your personal assets can be taken for your business
Emotional Spending
Failure to Budget and Plan
Bankruptcy is not limited to poor people
Catastrophic Injury or Illness

58. Advantages of Bankruptcy
Debts are erased.
Offers a fresh start.
Exempted assets are retained.
Able to retain certain assets to help start over.
Certain incomes are unaffected.
Bankruptcy does not affect: social security, veterans’ benefits, unemployment compensation, alimony, child support, disability payments, and payments from pensions.
The cost is small.
Fees small compared to amount of financial relief provided.

59. Disadvantages of Bankruptcy
Credit is damaged.
Judgment cannot be wiped off your record for 10 years.
Property is lost.
Property you get to keep is limited to the exemptions.
Some obligations remain.
Not ALL debt is erased.
Some debts can be reaffirmed.
Co-signers must pay.
If you do not reaffirm a debt that has a co-signer, they will be forced to pay the debt off.