7Who uses credit: Credit used by people for personal reasons. Consumer CreditCommercial CreditCredit used by people for personal reasons.Credit used by businesses.
8Main Types of Credit What is credit? Credit is an agreement to obtain money, goods or services now in exchange for a promise to pay in the future.Main types of creditCharge AccountsCredit CardsInstallment CreditConsumer LoansWhat is credit?
9Main Types of Credit continued Charge account is a contract between creditors and debtors. Charge accounts allow debtors (customers) to receive goods or services from suppliers (creditor) and pay for them at a later date.Deadbeats: People or businesses who pay off the balance of their credit card bill every month with no interest expense.You want to be a deadbeat!!!!!
10Credit Cont.Charge 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. Example: A charge account with an electrician who re-wired a houseRevolving 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. Example: A charge account with Duke Power utility companyBudget Charge AccountsAllows you to pay for costly items in equal payments spread out over a period of time (6 months same as cash). Example: Home equity credit line
11Main Types of Credit continued Credit cards allow debtors (customers) to receive goods and services from suppliers (creditor) and pay for them later.Types and examples:BankMasterCard and VISATravel and entertainmentAmerican Express and Diner’s ClubOil companyBP Oil and ExxonRetail storeBelk and American Eagle
12Credit Examples cont. Single-Purpose Multipurpose 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
13Main Types of Credit continued Installment sales credit is a contract issued by the seller that requires intermittent payments at specified times such as bi-weekly or monthly.ExampleRooms To Go Furniture StoreConsumer loans require debtors to make monthly payments of a specified amount for a period of time.Borrowing $1,000 from a bank and agreeing to make $100 payments for ten months
14Credit Types: Secured vs. Unsecured Closed vs. Open Ended Cosigner 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.CosignerPerson responsible for the repayment of a loan if the original party does not pay.
15Business/Gov. forms of Credit Bonds – 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.
16Other Sources of Credit for Businesses Small Business AdministrationOffers a number of financial, technical, and management programs to help businesses.Credit BureauAn 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.
17DefinitionsTrade credit: a company receives goods from a supplier and pays for them laterLoan credit: borrowing money for a specific purposeSales credit: Charge a purchase at the time you buy a good or serviceFinance charge: Total $$ cost of credit including interest and all chargesDown payment: payment of part of the purchase price usually made at the time of purchase
18DefinitionsInstallment loan: borrower agrees to make monthly payments in specific amounts over a period of timePromissory note: a written promise to repay based on a debtor’s excellent credit historyCollateral: aka security; property that is used as security for a loan; the lender has the right to sell the property to get back the amount of the loan if you default or don’t repay itCosigner: person responsible for payment of the note if the signer doesn’t pay as promised
20Terms Review what is 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.Usury Laws :Restricts the amount of interest that can be charged.
21Why Use Credit?ConvenienceImmediate PossessionEmergencies
22Common advantages and disadvantages of businesses using credit Establishing favorable credit ratingKeeping business separate from personal expensesMinimizing record-keeping and receiptsKeeping track of what employees are spendingEarning rewardsGrowth of the EconomyBuying goods will help the economy expand.Experiencing theft of customer records/databasesOverbuying by employeesOverusing creditCredit FeesInterest paid on balance
23Results of OveruseRepossession = Loss of property because of failure to repay loan.Bankruptcy = Legal procedure for liquidating a business (or property owned by an individual) which cannot fully pay its debts out of its current assets.
24Cost of Credit continued 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 loanInterest 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= 500 x 7% x 3 months
25Cost of Credit continued How is time determined for a loan for each of the following lengths?Years =multiply by the number of yearsMonths=multiply by the portion of the year. Such as 2 months =2/12Days=portion of the year such as 30/360How 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 time determined for a loan for each of the following lengths?How is the maturity date calculated?How is a decreasing loan payment calculated?What is disclosed in APR?
26Business Credit Cont. How is a decreasing loan payment calculated? Interest is calculated on the amount of the loan that is unpaid.What is disclosed in Annual Percentage Rate (APR)?Percentage cost of creditService fees
27MATH Calculate Maturity Date Activity Converting Time and Percents ActivitySimple Interest ActivityInstallment Interest Activity
28Main factors examined for granting credit Creditors examine several factors about potential debtors when deciding whether to grant them credit, such as…….
29Main Factors Examined for Granting Credit The Four C’s of CreditCharacterCapitalCapacityCollateral
30The 4 C’s of Credit Character is Honesty to pay a debt when it is due.How past debt obligations were handled.Capacity refers to how much debt can comfortably be handled.Capital is current available assets that could be used to repay debt if income was to become unavailable.Collateral is security to help guarantee that the creditor will be repaid.
31Credit Worthiness Terms 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.CosignerPerson responsible for a loan if you, the original debtor, do not pay.
32Process of Obtaining Credit Credit ApplicationDocumentationProcessingUnderwritingClosingFunding
33Main Factors Examined for Granting Credit continued Credit Application:A form used by lenders to obtain information from applicants in order to make a decision about granting credit.Should be filled out completely, accurately and honestly.Requires signature of applicant, which indicates provided information is true.
34Main Factors Examined for Granting Credit continued 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 salaryFinancial institutionsType of data: Saving or checking account informationPersonal referencesType of data: Manner how personal business is conducted
35Main Factors Examined for Granting Credit continued Information provided by Credit BureausCredit 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.
36Credit documents:Checking loan features and credit activities for errors minimize potential credit problems. Two commonly used credit documents that assist with minimizing credit problems are:Credit ContractStatement of Account
37Credit Documents Credit contract Credit contracts are legal 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 chargesRepairs coveredAdd-on featuresReduction of finance charge if contract paid in full prior to ending dateReceive the copy of the contractRepossession conditions
38Credit Documents continued Statement of accountComes once credit is granted and purchases are made on credit.Comes monthly and includes summary of transactions completed during the billing period.What kind of information may be found on the statement of account?Balance dueAmounts charged or credited during the billing periodCurrent balanceMinimum amount of next paymentWhat kind of information may be found on the statement of account?
39Underwriting Examples: Equifax, Experian, and TransUnion. 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.
40Closing a loan and funding REAL ESTATEMeeting with lending financial institution and attorney to sign all documentsAttorney files documents indicating a lien on the property3 Days after closing, funds are releasedAUTO or PERSONALCar dealership or lending financial institution will process all documents indicating a lien on the propertyFinancial institution processes all documents
41Credit regulations and assistance options Credit Regulations: exist to protect rights of credit applicants and rights of credit users from fraudulent and unfair practices.
42Credit RegulationsTruth in Lending Law requires lenders to reveal the cost of credit (APR and finance charge) and terms before signing an application or contract.Equal Credit Opportunity Act allows credit applications be judged on financial responsibility of credit applicants. The three areas of responsibilities are low income, large debts, and a poor payment record.
43Credit Regulations continued 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.
44Credit Regulations continued Consumer Credit Reporting Reform Act requires that the credit reporting agency must be able to prove that credit information they provide is accurate.Fair Debt Collections Act prohibits deceptive, harassing, and unfair practices for collecting debt from debtors.
45Credit Regulations continued Credit Card Accountability, Responsibility, and Disclosure Act is an amendment to the Truth in Lending Act. The act institutes fair and transparent practices of providing credit. FTC: Federal Trade Commission enforces laws on credit
46Cost of Credit Terms Interest Rates Principal Time Factor 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.
47Terms Cont. Finance Charge or Fees Annual Percentage Rate (APR) Cost 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.
48Credit Regulations continued Some practices 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.
49Process of Obtaining Credit Credit ApplicationDocumentationProcessingUnderwritingClosingFunding
50Credit assistanceis available to minimize or eliminate credit problems of credit users.Credit assistance available includes:Debt repayment planCredit counselingBankruptcy
51Credit Assistance continued Debt repayment planAn agreement between a creditor and debtor that allows the debtor to pay off a debt with more manageable payment plan.Credit counselingProvides information on actions to take in order to manage debt.BankruptcyMay 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.
52Types of Bankruptcy 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 11 bankruptcy reorganization: what is it and how does it workChapter 13Propose a plan for using future earnings and assets to eliminate debts over a period of time.
53Effects of Bankruptcy Kept on file with credit bureau for 10 years. Affects credit rating, future extensions of credit, loss of jobs, etc.YouTube - Credit Card reform too late for one Small Business Owner