Presentation on theme: "Credit Management Chapter 16 - Credit in America Chapter 17 - Credit Records & Laws Chapter 18 - Responsibilities and Costs of Credit Chapter 19 - Problems."— Presentation transcript:
Credit Management Chapter 16 - Credit in America Chapter 17 - Credit Records & Laws Chapter 18 - Responsibilities and Costs of Credit Chapter 19 - Problems with Credit
Credit in America The History of Credit –Early Years Accounts at the general store Banks were reluctant to loan, charged high interest –The 1900s Began to understand advantages of credit Laws enacted to protect consumers –Today Easier to use
Vocabulary of Credit Debtor - person who borrows money Creditor - person/company who loans money Capital - property you possess that is worth more than your debts Collateral - property pledged to assure repayment of a loan Finance change - the interest you pay for the use of credit (handling charge, service charge, carrying charge)
More Vocabulary Minimum payment - least amount you can pay that month Due date - date payment is due Late fee - amount charged if payment is not made on time Installment agreement - contract you sign for an expensive purchase wherein you agree to make regular payments for a period of time Secured loan - loan that uses the goods being purchased as collateral
Advantages of Credit If used correctly, credit can: 1.Expand your purchasing power 2.Raise your standard of living 3.Purchase expensive items earlier than if you had to pay cash 4.Can provide emergency funds 5.Convenient 6.Provides proof of purchase
Disadvantages of Credit 1.Credit purchases may cost more than cash purchases. 2.You tie up future income. 3.Can lead to overspending.
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Kinds of Credit Open-Ended Credit –An agreement to lend the borrower an amount up to a stated limit and to allow borrowing up to that limit again whenever the balance falls below it Closed End Credit –A loan for a specific amount that must be repaid in full by a stated due date Service Credit –An agreement to have a service performed and pay for it later
Open-Ended Credit Open 30-day accounts –A credit agreement that must be paid in full every 30 days. Revolving Credit Accounts –A credit agreement that allows you the option of paying a minimum amount each month (credit cards)
Shopping for a Credit Card Need to consider and compare: 1.Annual percentage rate (APR) 2.Free Period - (grace period) allows you to avoid finance charges if balance paid in full by certain date 3.Annual Fees 4.Transaction Fees and Late Fees 5.Method of Calculating the Finance Charge
Closed-End Credit Does not allow for continuous borrowing Set payments (installments) Sometimes called an installment loan Must include: amount loaned, total finance charge, amount of each payment Usually requires a down payment Items bought serve as collateral
Service Credit An agreement to have a service performed now and paid for later Almost everyone uses some form of service credit Examples: phone, utilities, doctors, etc. Most do not charge a finance charge
Sources of Credit Retail Stores Banks and Credit Unions Finance Companies Pawnbrokers Private Lenders Other sources –Life insurance policies –Certificates of deposit
Establishing Good Credit Credit Records –Credit History is the complete record of your borrowing and repayment performance Credit File –On file with a credit bureau (a company that gathers, stores, and sells credit information to business subscribers) –Three major U.S. Credit Bureaus - Experian, Equifax, and Trans Union
Credit Report A written statement of a consumer’s credit history You can request a copy of your credit report at any time –Normally there is a small fee ($5 - $15) –If you are denied credit, you can get a FREE credit report if you ask within 30 days of being denied credit
Credit Report Information Any public information becomes a part of your credit report –Bankruptcy, marriage, divorce, paying property taxes, job promotions, lawsuits, etc. Subscribers pay a monthly fee to the credit bureaus and provide the information to the bureau
Creditworthiness Are you a good risk for credit? Creditors will look at five basic qualifications: 1.Character 2.Capacity 3.Capital 4.Conditions 5.Collateral
Character A responsible attitude toward living up to agreements. Will you repay the debt? Credit history will show if you pay your bills on time which shows good character. Creditors also look for stability. How often do you move or change jobs?
Capacity The financial ability to repay a loan with present income. Can you repay the debt? Creditors will want to know if you have the financial resources to add another bill to your monthly expenses.
Capital The property that you possess that is worth more than your debts. Is the creditor fully protected if you fail to repay? If the credit is unsecured, do you have enough to cover the debt?
Conditions The state of the economy can affect your ability to repay. What general economic conditions can affect your repayment of debt? Will look at your job stability - do you work in an industry that is struggling? -do you live in an area that is struggling?
Collateral Property pledged to assure repayment of a loan. Similar to capital What assets back up your promise to pay?
Questions a Creditor May Legally Ask Personal Information (Name, age, number of dependents, phone #) Employment Information (place and length of employment, history) Obligations (alimony, child support, outstanding debts and accounts) Residence (own or rent, immigration status, how long there, history)
Getting Started Establish a Savings Account Open a Checking Account –Shows that you can handle money Open a Store Credit Account Get a Small Loan Apply for a Credit Card
Assignment Chapter 17 worksheets are due on Wednesday at the BEGINNING of class Have them complete BEFORE you come to class YES THEY WILL BE GRADED!!!
Credit Ratings A measure of creditworthiness Excellent (A rating): pay bills before due date, well established, has not missed any payments, paid more than the minimum Good (B rating): pay bills on due date or within grace period, does not miss payments Fair credit rating: usually pays within grace period but may be late occasionally Poor credit rating: payments not regular, may miss a payment, frequently reminded to make a payment
What’s in a Credit Report? Summary of Information Public Record Information Credit Information Account Detail Requests for Credit History Personal Information
Fair Credit Reporting Act If you are denied credit: You have the right to know what is in your credit file and who has seen your file Can see your file at no charge if requested within 30 days of denial A small fee will be charged any other time You have the right to have inaccurate information investigated and removed; or write a statement re: the information giving your side of the story
Fair Credit Billing Act Creditors must resolve billing errors within a specified period of time You have to notify the creditor of the error - must be in writing and mailed within 60 days after you receive the statement Creditor must acknowledge your complaint within 30 days and correct (or show why you owe) error within 90 days
Equal Credit Opportunity Act Designed to prevent discrimination in judgment of creditworthiness Credit may not be denied: –solely because your are a woman, single, married divorced, separated, or widowed –Because of religion, nationality, race, color, or age. –Because you receive public assistance, unemployment, social security, or retirement benefits
Credit applications can be oral or written (creditors are prohibited from asking certain questions) Creditor may not discourage you from applying for credit for any reason prohibited by the act A denial must be sent to you in writing and a specific reason must be listed New accounts must list both spouses as responsible for payments
Fair Debt Collection Practices Act Designed to eliminate abusive collection practices by debt collectors Cannot use threats, obscenities, and false or misleading statements Restricts time and frequency of contacts Must verify accuracy of bills and allow the consumer the opportunity to clarify
Using Credit Responsibly Responsibilities of Consumer Credit –To Yourself –To Creditors –Creditors’ Responsibility to You
Responsibilities to Yourself Use credit wisely Don’t live beyond your means Check out the businesses where you make credit purchases Comparison shop Have the right attitude about using credit
Responsibilities to Creditors Limit your spending to amounts you can repay according to contract terms Read and understand all terms of the agreement Contact the creditor immediately if you find an error If you can’t make a payment, contact the creditor
Creditors’ Responsibilities to Yourself Assist consumers in making wise decisions Inform customers about all rules and regulations, and fees Cooperate with established credit reporting agencies Establish and carry out sound lending and credit policies Establish and maintain fair and reasonable methods of contacting customers
Protecting Yourself from Credit Card Fraud Costs businesses and consumers millions of dollars a year Most common type of fraud is illegal use or a lost or stolen credit card –Card holder’s liability is limited to $50 –Businesses may lose money
Safeguard Your Cards Sign as soon as you receive it Carry only the cards you need Keep card information in a safe place Notify creditor IMMEDIATELY if card is lost or stolen Watch your card during transactions »Continued
More Safeguarding Tear up any carbons or extra copies Do not lend your card to anyone Destroy expired cards Don’t give credit card information by phone to people or business you don’t know Keep your receipts and verify with your statement
Avoiding Unnecessary Credit Costs Accept only the amount of credit that you need. Do not increase credit spending when your income increases. Keep the number of credit cards to a minimum. Pay cash for purchases under $25. Understand the cost of credit. Shop for loans. Use credit to beat inflation. Time your credit card purchases carefully. Take full advantage of rebate programs.
Factors Affecting Credit Costs Method used to compute finance charges. Source of credit Total amount financed Length of time you are making payments Ability to repay debt Type of credit selected Collateral or security offered Interest rates Economic Conditions The business’s costs of providing credit
Computing Costs of Credit Simple Interest Formula –I = P x R x T Annual Percentage Rate Formula –(2 x n x f)/P(N+1) Credit Card Billings –Adjusted Balance Method –Previous Balance Method –Average Daily Balance Method
Solving Credit Problems Major disadvantage to credit is it can lead to overspending Usually does not happen suddenly –Years of poor planning –Impulse buying –Careless budgeting
The 20/10 Rule Credit counselors suggest 20/10 Rule Total borrowing should not exceed 20% of your yearly take-home pay Don’t take on monthly payment that total more than 10% of your monthly take home pay Does not apply to mortgages
Credit Counseling Private or government-sponsored services Fees usually based on ability to pay Help set up budgets and show you best way to use your income Cannot get loans from them
Debt Adjustment For people who need stricter discipline that advice from a counselor Charge fees and require contracts They take over –Contact creditors to work out payment plan –Control your accounts and pay your bills
Credit Repair Need to repair your credit rating Obtain copies of your credit reports –Challenge any incorrect information Take steps to assure the information reported about you is correct –Clear up debts responsibly –Make payment arrangements –Request that corrected information be supplied to credit bureaus
Legal Recourse When debtors are in severe debt trouble and cannot meet their bills, final most serious step is bankruptcy –Legal process that relives debtors of the responsibility of paying their debts or protects them while they try to repay Bankruptcy is a second chance but carries serious consequences
Purpose of Bankruptcy Laws Two goals of bankruptcy law: 1.Protect debtors by giving them a fresh start 2.Give fair treatment to creditors competing for debtors’ assets Original federal Bankruptcy Act was 1898 Bankruptcy Reform Act of 1994 tightened rules for bankruptcy
Types of Bankruptcy Voluntary and Involuntary Voluntary –Most common kind –Occurs when you file a petition with a federal court asking to be declared bankrupt Involuntary –Occurs when creditors file a petition with the court, asking the court to declare you bankrupt –Does not occur often because creditors prefer to be repaid in full
Voluntary Bankruptcy: How it Works Court notifies newspapers and creditors Creditors may file claims Court collects your assets & sells your property as needed If assets do not cover all liabilities, each creditor is given a proportional share Remainder of debt is discharged –Some debts cannot be discharged: taxes, child support, and alimony Once declared bankrupt, cannot file again for six years
Types of Bankruptcy Liquidation or Reorganization Chapter 11 –Reorganization for businesses that allows them to continue operating under supervision Chapter 7 –Commonly called straight bankruptcy –Wipes out most debt for giving up most assets –See next slide for exempted items Chapter 13 –Reorganization form for individuals that allows them to pay off their debts over three to five years
Federally Exempted Items (as of January 1, 2001) 1.$15,000 equity in a home or burial plot ($30,000 on joint bankruptcy) 2.$2,400 interest in a motor vehicle 3.Items worth up to $400 for a single item for household goods and furnishings, appliances, clothing, and personal items, for a total of not more than $8,000 4.$1,000 in jewelry 5.$1,500 in tools, books, and other items used in a trade or business 6.Other property worth up to $800, plus up to $7,500 of the unused part of the $15,000 exemption for equity in a home or burial plot
More About Bankruptcy If considering bankruptcy, seek legal advice –Legal fees range from $150 to $1,500 –Can help you protect some of your assets Creditors may ask debtor to repay debt even after bankruptcy has discharge them (reaffirmation)
Reaffirmation May wish to reaffirm a loan that someone co-signed for you May choose to reaffirm rather than allow the collateral to be repossessed Requires a court hearing and debtors have 30 days to change their minds Creditors may NOT harass debtors
Major Causes of Bankruptcy Business Failure –As a sole proprietor, your personal assets can be taken for your business Emotional Spending Failure to Budget and Plan –Bankruptcy is not limited to poor people Catastrophic Injury or Illness
Advantages of Bankruptcy 1.Debts are erased. –Offers a fresh start. 2.Exempted assets are retained. –Able to retain certain assets to help start over. 3.Certain incomes are unaffected. –Bankruptcy does not affect: social security, veterans’ benefits, unemployment compensation, alimony, child support, disability payments, and payments from pensions. 4.The cost is small. –Fees small compared to amount of financial relief provided.
Disadvantages of Bankruptcy 1.Credit is damaged. –Judgment cannot be wiped off your record for 10 years. 2.Property is lost. –Property you get to keep is limited to the exemptions. 3.Some obligations remain. –Not ALL debt is erased. 4.Some debts can be reaffirmed. 5.Co-signers must pay. –If you do not reaffirm a debt that has a co-signer, they will be forced to pay the debt off.