Presentation on theme: "Credit Management Chapter 16 - Credit in America"— Presentation transcript:
1Credit Management Chapter 16 - Credit in America Chapter 17 - Credit Records & LawsChapter 18 - Responsibilities andCosts of CreditChapter 19 - Problems with Credit
2Credit in America The History of Credit Early Years The 1900s Today Accounts at the general storeBanks were reluctant to loan, charged high interestThe 1900sBegan to understand advantages of creditLaws enacted to protect consumersTodayEasier to use
3Vocabulary of Credit Debtor - person who borrows money Creditor - person/company who loans moneyCapital - property you possess that is worth more than your debtsCollateral - property pledged to assure repayment of a loanFinance change - the interest you pay for the use of credit (handling charge, service charge, carrying charge)
4More Vocabulary Minimum payment - least amount you can pay that month Due date - date payment is dueLate fee - amount charged if payment is not made on timeInstallment agreement - contract you sign for an expensive purchase wherein you agree to make regular payments for a period of timeSecured loan - loan that uses the goods being purchased as collateral
5Advantages of Credit If used correctly, credit can: Expand your purchasing powerRaise your standard of livingPurchase expensive items earlier than if you had to pay cashCan provide emergency fundsConvenientProvides proof of purchase
6Disadvantages of Credit Credit purchases may cost more than cash purchases.You tie up future income.Can lead to overspending.
8Kinds of Credit Open-Ended Credit Closed End Credit Service 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 itClosed End CreditA loan for a specific amount that must be repaid in full by a stated due dateService CreditAn agreement to have a service performed and pay for it later
9Open-Ended Credit Open 30-day accounts Revolving Credit Accounts A credit agreement that must be paid in full every 30 days.Revolving Credit AccountsA credit agreement that allows you the option of paying a minimum amount each month (credit cards)
10Shopping for a Credit Card Need to consider and compare:Annual percentage rate (APR)Free Period - (grace period) allows you to avoid finance charges if balance paid in full by certain dateAnnual FeesTransaction Fees and Late FeesMethod of Calculating the Finance Charge
11Closed-End Credit Does not allow for continuous borrowing Set payments (installments)Sometimes called an installment loanMust include: amount loaned, total finance charge, amount of each paymentUsually requires a down paymentItems bought serve as collateral
12Service CreditAn agreement to have a service performed now and paid for laterAlmost everyone uses some form of service creditExamples: phone, utilities, doctors, etc.Most do not charge a finance charge
13Sources of Credit Retail Stores Banks and Credit Unions Finance CompaniesPawnbrokersPrivate LendersOther sourcesLife insurance policiesCertificates of deposit
14Establishing Good Credit Credit RecordsCredit History is the complete record of your borrowing and repayment performanceCredit FileOn 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
15Credit Report A written statement of a consumer’s credit history You can request a copy of your credit report at any timeNormally 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
16Credit Report Information Any public information becomes a part of your credit reportBankruptcy, 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
17Creditworthiness Are you a good risk for credit? Creditors will look at five basic qualifications:CharacterCapacityCapitalConditionsCollateral
18Character 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?
19Capacity 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.
20CapitalThe 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?
21Conditions 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?
22Collateral Property pledged to assure repayment of a loan. Similar to capitalWhat assets back up your promise to pay?
23Questions 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)
24Getting Started Establish a Savings Account Open a Checking Account Shows that you can handle moneyOpen a Store Credit AccountGet a Small LoanApply for a Credit Card
25AssignmentChapter 17 worksheets are due on Wednesday at the BEGINNING of classHave them complete BEFORE you come to classYES THEY WILL BE GRADED!!!
26Credit Ratings A measure of creditworthiness Excellent (A rating): pay bills before due date, well established, has not missed any payments, paid more than the minimumGood (B rating): pay bills on due date or within grace period, does not miss paymentsFair credit rating: usually pays within grace period but may be late occasionallyPoor credit rating: payments not regular, may miss a payment, frequently reminded to make a payment
27What’s in a Credit Report? Summary of InformationPublic Record InformationCredit InformationAccount DetailRequests for Credit HistoryPersonal Information
28Fair 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 fileCan see your file at no charge if requested within 30 days of denialA small fee will be charged any other timeYou have the right to have inaccurate information investigated and removed; or write a statement re: the information giving your side of the story
29Fair Credit Billing Act Creditors must resolve billing errors within a specified period of timeYou have to notify the creditor of the error - must be in writing and mailed within 60 days after you receive the statementCreditor must acknowledge your complaint within 30 days and correct (or show why you owe) error within 90 days
30Equal Credit Opportunity Act Designed to prevent discrimination in judgment of creditworthinessCredit may not be denied:solely because your are a woman, single, married divorced, separated, or widowedBecause of religion, nationality, race, color, or age.Because you receive public assistance, unemployment, social security, or retirement benefits
31Credit 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 actA denial must be sent to you in writing and a specific reason must be listedNew accounts must list both spouses as responsible for payments
32Fair Debt Collection Practices Act Designed to eliminate abusive collection practices by debt collectorsCannot use threats, obscenities, and false or misleading statementsRestricts time and frequency of contactsMust verify accuracy of bills and allow the consumer the opportunity to clarify
33Using Credit Responsibly Responsibilities of Consumer CreditTo YourselfTo CreditorsCreditors’ Responsibility to You
34Responsibilities to Yourself Use credit wiselyDon’t live beyond your meansCheck out the businesses where you make credit purchasesComparison shopHave the right attitude about using credit
35Responsibilities to Creditors Limit your spending to amounts you can repay according to contract termsRead and understand all terms of the agreementContact the creditor immediately if you find an errorIf you can’t make a payment, contact the creditor
36Creditors’ Responsibilities to Yourself Assist consumers in making wise decisionsInform customers about all rules and regulations, and feesCooperate with established credit reporting agenciesEstablish and carry out sound lending and credit policiesEstablish and maintain fair and reasonable methods of contacting customers
37Protecting Yourself from Credit Card Fraud Costs businesses and consumers millions of dollars a yearMost common type of fraud is illegal use or a lost or stolen credit cardCard holder’s liability is limited to $50Businesses may lose money
38Safeguard Your Cards Sign as soon as you receive it Carry only the cards you needKeep card information in a safe placeNotify creditor IMMEDIATELY if card is lost or stolenWatch your card during transactionsContinued
39More Safeguarding Tear up any carbons or extra copies Do not lend your card to anyoneDestroy expired cardsDon’t give credit card information by phone to people or business you don’t knowKeep your receipts and verify with your statement
41Avoiding 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.
42Factors Affecting Credit Costs Method used to compute finance charges.Source of creditTotal amount financedLength of time you are making paymentsAbility to repay debtType of credit selectedCollateral or security offeredInterest ratesEconomic ConditionsThe business’s costs of providing credit
43Computing Costs of Credit Simple Interest FormulaI = P x R x TAnnual Percentage Rate Formula(2 x n x f)/P(N+1)Credit Card BillingsAdjusted Balance MethodPrevious Balance MethodAverage Daily Balance Method
44Solving Credit Problems Major disadvantage to credit is it can lead to overspendingUsually does not happen suddenlyYears of poor planningImpulse buyingCareless budgeting
45The 20/10 Rule Credit counselors suggest 20/10 Rule Total borrowing should not exceed 20% of your yearly take-home payDon’t take on monthly payment that total more than 10% of your monthly take home payDoes not apply to mortgages
46Credit Counseling Private or government-sponsored services Fees usually based on ability to payHelp set up budgets and show you best way to use your incomeCannot get loans from them
47Debt AdjustmentFor people who need stricter discipline that advice from a counselorCharge fees and require contractsThey take overContact creditors to work out payment planControl your accounts and pay your bills
48Credit Repair Need to repair your credit rating Obtain copies of your credit reportsChallenge any incorrect informationTake steps to assure the information reported about you is correctClear up debts responsiblyMake payment arrangementsRequest that corrected information be supplied to credit bureaus
49Legal RecourseWhen debtors are in severe debt trouble and cannot meet their bills, final most serious step is bankruptcyLegal process that relives debtors of the responsibility of paying their debts or protects them while they try to repayBankruptcy is a second chance but carries serious consequences
50Purpose of Bankruptcy Laws Two goals of bankruptcy law:Protect debtors by giving them a fresh startGive fair treatment to creditors competing for debtors’ assetsOriginal federal Bankruptcy Act was 1898Bankruptcy Reform Act of 1994 tightened rules for bankruptcy
51Types of Bankruptcy Voluntary and Involuntary Voluntary Involuntary Most common kindOccurs when you file a petition with a federal court asking to be declared bankruptInvoluntaryOccurs when creditors file a petition with the court, asking the court to declare you bankruptDoes not occur often because creditors prefer to be repaid in full
52Voluntary Bankruptcy: How it Works Court notifies newspapers and creditorsCreditors may file claimsCourt collects your assets & sells your property as neededIf assets do not cover all liabilities, each creditor is given a proportional shareRemainder of debt is dischargedSome debts cannot be discharged: taxes, child support, and alimonyOnce declared bankrupt, cannot file again for six years
53Types of Bankruptcy Liquidation or Reorganization Chapter 11 Chapter 7 Reorganization for businesses that allows them to continue operating under supervisionChapter 7Commonly called straight bankruptcyWipes out most debt for giving up most assetsSee next slide for exempted itemsChapter 13Reorganization form for individuals that allows them to pay off their debts over three to five years
54Federally Exempted Items (as of January 1, 2001) $15,000 equity in a home or burial plot ($30,000 on joint bankruptcy)$2,400 interest in a motor vehicleItems 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$1,000 in jewelry$1,500 in tools, books, and other items used in a trade or businessOther 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
55More About Bankruptcy If considering bankruptcy, seek legal advice Legal fees range from $150 to $1,500Can help you protect some of your assetsCreditors may ask debtor to repay debt even after bankruptcy has discharge them (reaffirmation)
56ReaffirmationMay wish to reaffirm a loan that someone co-signed for youMay choose to reaffirm rather than allow the collateral to be repossessedRequires a court hearing and debtors have 30 days to change their mindsCreditors may NOT harass debtors
57Major Causes of Bankruptcy Business FailureAs a sole proprietor, your personal assets can be taken for your businessEmotional SpendingFailure to Budget and PlanBankruptcy is not limited to poor peopleCatastrophic Injury or Illness
58Advantages of Bankruptcy Debts are erased.Offers a fresh start.Exempted assets are retained.Able to retain certain assets to help start over.Certain incomes are unaffected.Bankruptcy does not affect: social security, veterans’ benefits, unemployment compensation, alimony, child support, disability payments, and payments from pensions.The cost is small.Fees small compared to amount of financial relief provided.
59Disadvantages of Bankruptcy Credit is damaged.Judgment cannot be wiped off your record for 10 years.Property is lost.Property you get to keep is limited to the exemptions.Some obligations remain.Not ALL debt is erased.Some debts can be reaffirmed.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.