Presentation on theme: "Credit Evaluate various sources of credit available to the government, business, and consumers."— Presentation transcript:
1CreditEvaluate various sources of credit available to the government, business, and consumers.
2Who uses Credit? Consumer Credit Credit used by people for personal reasons.Commercial CreditCredit used by businesses.
3Types of CreditCharge Accounts – most common type of short- term or medium-term credit.Regular Charge AccountsRequire that you pay for purchases in full within a certain period of time.Revolving Charge AccountsAllows 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.Budget Charge AccountsAllows you to pay for costly items in equal payments spread out over a period of time.
4Credit Cards Single-Purpose Multipurpose Travel and Entertainment Can only be used to buy goods or services at the business that issued the card.Examples: JC Penney, SearsMultipurposeSimilar to a revolving charge account.May be used at several locations.Examples: Visa and Master CardTravel and EntertainmentSimilar to regular charge accounts.Must be paid in full each month.Example: American Express
5Banks and Other Financial Institutions Single Payment LoanDebtor pays off loan in one payment.Promissory NoteWritten promise to repay with interest.Installment LoanRepaid in regular payments.
6Installment Loans Types: Secured vs. Unsecured Closed vs. Open Ended Student, mortgage, automobile, etc.Secured vs. UnsecuredSecured loans are backed by collateral (help guarantee the repayment of a loan).Closed vs. Open EndedClosed-end credit is used for a specific purpose and involves a definite amount of money.Open-end credit gives you a certain limit on the amount of money you can borrow.CosignerResponsible for the repayment of a loan if the original party does not pay.
7Seller-Provided Credit Many stores provide credit to customers.
8Consumer Finance Companies Specialize in loans to people with poor credit ratings.The cost of credit is higher than other institutions.
9Payroll Advance Services Short-term loans.PawnshopBased on the value of something you own.“Borrow Until Payday” LoanCost is extremely high.
10BondsBonds – written promise to repay a loan with interest on a specific date. The buyer of the bond is considered the creditor.Corporate BondsUsually used to finance buildings and equipment.Municipal BondsState and local governments use these to finance projects.Savings BondsSold by federal government.
11Other Sources of Credit for Businesses Small Business AdministrationOffers a number of financial, technical, and management programs to help businesses.
12Other Sources of Credit for Consumers Life Insurance PlansCash Value InsuranceProvides both savings and death benefits.Retirement Plans
13CreditExplain when and why borrowing is used for the purchase of goods and services.
14Terms Credit Creditor Debtor Privilege of using someone else’s money for a period of time.CreditorOne who sells on credit or makes a loan.DebtorAnyone who buys on credit or receives a loan.Obligated to pay back the loan.
15Why Use Credit? Convenience Immediate Possession Emergencies Shop without carrying cash.Immediate PossessionAllows you to have possession on the goods or services now.EmergenciesHelps in case of a serious situation.
16Determine the advantages and disadvantages of using credit.
17Advantages Immediate Possession Convenience Emergencies Saving Money Buy now and pay later.EmergenciesSaving MoneyBuy an item while it is on sale.Credit RatingEstablish a favorable credit rating.Growth of the EconomyBuying goods will help the economy expand.
18Disadvantages Overbuying Careless Buying Higher Prices Most common hazard.Careless BuyingComparison shopping may not be a priorityEncourages impulse buyingHigher PricesSome stores offer discounts for cash sales.
19Disadvantages continued Overuse of CreditToo much is owed – unable to pay back.Credit FeesInterest paid on balanceHabit Forming
20Results of Overuse Garnishment of Wages Repossession Bankruptcy Money deducted from wages for money owed.RepossessionLoss of property because of failure to repay loan.Bankruptcy
21CreditWhat are the factors on which credit is granted and the cost of credit?
22Process of Obtaining Credit Credit ApplicationDocumentationProcessingUnderwritingClosingFunding
231. Credit ApplicationForm on which you provide information needed by a lender to make a decision about granting credit or approving a loan.Provide the following information:Salary, Employer, Outstanding Credit (Debt), Assets, Credit References, Checking and Savings Accounts, Stock Portfolio, etc.
242. DocumentationCreditor will collect and verify necessary documentation for the extension of credit.Examples: Bank statements, credit card statements, past W-2’s, etc.
253. ProcessingBuilding of loan file.Evaluating credit worthiness.
26Credit Worthiness Terms (Processing) The C’s of Credit WorthinessCapacityYour ability to pay (income)CharacterEarned by paying bills on time and being a trustworthy, reliable, stable person.References – people you have borrowed from in the past.CollateralSecurity to help guarantee that the creditor will be repaid.
27Credit Worthiness Terms (Processing) continued Credit HistoryIndicates the amount of debt you have and your payment history.CapitalHow much you have beyond what you owe.Credit LimitMaximum amount you can borrow.CosignerResponsible for a loan if you, the original debtor, do not pay.
284. Underwriting Reviewing loan for soundness. Consumer Reporting AgenciesCompany that compiles and keeps records on consumer payment habits.Used to evaluate creditworthiness.Examples: Equifax, Experian, and TransUnion.
306. FundingCreditor will issue credit/funds to the debtor.
31Denial of CreditFair Credit Opportunity Act requires that credit denial cannot be based on sex, family, religion, etc.Must be based on ability to pay back loan.
32Cost of Credit Interest Rates Principal Time Factor Maturity Date Percentage that is applied to debt.PrincipalAmount of money borrowed.Time FactorLength of time for which interest will be charged.Maturity DateDate on which a loan must be repaid.
33Cost of Credit continued Finance Charge or FeesCost of credit stated in a dollar figureAnnual Percentage Rate (APR)Indicates how much credit costs on a yearly basis.Grace PeriodTime period during which no finance charges will be added to an account.Cash AdvanceBorrow money on a credit card.
34Simple Interest Formula I=PRTI=InterestP=PrincipalR=RateT=Time
36Your Credit Credit Bureau Building Credit An agency that collects information on how promptly people and businesses pay their bills.Information retrieved from banks, finance companies, stores, credit card companies, and other lenders.Building CreditOpen a checking or savings accountApply for a local department store credit card.Take out a small loan from your bank.Pay all loans and credit card bills on time.
37Handling Credit Problems Credit CounselorHelps consumers with credit problems.Consolidation LoanCombines all your debts in order to make one monthly payment on several different loans or credit cards.
38Handling Credit Problems continued Credit ServicesConsumer Credit Counseling ServiceNonprofit organization that provides debt counseling services for families and individuals with serious financial problems.Debt Repayment PlanReorganizes debt and sometimes includes renegotiating terms of debt.Creditors will often accept such arrangements for partial payment, rather than not be repaid.
39What if you are denied credit? The Equal Credit Opportunity Act says:You have the right to know the reasons.You are entitled to know what specific information in the credit report led to your denial.No fee will be charged if you state why you are requesting a copy of the report.You are entitled to ask the credit bureau to investigate any inaccurate or incomplete information and correct your records.
40Truth-in-Lending Laws Requires that you be told the cost of a credit purchase in writing before you sign a credit agreement.Protects consumers against unauthorized use of credit cards.Limits your liability to $50 for unauthorized credit card purchases made prior to notification of the issuer.
41Usury LawsRestricts the amount of interest that can be charged.
42Equal Credit Opportunity Act The credit application can be judged only on the basis of financial responsibility.Cannot discriminate based on gender, age, ethnicity, or religion.Allows only three reasons for denying credit:Low incomeLarge current debtsPoor record of making payments in the pastG77
43Fair Credit Billing Act Requires creditors to correct billing mistakes brought to their attention.Requires creditor to inform consumers of steps they need to take to get the error corrected.
44Fair Credit Reporting Act Gives consumers the right to know what specific information credit bureaus are providing to potential creditors, employers, and insurers.
45Fair Debt Collection Practices Act Protects consumers from collection agents.Collection agents:Must identify themselves.Cannot tell others about the debt.Cannot harass debtor.
46Federal Trade Commission (FTC) Enforces laws on credit.
47BankruptcyLegal 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.
48US Bankruptcy Act of 1978 Chapter 7 (Liquidation) Draw up a petition listing assets and liabilities.Most of the debtor’s assets are sold to pay off creditors.Cannot release debt on alimony, child support, taxes, fines, educational loans, and court fees.Chapter 11 – (Reorganization) Businesses OnlyChapter 13Propose a plan for using future earnings and assets to eliminate debts over a period of time.
49Effects of Bankruptcy Kept on file with credit bureau for 10 years. Affects credit rating, future extensions of credit, loss of jobs, etc.