2Topics: Main Types Of Credit Common Advantages and Disadvantages of businesses using creditCost of CreditMain factors examined for granting creditCredit DocumentsCredit RegulationsCredit Assistance
3CREDIT…What is Credit?What are the different types of Consumer Credit?What are some Advantages/Disadvantages to using Credit?How do you establish credit?What are Loan SourcesHow do you ‘Shop’ for Credit?What is Good Credit?What is a Credit ReportWhat are some signs of a debt problem?What is Bankruptcy?
5Main Types of Credit Consumer Credit Commercial Credit A debt that someone incurs for the purpose of purchasing a good or service. This includes purchases made on credit cards, lines of credit and some loans.Consumer DebtCommercial CreditPre-approved amount of money issued by a bank to a company that can be accessed by the borrowing company at any time to help meet various financial obligations.Commercial credit is commonly used to fund common day-to-day operations and is often paid back once funds become available.May be called “Commercial Line of Credit”
6Main Types of CreditCredit: An agreement to obtain money, goods or services now in exchange for a promise to pay in the futureMain Types of CreditCharge AccountsCredit CardsInstallment CreditConsumer Loans
7Charge AccountsA Charge Account represents 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.ExamplesRegular AccountsBudget AccountsRevolving Accounts
8Charge Accounts Regular Accounts Budget Accounts Requires the buyer to make a full payment within a stated periodUsed for everyday needs and small purchasesExample: charge account with an electrician who re-wired a houseBudget AccountsRequires that a customer make payments of a fixed amount over several monthsExample: A charge account with Progress Energy utility company
9Charge Accounts Revolving Accounts Most popular form of sales credit Charge purchases at any time, but only part of the debt must be paid each monthA credit limit is set for the maximum amount to be spentPayments are required once a month, but it doesn’t have to be the FULL paymentA finance charge is added if the total bill is not paid (total dollar amount spent plus interest)
10Credit CardsCredit Cards allow debtors (customers) to receive goods and services from suppliers (creditor) using credit cards and pay for them later.Types of credit cardsBankA bank will pay the business (taking liability for payment)Customers are required to pay a fee for using the credit cardExamplesMasterCard, VISA
11Credit Cards Travel/Entertainment Oil Company Retail Store Pay a yearly membership feeExpected to pay the full balance each monthExamples: American Express, Diners ClubOil CompanyExamples: BP Oil, ExxonRetail StoreCards offered by a particular storeExamples: Belk, Kohl’s
12Installment CreditInstallment Sales Credit is a contract issued by the seller that requires intermittent payments at specified times such as bi-weekly or monthly.Customers are required to make a down payment which is a portion of the entire purchase.Most often used for furniture and household appliancesExamples:Rooms to Go FurnitureAaron’s
13Consumer LoansA Consumer Loan is when a buyer agrees to make monthly payments in specific amounts over a period of time.Example –Student Loans, Automobile Loans, Home Loans, etc.Borrowing $1,000 from a bank and agreeing to make $100 payments for a period of time.
14Consumer Loans Two Parties: The borrower receives money up front and agrees to pay the price back in full plus interestThe lender needs some assurance that the borrower will pay the money back.Promissory noteCollateral (property used as security)Cosigner
15Consumer Loans Promissory Note Collateral Cosigner A written promise to repay based on a debtor’s excellent credit history.Guarantees that ‘someone’ will repay the loan:CollateralAn item promised to the lender if the borrower does not pay back the loan.CosignerA person who agrees to pay back the loan if the borrower fails to.
17Business Advantages for using Credit Establishing a favorable credit ratingKeeping business separate from personal expensesMinimizing record-keeping and receiptsKeeping track of what employees are spendingEarning rewards
18Business Disadvantages for Using Credit Experiencing theft of customer records/databasesOverbuying by employeesOverusing credit
20Cost of Credit Interest (I) The cost of using someone else’s money Principal (P)Amount of the loanInterest Rate (R)Percent of interest charged or earnedTime (T)The length of time for which the interest will be chargedExpressed in years
21Cost of Credit Simple Interest I=P*R*T Time in Years Time in Months Multiply by the number of yearsTime in MonthsDivide the number of months by 12Time in DaysDivide the number of days by 360
22Cost of Credit Maturity Date The date on which a loan must be repaid MonthsThe maturity date is the same day of the month that the loan was madeExample: One month loan on January 15 will be due on February 15DaysDetermine the day the loan was made, and then count the exact number of days of maturityExample: A 90-day loan made on March 4 will be due on June 2
23Cost of CreditInstallment Interest: When a loan is repaid in partial paymentsCalculation:Calculate out how much Interest you oweI = P x R x TCalculate the Total Cost of the loanTotal Cost = P + I
24Cost of Credit Based on how often you are required to make payments Calculation:Determine the Number Of PaymentsBased on how often you are required to make paymentsGenerally, you make monthly payments# payments = # years * 12 [because there are 12 months/yr]Calculate your PaymentsPayments = Total Cost / # of payments
25Cost of Credit Decreasing Loan Payments Calculation: Interest is calculated on the amount that is unpaid at the end of each monthCalculation:Interest is calculated on the amount of the loan that is unpaid.Interest = Unpaid Balance * Interest rateRemember: The amount of interest is based on the portion of the year.1 month is 1/12th of a yearInterest Rate for 1 month = Annual Interest Rate / 12Monthly Payment = Interest + Loan Repayment
26Cost of Credit Annual Percentage Rate (APR) A disclosure required by law on all credit agreementsStates the percentage cost of credit on a yearly basisAlso includes service fees
28Three C’s of Credit Character Capacity Capital Honesty to pay a debt when it is due.How past debt obligations were handledCapacityRefers to a person’s ability to pay a debt when it is dueHow much debt can a person handleCapitalCurrent available assets that could be used to repay debt if income was to become unavailable
29Credit ApplicationA form on which you provide information needed by a lender to make a decision about granting credit.Credit references businesses or individuals who are able and willing to provide information about your creditworthinessShould be filled out completely, accurately, and honestly.Requires signature of applicant, which indicates provided information is true.
30Creditworthiness:An assessment of the likelihood that a borrower will default on their debt obligations.Based Upon:History of RepaymentCredit Score
31Documenting Credit Data Credit data makes up the information that applicants provide on credit applicationsDocumentation of credit data may be verified by:Employers (former and current)Type of data: Employment dates and salaryFinancial InstitutionsType of data: Saving or checking accountsPersonal ReferencesType of data: Manner how personal business is conducted
32Credit Bureaus What is a Credit Bureau? A company that gathers information on credit users (credit reporting agency)Credit 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.
33Credit BureausCredit bureaus create a credit report to show the debts an individual owes, how often the individual uses credit, and whether the individual will pay their debts on time.3 Main Credit BureausEquifaxTransUnionExperian
34Credit Documents Credit Contracts KWYS “Know what you’re signing” Credit contracts are legal binding documents that allow debtors to use credit to obtain goods and services.
35Credit Documents Credit Contracts 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
36Credit Documents Statement of Account “The Bill” A record of the transactions completed during the billing periodStatement includes…Balance that was due from last statementAmounts charged during the monthAmounts credited to your account for payments or for returned itemsThe current balance (old balance + finance charges +purchases – payments)The minimum payment due
38Credit Regulations Truth-in-Lending Law Requires lenders to reveal the cost of credit (APR and finance charge) and terms before signing an application or contractProtects consumers against unauthorized use of credit cards
39Credit Regulations Equal Credit Opportunity Act Prohibits creditors from denying a person credit because of age, race, sex, or marital statusAllows 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.
40Credit Regulations Fair Credit Billing Act Requires creditors to correct billing mistakes promptly.Fair Credit Reporting ActAllows individuals to scrutinize any information shared by credit reporting agencies with potential creditors and employers.Individuals also may correct any incorrect credit information.
41Credit Regulations 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 ActProhibits deceptive, harassing, and unfair practices for collecting debt from debtors.
42Credit RegulationsCredit Card Accountability, Responsibility, and Disclosure ActAn amendment to the Truth in Lending ActThe act institutes fair and transparent practices of providing credit.
43Credit Regulations Some practices are 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.
44Credit Assistance Debt Repayment Plan Credit Counseling An agreement between a creditor and debtor that allows the debtor to pay off a debt with more manageable payment planCredit CounselingProvides information on actions to take in order to manage debt (reduce spending and eliminate credit difficulties)
45Credit Assistance Bankruptcy The legal process of reducing or eliminating an amount owedOnly should be used for extreme situationsStays on your credit record for 10 yearsChapter 7 – must sell certain personal belongings, use proceeds to repay debtsChapter 13 – can retain most personal property, but must propose a repayment plan, go to credit counseling, receive financial management education, and be employed