Credit Evaluate various sources of credit available to the government, business, and consumers.

Who uses Credit? Consumer Credit Credit used by people for personal reasons. Commercial Credit Credit used by businesses.

Types of Credit Charge Accounts – most common type of short- term or medium-term credit. Regular Charge Accounts Require that you pay for purchases in full within a certain period of time. Revolving Charge Accounts Allows you to borrow or charge up to a certain amount of money (credit limit) and pay back a part or the entire balance each month. Budget Charge Accounts Allows you to pay for costly items in equal payments spread out over a period of time.

Credit Cards Single-Purpose Multipurpose Travel and Entertainment Can only be used to buy goods or services at the business that issued the card. Examples: JC Penney, Sears Multipurpose Similar to a revolving charge account. May be used at several locations. Examples: Visa and Master Card Travel and Entertainment Similar to regular charge accounts. Must be paid in full each month. Example: American Express

Banks and Other Financial Institutions Single Payment Loan Debtor pays off loan in one payment. Promissory Note Written promise to repay with interest. Installment Loan Repaid in regular payments.

Installment Loans Types: Secured vs. Unsecured Closed vs. Open Ended Student, mortgage, automobile, etc. Secured vs. Unsecured Secured loans are backed by collateral (help guarantee the repayment of a loan). Closed vs. Open Ended Closed-end credit is used for a specific purpose and involves a definite amount of money. Open-end credit gives you a certain limit on the amount of money you can borrow. Cosigner Responsible for the repayment of a loan if the original party does not pay.

Seller-Provided Credit Many stores provide credit to customers.

Consumer Finance Companies Specialize in loans to people with poor credit ratings. The cost of credit is higher than other institutions.

Payroll Advance Services Short-term loans. Pawnshop Based on the value of something you own. “Borrow Until Payday” Loan Cost is extremely high.

Bonds Bonds – written promise to repay a loan with interest on a specific date. The buyer of the bond is considered the creditor. Corporate Bonds Usually used to finance buildings and equipment. Municipal Bonds State and local governments use these to finance projects. Savings Bonds Sold by federal government.

Other Sources of Credit for Businesses Small Business Administration Offers a number of financial, technical, and management programs to help businesses.

Other Sources of Credit for Consumers Life Insurance Plans Cash Value Insurance Provides both savings and death benefits. Retirement Plans

Credit Explain when and why borrowing is used for the purchase of goods and services.

Terms Credit Creditor Debtor Privilege of using someone else’s money for a period of time. Creditor One who sells on credit or makes a loan. Debtor Anyone who buys on credit or receives a loan. Obligated to pay back the loan.

Why Use Credit? Convenience Immediate Possession Emergencies Shop without carrying cash. Immediate Possession Allows you to have possession on the goods or services now. Emergencies Helps in case of a serious situation.

Determine the advantages and disadvantages of using credit.

Advantages Immediate Possession Convenience Emergencies Saving Money Buy now and pay later. Emergencies Saving Money Buy an item while it is on sale. Credit Rating Establish a favorable credit rating. Growth of the Economy Buying goods will help the economy expand.

Disadvantages Overbuying Careless Buying Higher Prices Most common hazard. Careless Buying Comparison shopping may not be a priority Encourages impulse buying Higher Prices Some stores offer discounts for cash sales.

Disadvantages continued Overuse of Credit Too much is owed – unable to pay back. Credit Fees Interest paid on balance Habit Forming

Results of Overuse Garnishment of Wages Repossession Bankruptcy Money deducted from wages for money owed. Repossession Loss of property because of failure to repay loan. Bankruptcy

Credit What are the factors on which credit is granted and the cost of credit?

Process of Obtaining Credit Credit Application Documentation Processing Underwriting Closing Funding

1. Credit Application Form on which you provide information needed by a lender to make a decision about granting credit or approving a loan. Provide the following information: Salary, Employer, Outstanding Credit (Debt), Assets, Credit References, Checking and Savings Accounts, Stock Portfolio, etc.

2. Documentation Creditor will collect and verify necessary documentation for the extension of credit. Examples: Bank statements, credit card statements, past W-2’s, etc.

3. Processing Building of loan file. Evaluating credit worthiness.

Credit Worthiness Terms (Processing) The C’s of Credit Worthiness Capacity Your ability to pay (income) Character Earned by paying bills on time and being a trustworthy, reliable, stable person. References – people you have borrowed from in the past. Collateral Security to help guarantee that the creditor will be repaid.

Credit Worthiness Terms (Processing) continued Credit History Indicates the amount of debt you have and your payment history. Capital How much you have beyond what you owe. Credit Limit Maximum amount you can borrow. Cosigner Responsible for a loan if you, the original debtor, do not pay.

4. Underwriting Reviewing loan for soundness. Consumer Reporting Agencies Company that compiles and keeps records on consumer payment habits. Used to evaluate creditworthiness. Examples: Equifax, Experian, and TransUnion.

5. Closing Representative explains terms of credit. Debtor signs appropriate forms.

6. Funding Creditor will issue credit/funds to the debtor.

Denial of Credit Fair Credit Opportunity Act requires that credit denial cannot be based on sex, family, religion, etc. Must be based on ability to pay back loan.

Cost of Credit Interest Rates Principal Time Factor Maturity Date Percentage that is applied to debt. Principal Amount of money borrowed. Time Factor Length of time for which interest will be charged. Maturity Date Date on which a loan must be repaid.

Cost of Credit continued Finance Charge or Fees Cost of credit stated in a dollar figure Annual Percentage Rate (APR) Indicates how much credit costs on a yearly basis. Grace Period Time period during which no finance charges will be added to an account. Cash Advance Borrow money on a credit card.

Simple Interest Formula I=PRT I=Interest P=Principal R=Rate T=Time

NEXT - Examine bankruptcy and credit laws.

Your Credit Credit Bureau Building Credit An agency that collects information on how promptly people and businesses pay their bills. Information retrieved from banks, finance companies, stores, credit card companies, and other lenders. Building Credit Open a checking or savings account Apply for a local department store credit card. Take out a small loan from your bank. Pay all loans and credit card bills on time.

Handling Credit Problems Credit Counselor Helps consumers with credit problems. Consolidation Loan Combines all your debts in order to make one monthly payment on several different loans or credit cards.

Handling Credit Problems continued Credit Services Consumer Credit Counseling Service Nonprofit organization that provides debt counseling services for families and individuals with serious financial problems. Debt Repayment Plan Reorganizes debt and sometimes includes renegotiating terms of debt. Creditors will often accept such arrangements for partial payment, rather than not be repaid.

What if you are denied credit? The Equal Credit Opportunity Act says: You have the right to know the reasons. You are entitled to know what specific information in the credit report led to your denial. No fee will be charged if you state why you are requesting a copy of the report. You are entitled to ask the credit bureau to investigate any inaccurate or incomplete information and correct your records.

Truth-in-Lending Laws Requires that you be told the cost of a credit purchase in writing before you sign a credit agreement. Protects consumers against unauthorized use of credit cards. Limits your liability to $50 for unauthorized credit card purchases made prior to notification of the issuer.

Usury Laws Restricts the amount of interest that can be charged.

Equal Credit Opportunity Act The credit application can be judged only on the basis of financial responsibility. Cannot discriminate based on gender, age, ethnicity, or religion. Allows only three reasons for denying credit: Low income Large current debts Poor record of making payments in the past G77

Fair Credit Billing Act Requires creditors to correct billing mistakes brought to their attention. Requires creditor to inform consumers of steps they need to take to get the error corrected.

Fair Credit Reporting Act Gives consumers the right to know what specific information credit bureaus are providing to potential creditors, employers, and insurers.

Fair Debt Collection Practices Act Protects consumers from collection agents. Collection agents: Must identify themselves. Cannot tell others about the debt. Cannot harass debtor.

Federal Trade Commission (FTC) Enforces laws on credit.

Bankruptcy Legal process in which some or all of the assets of a debtor are distributed among the creditors because the debtor is unable to pay his or her debts.

US Bankruptcy Act of 1978 Chapter 7 (Liquidation) Draw up a petition listing assets and liabilities. Most of the debtor’s assets are sold to pay off creditors. Cannot release debt on alimony, child support, taxes, fines, educational loans, and court fees. Chapter 11 – (Reorganization) Businesses Only Chapter 13 Propose a plan for using future earnings and assets to eliminate debts over a period of time.

Effects of Bankruptcy Kept on file with credit bureau for 10 years. Affects credit rating, future extensions of credit, loss of jobs, etc.