1. Chapter 8
Consumer Credit

2. Question: What is credit?
Is credit necessary/important? Why or why not?
What type of things would you use credit for?

3. The Importance of Consumer Credit to the U.S. Economy
Credit: An arrangement to receive cash, goods, or services now and pay for them in the future
Consumer Credit: Use of credit for personal needs.
Creditor:An entity (bank, finance company, business, or individual)to which money is owed. Agrees to advance an individual the money, goods, or services. In turn the individual agrees to repay the creditor over a period of time

4. Cont. Consumer Credit: Use of credit for personal needs
Installment credit was introduced in the 1900’s as automobiles were introduced
Especially helpful for expensive items
Each installment includes part of the amount due on the purchase as well part of the cost of credit
Major force in American Economy. Track consumer spending
See Figure 1 pg. 226

5. Uses and Misuses of Credit
Increases the amount of money you can spend now, however decreases the amount of money you will be able to spend in the future

6. Factors to Consider Before Using Credit
Finance: Give or get money for something
See pg. 226 for list of things to consider before using credit
Creditor may add to the purchase price, especially if you don’t pay your bill in full every month
Interest: Periodic charge in exchange for the use of credit
Make sure the benefit of using credit now outweigh the possible costs later

7. Advantages of Credit
Main advantage: Allows you to enjoy goods and services now (esp. if you have low funds)
May get special deals or discounts if you pay your bills on time (store department credit cards)
Often time only acceptable way to pay for services: Electric bill, telephone bill
Often used for making reservations, renting a car, shopping by phone or internet
Safer to use because don’t have to carry cash

8. Disadvantages of Credit
Temptation to overspend is greatest disadvantage
Don’t buy things you can’t afford
Could cause you to lose income or property
Using credit does not mean you have more money, just delays payment

9. Types of Credit
Closed-end credit and open ended, both will be used sometime on your life

10. Closed-End Credit
Receive a one-time loan that you will pay back over a specified period of time and in payments or equal amounts
For a specific purpose and involves a definite amount of money
Mortgage, car payment, furniture, appliances
Title: Document showing ownership to the item until all payments have been made

11. Open-End Credit You borrow money for a variety of goods and services
Company issuing the credit gives you a certain limit on the amount of money you can borrow
Line of Credit: Maximum amount of money the creditor has made available to you (visa, MasterCard, store brand)
Can make as many purchases as you wish as long as you stay below credit line
Billed monthly for at least partial payment

12. Sources of Consumer Credit
Chart pg.231

13. Loans
Borrowing money with an agreement to repay it along with interest, within a certain amount of time

14. Inexpensive Loans Parents or family members are often common source
May not charge any interest or very low interest
May complicate family dynamics

15. Medium-Priced Loans Usually moderate interest rates
Get from commercial banks, credit-unions, savings and loan associations
Credit unions are often more patient and have better rates, because you are a member

16. Expensive Loans
Easiest to obtain, but will have the highest interest rates, often 15-25%
Banks also offer cash advances, loans that are billed to charge account
Usually higher interest rates on cash advances
More expensive to take cash advance rather then use credit card
Why are they the easiest to obtain?

17. Home Equity Loans
Based on the difference between the current market value of your home and the amount you still owe on the mortgage, interest you pay is tax deductible
Should use these loans only for major items or emergency
If you miss a payment, the lender can take your home

18. Credit Cards
Average cardholder has more than nine credit cards (bank, retail, gasoline, and telephone cards)
Convenience Users: Those who pay off their balances in full each month
Borrowers: Those who do not pay off their balances every month
Grace Period: Time period during which no finance charges will be added to your account
Finance Charge: Total dollar amount you pay to use credit, usually is you pay entire balance before due date you will not have to pay a finance charge
See pg. 232 for “Choosing a Credit Card” tips

19. Debit Cards Used for ATM’s and purchases
Electronically deducts money from checking or savings account

20. Cobranding
Linking of a credit card with a business trade name offering points or premiums toward the purchase of a product or service
Advantage to credit card?
Very popular

21. Smart Cards Plastic card with computer chip
Stores 500 times more data then normal card
Can combine credit card balances, drivers license, health care information, travel information

22. Travel and Entertainment Cards (T&E Cards)
Balance is due in full each month
Diners club or American Express

23. Measuring the Cost of Credit and Obtaining Credit
Section 8.2
Measuring the Cost of Credit and Obtaining Credit

24. Can you Afford a Loan?
Will you be able to afford all of your usual monthly expenses, plus a loan payment?
Add all of your basic monthly expenses, then subtract the total from your take-home pay
What could you give up to take out the loan?
Could use the debt-payments-to-income ratio formula to decide if you can safely take on a loan

25. Debt-Payments-to-Income Ratio
The percentage of debt you have in relation to your net income
Net Income: All income you receive
Should spend no more then 20% of your net income on debt payments
Monthly debt includes credit card and loan payments
To figure: Divide your total monthly debt payments (except house payments) by your monthly net income
If young, recommend staying under the 20% limit (Ideally 15%)

26. The Cost of Credit
2 key factors will be finance charge and the annual percentage rate (APR)

27. The Finance Charge and the APR
Finance Charge: Total dollar amount you pay to use credit, normally paid for any unpaid balance
Finance charge calculated using the APR
Annual Percentage Rate: Shows how much credit costs you on a yearly basis, expressed as a percentage
Ex: APR of 18% means you pay $18 per $100 you owe
See fig. 6.4 for APR chart
Truth in Lending Act says creditor must inform you in writing and before you sign anything of the finance charge and the APR

28. Tackling the Trade-Offs
Various decisions: Length of the loan, size of monthly payments, and the interest rate
Term Versus Interest Costs: Choosing longer-term financing in exchange for smaller payments, disadvantage is you pay more interest. See pg. 236

29. Lender Risk Versus Interest Rate
May prefer to have a down payment
Lenders goal is to minimize risk
Various ways to reduce lender risk….

30. Variable Interest Rate
Based on changing rate in the banking system
Interest rate you pay on your loan will vary from time to time
Somewhat risky, recommend to avoid

31. Secured Loan Receive a lower interest rate by pledging collateral
Collateral: Form of security to help guarantee that the creditor will be repaid
Ex: Savings, property, investments
Pledged: What you promised as collateral. Lender can take if you fail to pay

32. Up-Front Cash
Lenders feel you have more of a stake in the loan if you put down a large down payment
The bigger the down payment the more likely you are to get the loan
The lower your credit score the more down payment you will need

33. A Shorter Term
Shorter the term of the loan, the less chance you will default on it
Monthly payment will be higher

34. Calculating the Cost of Credit
Simple Interest Formula most commonly used. Based on the following: Principal*Rate*Time (computed only on the principle)
Simple Interest on the Declining Balance: When simple interest loan is paid back in more than one payment, this method is used. You pay interest only on the principal you have not yet paid. The more payments you make the less interest you will pay (often used by credit unions)

35. Cont.
Add on interest: Interest calculated on the full amount of the original principal no matter how often you make payments. Longer you pay the loan the more interest you will pay
Cost of Open-End Credit: Truth in lending act requires lender to let you know how the finance charge and APR will affect the cost
Cost of Credit and Expected inflation: Each percentage increase in inflation decreases 1 percent of the cost of goods you can buy. Lenders try to let you know the expected inflation

36. Continued
Avoid the Minimum Monthly Payment Trap: Smallest amount you can pay and remain a borrower in good standing.
Lenders often encourage this (why?)
Ex: $500 charged at 19.8% per year. Minimum payment $ Would take almost 2 years to pay off and additional $150 in interest

37. Applying for Credit
Most lenders establish credit policies on the 5 C’s of Credit
Character, Capacity, Capital, Collateral, and Credit History

38. 1) Character: Will you repay the loan
Creditors want to know what kind of person they are lending money to
May ask for references or check to see if you have had law trouble
See pg. 241 for questions you may be asked

39. 2) Capacity: Can you Repay the Loan?
What income do you have, what debts do you already have?
If you have large amounts of debt you may not get a loan
See questions pg. 241

40. 3) Capital: What are your Assets and Net Worth?
Your capital is the amount of your assets that exceed your liabilities or the debts you owe
Do you have savings or assets to sell to pay off the loan if needed
Questions: What are your assets? What are your liabilities?

41. 4) Collateral: What if you don’t repay the loan?
What property and savings do you have?
Creditor may take whatever you pledged as collateral
See pg. 242

42. 5) Conditions: what if your job is insecure?
Economic conditions such as unemployment and recession can affect your ability to repay a loan
Question focuses on security of your job and your company that employs you
Credit Rating: Measure of a persons ability and willingness to make credit payments on time

43. Credit Rating
Factors that determine: Income, current debt, character, past debt payments
If you have low debt and made payments on time you should be fine
Pg. 242 Figure 5
See pg. 243 Figure 6

44. FICO and Vantagescore
Info from credit report is used to calculate your FICO score
Score ranges from
Higher the score the better
Vantagescore: New scoring technique made by the 3 credit bureaus. More predictable for consumers. Ranges from You want the 3 bureaus to be similiar

45. Improving Credit Score
1st step is to review credit report to make sure its accurate
Long-term responsibility is key
Pay bills on time, lower balances, use credit wisely
Some debt is good

46. Credit and Equal Opportunity
Equal Credit Opportunity Act states all credit applicants have the same basic rights
Can’t discriminate based on age, race, nationality, sex marital status, etc.

47. Age Can request you to state age on application
If (depending on state) creditor cant….
Turn you down or decrease credit because of age
Ignore retirement income when rating
Close credit account because retired
Close after reaching certain age

48. Public Assistance
Can’t be denied because you receive Social Security or public assistance
HOUSING LOANS
Bans discrimination against you based on race or nationality of the people in a neighborhood known as REDLINING

49. What if your Application is Denied?
ECOA give you the right to know the reasons why you were denied for credit
After you receive the denial you have 60 days to dispute anything on the report
See figure 7 pg. 244

50. Your Credit Report
Most lenders rely on them heavily
Figure 8 pg. 246

51. Credit Bureaus
Agency that collects information on how promptly people and businesses pay their bills
Major Bureaus: Experian, Transunion, and Equifax
Get info from banks, finance companies, stores, credit card companies, and lenders
Also track payment habits and court records

52. What’s in your Credit Files?
Typically: Name, address, SSN, DOB
May also include those items found on page 247
Every time you use a Credit Card the credit bureau is informed

53. Fair Credit Reporting Fair Credit Reporting Act, enacted 1971
Requires deletion of out-of-date information and gives consumers access to their files as well as right to correct mistakes. Every 5 years, 10 if filed for bankruptcy
Exceptions: If applying for more then $75,000 loan or $150,000 life insurance policy

54. Legal Rights
You have the right to sue a credit bureau or creditor that has cause you harm by not following rules established or filed wrongful claim

55. Protecting Your Credit
Section 8-3
Protecting Your Credit

56. Billing Errors and Disputes
Even if you pay your bills all the time, errors may happen
Billed Twice, lost payment
Notify your creditor in writing and include any information that might support your case
Pay portion of the bill not in question
Creditor must acknowledge your letter within 30 days
Within 2 billing periods (not longer than 90 days) creditor must adjust or tell you why it is correct
If no errors are found you can be charged for the finance charges that accumulated

57. Protecting your Credit Rating
Creditor may not threaten your credit rating or do anything to damage your credit reputation while you’re negotiating a billing dispute
Can’t take any action to collect the amount in question until your complaint has been answered

58. Defective Goods and Services
If used a credit card, and store will not accept a return you may call credit company and put a halt on the payment

59. Identity Crisis: What to Do if your Identity is Stolen?
Identity theft is the fastest growing major crime
Identity Theft: Imposters using your personal information to commit fraud
Often times don’t realize it happened till an inopportune time
If victim…. Contact credit bureau, Contact creditors, file a police report

60. Protecting your Credit from Theft of Loss
Dumpster Divers, shred papers
If believe someone got your account numbers, close account ASAP, get new pin numbers
Tips: Make sure card is returned to you after a purchase, keep separate record of credit card numbers
Contact CC Company immediately.
$50 max if reported quickly. No responsiblility if reported before used

61. Keeping Track of your Credit
Don’t notice until something wrong
Get a bill in the mail for accounts you didn’t open
Suspicious activity on your credit accoun

62. Steps to Protect Other Accounts
Bank statements, checking account, atm
Close immediately
Get password only access
Stop lost checks
Get new pin if lose ATM

63. Government Agency Protection
If after taking the necessary steps you still have problems, contact the FTC
Secret service has jurisdiction over financial fraud cases
Often times your case is part of a bigger case
May need a new Social Security #

64. Credit Information on the Internet
Internet may be the most important part to everyday life
Investing, banking shopping
Use secure sites/browsers
Keep records of transactions
Review all statements
Read privacy and security policy
Keep personal information to yourself
Never give password
Don’t download files from strangers

65. Co-signing a loan Take time to think it over
Co-signing: Agreeing to be responsible for loan payments if the other party fails to make them
Lender would not take a risk on the person, that’s why the co-signer is needed. Are you willing to risk that?
Negative feedback can appear on both your record and the borrowers
Pg. 254 list

66. Complaining About Consumer Credit
If you feel lender is not following laws, first try to contact the lender
After that follow consumer protection laws

67. Consumer Credit Protection Laws
If banks can’t help, get in contact with the Federal Reserve
If take legal action, be aware of the following credit protection laws:
Truth in Lending and Consumer Leasing Acts: If fails to issue information or gives inaccurate information, you can sue for any money loss you suffer, also permits class action lawsuits
Equal Credit Opportunity Act: Discrimination suits, sue for actual plus punitive damages up to $10,000
Fair Credit Billing Act: If don’t follow rules for correcting billing erros they will automatically give up the amount owed on the item in question and any finance charges on it, up to $50. May charge for actual damages plus twice the amount of any finance charge

68. Cont.
4) Fair Credit Reporting Act: May sue any credit bureau that violates the rules regarding access to your credit records to that fails to correct errors in your credit file. Actual and punitive damages apply.
5) Consumer Credit Reporting Reform Act: Places the burden of proof for accurate credit information on the credit bureau rather than to you
6) Credit Card Act: 2009 act that est. clear practices for extending credit to consumers (list pg. 255)

69. Your Rights Under Consumer Credit Laws
If you feel you have been refused because of discrimination:
Complain to the creditor, let them know you know the law
File a complaint with the government
Sue the creditor as a last resort (actual damages, punitive, and fees)

70. Section 6-4
Managing your Debts

71. Warning Signs of Debt Problems
Some people who appear to have a lot of money are actually barely keeping their head above water.
Main problem is financial immaturity (lack self-discipline and impulses)

72. Financial Trouble Warning Signs
You make only the minimum monthly payment on credit cards
Your having trouble making the minimum monthly payment
The total balance on your credit card increases every month
You miss loan payments or often pay late
You use saving to pay for necessities
You receive second or third payment notices from creditors
You borrow money to pay off old debt
You exceed the credit limits on your credit cards
You have been denied for credit because of a bad credit report
*If you experience 2 or more of these, consider
your spending habits

73. Debt Collection Practices
Fair Debt Collection Practices Act: Prohibits certain practices by debt collectors
Debt Collectors: Businesses that collect debts for creditors

74. Financial Counseling Services
Can try to work out payment plans with creditors
Or contact a nonprofit financial counseling program

75. Consumer Credit Counseling Service
Nonprofit organization affiliated with the National Foundation for Consumer Credit
Provide debt counseling services for families and individuals with serious financial problems. May charge small fee
Divided into 2 parts: 1) helping families with debt problems by helping them setup a realistic budget (2) Helping people prevent indebtedness by teaching them the importance of budget planning, unwise credit buying, and encouraging credit institutions from withholding credit from them

76. Other Counseling Services
Universities, Credit Unions, Military Bases, some banks
Debt Counselors of America

77. Declaring Personal Bankruptcy
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. May also include a repayment plan based on installments (Last Resort)
See Figure 6.10 pg 190

78. The U.S. Bankruptcy Act of 1978
Majority of U.S. Bankruptcy are filed under Chapter 7 (straight Bankruptcy) others Chapter 13 (wager earner plan bankruptcy)

79. Chapter 7 Bankruptcy
Required to draw up a petition listing his or her assets and liabilities
Debtor: Person who files for relief under the bankruptcy code. Submits petition to U.S. District court and pays a fee
Assets Protected: Social Security Payments, unemployment compensation, net value of your home, vehicle, household goods and appliances, tools used for work, and books
Still must pay alimony, child support, fines, some educational loans, and debts you fail to disclose

80. Chapter 13 Bankruptcy
If you have a regular income, propose a plan for using future earnings to eliminate debt over time
Usually keep all or most property
Plan can be as long as 5 years, makes payments to a representative who then distributes the payments to creditors

81. The Bankruptcy Abuse Prevention and Consumer Protection
Passed in 2005 by President Bush
Government financial educational curriculum program to increase awareness in American citizens
Debtors must take course

82. Effects of Bankruptcy
Some people actually say they have an easier time obtaining credit after they file for bankruptcy
Easier for chapter 13 filers
Kept on file for 10 years