Credit/Consumer Rights Ch. 20 Credit/Consumer Rights

Credit Credit—Borrowing money to pay for something now while promising to repay at a later time. Principle: Actual cost of the good or service. Interest: Amount paid for the use of money.

Charge Accounts Buy goods and services at individual stores and pay for them later. Credit limit: Maximum amount a person can buy with the promise of payment at a later time. Three types of accounts are installment, regular, and revolving.

Types of Charge Accounts Installment Account Repaid with equal payments over a certain period of time Part of the payment goes towards interest & part towards the principle Car loan or mortgage Regular Account Billing cycles where a bill is sent at the end of the month No interest is charged if entire bill is paid Account can’t be used again until the balance is paid Interest is charged on the balance not paid Furniture Stores usually do this. Pay by 2019, certain amount each month, but with no interest. Revolving Account Interest charged on portion not paid Account can still be used until credit limit is reached Example: Credit Cards

Credit and Debit cards Credit cards: Make purchases without cash. Used to purchase items and receive loans. Charge high interest rates (Avg. 18%) in the 1990’s. Lower interest rates if the customer is “reliable”. Debit Cards: Transfer funds electronically. Popular use in Automated Teller Machines (ATMs) Now can be tied directly to checking accounts (check cards)

Credit Cards Make purchases without having the money Charge high interest rates – usually @ 18% Lower interest rates if the customer is reliable Finance Charges – Cost of credit (interest) expressed in dollars APR – Cost of credit (interest) expressed as a percentage

Applying for Credit Fill out application Credit Bureau does a credit check Creditor may ask for references Credit checks show your income, debt and ability to pay debts in the past

Credit Rating Rating of risk: Excellent, Good, Average or Poor Ratings have a number associated with them 3 Credit Bureaus: Experian, Transunion & Equifax Gives lenders an idea of reliability when issuing loans Higher Credit Score = less interest you are charged on a loan = saving money Unsecured loans – loan based on reputation Secured loans – have collateral to back up the loan

Credit Bureaus

Government Regulations Equal Credit Opportunity Act: a person can’t be denied credit because of race, religion, national origin, gender, marital status or age Usury Laws: Restrict the amount of interest companies, not banks, can charge In North Carolina, it is 8%. Lend neighbor $100 loan can only receive $8 from interest

Bankruptcy Debts are so large they can’t be paid back Most of what a debtor owns is sold or given to creditors Takes 10 years to reestablish credit States can go bankrupt as well.

Financial Institutions Commercial banks: Main functions are accepting deposits, lending money, and transferring funds. Savings and loan: Very much like commercial banks. Normally smaller banks. Savings banks: Original purpose was to help those overlooked by large banks. Sometimes charge higher interest rates. Credit Unions: Offer high interest on saving and low interest on loans. Must be a member to use their services. Finance Companies: Charge high interest rates. Used by those with bad credit history.

Consumer Rights Consumer – someone who buys a product or service (YOU!) Types of Income Disposable Income – money remains after taxes taken out. Money to pay for house, car, etc. (satisfies your needs) Discretionary Income – money remaining after paying for necessities (satisfies your wants) Either save or spend it

Consumer Rights cont. Consumerism – a movement to educate buyers on purchases and to make sure products are safe---caveat emptor—”let the buyer beware” Congress laws – Pure Food and Drug Act in 1906 Private groups – BBB or Better Business Bureau (120 located in principal cities around the U.S.) Run by businesses to gain the trust of customers Consumer Bill of Rights (1960s) Consumers have… Right to a safe product Right to be informed Right to choose Right to be heard Right to redress

Consumer Responsibilities Smart Buying Strategies Info on products (consumer reports, reviews on various websites) Watch out for advertising that appeals to your emotions Comparison shopping – find out prices on product from different stores/internet Brand Name vs. Generic When product fails Report the problem immediately Check the warranty, self repair may void any warranties for product Keep a copy of records; names of people spoken to Be calm; person you speak to may not be responsible for said problem Make Fair complaints Ex. Exhibit ethical behavior (we expect honesty from sellers, they expect that from consumers as well)