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Chapter 11 Consumer Credit.

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Presentation on theme: "Chapter 11 Consumer Credit."— Presentation transcript:

1 Chapter 11 Consumer Credit

2 Chapter 11.1 Understanding Credit
Objectives Explain basic principles of credit; Describe types of credit; and Analyze the benefits, costs, and drawbacks of using credit.

3 The Meaning of Credit Credit – is the supplying of money, goods, or services at present in exchange for the promise of future payment Creditor – business or organization that extends the credit Principal – the original amount borrowed

4 Credit Benefits All: Buyer – buys the item Seller – sells the item Bank – makes a profit from interest

5 Types of Credit Cash Credit – take out a loan and receive cash Sales Credit – buy now pay later Secured Credit – backed by a pledge of property, something of value as assurance that the loan will be repaid Security Interest – when the lender can take property if the loan is not repaid Collateral – the property that is pledged to guarantee repayment

6 Types of Credit Continued
Closed-ended Credit – a one-time extension of credit for a specific amount and time period Open-end Credit (Line of Credit) – can be used repeatedly

7 Types of Credit Continued
Single- Payment – the entire amount due in a single payment Installments – a set portion of the loan amount that the borrower must pay at regularly scheduled intervals Payment Schedule – specifies the dates on which installment payments are due and the amount of each installment

8 Pros and Cons of Credit Pros of Using Credit Temporary Expansion of Income – allows you to use goods and services before you’ve paid for them. Convenience – making large purchases without carrying cash, also refunds on returned items are usually easier Financial Responsibility – creating good credit provides proof to others of your financial responsibility

9 Pros and Cons of Credit Continued
Costs of Using Credit Finance Charges – total cost of using credit (interest and fees) Increased Cost of Merchandise – because retailers must pay banks to collect on their credit sales therefore, must offset that cost. Opportunity Cost – are needs and wants that they must give up because of the expense of paying back borrowed money + interests + fees.

10 Pros and Cons of Credit Continued
Cons of Using Credit Security Concerns – taking precautions against stolen cards Impulse Buying – more likely to buy items on the spur of the moment without careful consideration Overspending – spending more than you can afford Reclaimed Merchandise – the merchant could take items that you fail to pay for back

11 Deciding When to Use Credit
Alternatives to Using Credit Paying by cash or check Use a prepaid card or debit

12 Chapter 11.2 Qualifying for Credit
Objectives Analyze factors that affect the ability to get credit; Explain the significance of credit reports; and Describe how to establish and maintain a good credit history.

13 What Lenders to Consider
The Three C’s of Credit Character – a person’s reputations Capacity – a person’s earning power and ability to pay debts from regular income Capital – items owned, or assets

14  Credit History – pattern of past behavior in regard to repaying debt.

15 The Credit Application
Employment Residence Home Ownership – Rent / own a home. Home owner may be more permanent Monthly Housing Cost – if there enough money left to pay bills Credit References – checking if you have a good credit history with other businesses Collateral – property that you could use to secure the loan Bank References – checking how much you have in accounts

16 Equal Credit Opportunity Act
– a federal law ensuring that all consumers are given an equal chance to obtain credit.

17 Credit Reporting and Rating
Credit Bureau (Credit Reporting Agency) – a firm that collects information about the creditworthiness of consumers Credit Report – a record of particular consumer’s transactions and payment patterns Credit Rating – an evaluation of a consumers credit history

18 Credit Reporting and Rating Continued
Credit Score – a numerical rating, based on credit report information that represents a person’s level of creditworthiness Fair Credit Reporting Act – assures a consumer’s right to access his or her credit file and dispute incorrect information You should check your credit report once a year Information from your credit file may be given only to those who have a legitimate need for it

19 Establishing and Maintaining Credit
Step 1 Opening a checking and savings account Step 2 Put a utility bill in your name and pay it regularly Step 3 Apply for a credit card from a local store and pay bills on time

20 Establishing and Maintaining Credit
Cosigner – a person with a strong established credit history who signs the credit application and contract along with the borrower Secured Credit Card – one that requires you to keep a savings account as security A disadvantage is that your money is tied up and can’t be used for other purposes

21 Chapter 11.3 Managing Credit Cards
Objectives Identify sources and types of credit cards; Evaluate credit card terms and conditions; Give guidelines for using credit cards wisely; and Explain how to resolve credit card billing problems.

22 Types of Credit Cards Private Label Cards – can be used only at a single retailer General Purpose Cards (bank card or major credit card) – can be used at millions of different business across the country and around the world

23 Types of Credit Cards Continued
Revolving Credit Cards – has payment options: pay in full, only a minimum payment, any amount in between Charge Card – charge must be paid in full each month

24 Credit Card Variations
Prestige / Status Cards – generally have higher annual fee, highly promoted to consumers with established credit Co-branded Cards – carry the name of not only a card network and possibly a bank but also another company

25 Credit Card Variations Continued
Affinity Cards – carries the name of a non-profit or charitable organization Smart Card – has a computer chip used for online shopping

26 Comparing Credit Cards Terms
Annual Fee Annual Percentage Rate (APR) – is the annual rate of interest that is charged for using credit Whether the APR may change Variable Rate – means the APR can go up or down depending on economic factors Teaser Rate – a low introductory rate that is in effect for only a limited time.

27 Comparing Credit Cards Terms Continued
Computation Method – agreement specifies how finance charges are computed Minimum Payment Grace Period – period of time during which the balance may be paid in full to avoid finance charges Minimum Finance Charge

28 Comparing Credit Cards Terms Continued
Other Fees – Late payments, cash advances, credit limit, & returned checks Credit Limit – is the maximum amount of credit that the creditor will extend to the borrower Special Features and Services – discounts, frequent flyer miles, insurance, etc…

29 Finance Charge Computation Methods (pg. 274)
Previous Balance Adjusted Balance Average Daily Balance (excluding new purchases) Average Daily Balance (including new purchases) Two-Cycle Average Daily Balance

30 Truth in Lending Act – requires creditors to
Truth in Lending Act – requires creditors to adequately inform consumers about credit terms and costs. Lenders must disclose specific information such as APR, variable rates, & fees. They should be clear and easy to read.

31 Using Credit Cards Wisely
Remember that your credit limit is a maximum, not a goal. Save credit card receipts. Set your own limit for how much you want to charge each month. Try to pay the full balance each month to avoid finance charges. If you can’t pay full amount the pay your largest amount that you can. Pay bills on time.

32 Safeguarding Your Card
Credit Card Fraud – Unauthorized use of credit cards or account numbers. Put in safe place Keep it in your sight Don’t leave without it Keep records private Consumer Credit Protection Act – says the maximum amount for which you may be held liable if someone uses the card illegally is $50

33 Reviewing the Monthly Statements
Online access Check the list of transactions Verify personal information Pay attention to fees

34 Resolving Billing Problems
Fair Credit Billing Act – outlines procedures for settling credit card billing disputes. Must write a letter, sent within 60 days Name, account number, description, copies Use certified mail and get receipt They should respond in 30 days and resolve it in 90 days They will investigate Can withhold payment for disputed amount but are required to pay all other expenses. If error is confirmed, creditor pays full disputed amount plus all additional fees

35 Chapter 11.4 Taking Out a Loan
Objectives Discuss sources and types of loans; Explain provisions that may be found in loan contracts; and Describe the loan process from application to payment.

36 Sources & Types of Loans
Loans from Financial Institutions Offer a variety of loans; interest rate & other terms depend on type of loan Home Loans – Closed-end installment loans; home serves as security for loan; term is usually 15, 20, 30 years

37 Loans from Financial Institutions Continued
Home Equity Loan – closed or open-end loans, used for a variety of purposes; available whenever homeowner needs/wants to use it after building equity Home Improvement Loan – repair or improve home; increase it’s value; closed-end loan; secured by home; five-year term usually Vehicle Loan – purchase a new or used vehicle; closed-end; three to five years

38 Loans from Financial Institutions Continued
Personal line of Credit – open-end unsecured loan; consumer can draw upon it when needed up to a preset limit Education or Student Loans – pay for higher education, low interest rates, flexible repayment schedule

39 Loans from Consumer Finance Companies
-businesses that specialize in making small or personal loans Give credit to those who can not get credit elsewhere negative credit history low income minimal assets

40 Loans from Consumer Finance Companies Continued
Higher interest rate They borrow the money and pay interest Costs include: credit investigation, record keeping, small loans so they can not absorb costs like banks Greater credit risk – higher collection costs & bad debts

41 “Payday” Loans -cash advance loans Write a personal check for amount you want to borrow Gives the borrower the amount minus fees until borrower’s next pay day Fees = a percentage or fee for every $50 or $100 loaned APR extremely high Creates a cycle of debt difficult to break

42 Insurance Policy Loans
Borrow against the amount paid in premiums No credit investigation Policy is the security Interest rate lower than bank rates

43 Insurance Policy Loans Continued
Drawbacks Pays a benefit to survivors in event of a death, if an outstanding loan exists, then company will deduct any amount still owed before paying benefit Pay back loan, you might only be charged for interest

44 Private Loans – borrow from family or friend Guidelines to help pay back Keep loan small Interest rate? Payment plan Specific about terms-get in writing Pay promptly Get a signed receipt

45 Loans from Other sources
Credit card Pawnbroker – trade a valuable item for cash; holds item for 30 days; then you buy back your item at higher price then amount borrowed Loan sharks – avoid dealing with unlicensed lenders who operate illegally and charge excessive interest

46 Loan Contract Provisions
– shop around; look at APR, payment due dates, charged for penalty if you pay back the loan ahead of schedule; down payment Balloon Payment Clause – final payment that is much larger than the other installments Acceleration Clause – gives the seller the right to declare the whole balance due if the buyer misses even one installment payment Add-On Clause – allows additional purchases to be added to an installment contract

47 Getting the Loan Apply by phone, online, or in person Provide info about income, employment history, residence, and credit history Run a credit check Sign the loan contract Credit life insurance – optional

48 Getting the Loan Continued
Right of rescission – right to cancel the loan within 3 business days if you are using your home as security; must give notice in writing Loan contract outlines payment schedule-pay installments, online, automatic deductions from bank account; use payment booklet

49 Chapter 11.5 Handling Debt Problems
Objectives Analyze the consequences of excess debt; Identify warning signs of excess debt; and Describe assistance and remedies for debt problems.

50 Dangers of Excess Debt Inability to keep up with normal expenses from one paycheck to the next. Getting caught in a cycle of taking on new debt to pay off old debt. Stress over constant financial worries. Serious damage to one’s credit history. Inability to save or invest sufficiently to reach financial goals.

51 Debt Collection Methods
Delinquent – payments are overdue. Defaults – failure to fulfill the obligations of the loan, and a warning that the creditor is taking more aggressive actions toward collecting the debt. Repossession – taking away property due to failure to make loan or credit payments (car) Shut-offs – discontinue providing the service (electricity)

52 Debt Collection Methods Continued
Collection Agencies – a business that collects unpaid debt for others. This will result in seriously lowering your credit rating. Agencies get a high incentive for being relentless and aggressive in their collection tactics. Fair Debt collection Practices Act – protects consumers against abusive practices of debt collectors.

53 Debt Collection Methods Continued
Judgments – a court ruling that says the debt must be paid Liens – a claim upon property to satisfy a debt. Put on public record Appear on the debtor’s credit history Lower credit rating Garnishment – the legal withholding of a specified sum from a person’s wages in order to collect a debt

54 Avoiding Excess Debt Set reasonable limits on debt Stay within those limits Set aside money for emergencies

55 Warning Signs Reaching a credit limit on most credit cards Skipping payments on some bills in order to pay others Using cash advances on one credit card to pay off another Using credit cards for day-to-day purchases

56 Climbing Out of Debt Workings with Creditors – letting them know that you’re struggling and arranging mutual solutions Self-help Measures – making paying off debt your top priority Credit Counseling – guidance provided by trained people who help consumers learn to live within their means Debt Consolidation Loans – combines all existing debt into a new loan to pay off all previous creditors

57 Bankruptcy: A Last Resort
Bankruptcy – legal relief from repaying certain debt, most negative information possible on a credit report, and last 7-10 years. Types: Chapter 7 – sale of all the debtor’s property except that related to continuing employment. Chapter 13 – debtor proposes a plan which must be approved and supervised by the court

58 Rebuilding Credit Takes time Starting new credit habits Avoid high balances on credit

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