Chapter 6 Consumer Credit Mrs. Ferry 4/12/2017 Chapter 6 Consumer Credit Pages 152 – 194 Chapter 6 - Consumer Credit

What is Consumer Credit? Credit is an arrangement to receive cash, goods, or services now and pay for them in the future Creditor is an entity (bank, finance company, credit union, business or individual) to which money is owed

Consumer Credit Consumer credit is the use of credit for personal needs which dates back to colonial times Installment credit allows people to pay with equal payments over a period of time Credit can be used as an advantage but it also involves RESPONSIBILITY and risk

Uses and Misuses of Credit Factors to CONSIDER before using credit Do you have $$$ for a down payment? Should you use your savings instead of credit? Can you afford the item? Could you use the credit in some better way? Could you put off buying the item for a while? What are the costs of using credit? INTEREST – is a periodic charge in exchange for the use of credit

Advantages of Credit Credit allows you to enjoy goods and services now and pay for them later Discounts for paying your bills on time Combine purchases and making one monthly payment Credit may be the only way to pay for some services (Car rental, hotel reservations, shopping by phone or online shopping) If you use credit wisely, lenders will view you as a good risk

Disadvantages of Credit Credit costs $$$ Temptation to overspend You could ruin your credit rating if you don’t pay your bills You could lose your income and property to repay your debts Use caution and avoid using credit for more than you can afford

Two Types of Credit Closed-end credit – a one-time loan that you pay back over a specified time with payments of equal amounts Examples: Mortgage, car loans, furniture, appliances These types of loans usually carry lower interest rates than open-end credit Open-end credit – borrow money for a variety of goods and services; usually with a credit limit Usually a limit on the amount you can borrow A line of credit is the maximum amount of $$$ available to you Examples: Visa, MasterCard, bank cards or store cards

Loans Inexpensive loans – parents or other family; low interest Medium priced loans– commercial banks, savings and loans, and credit unions, moderate interest Expensive loans – easiest to obtain but most expensive by finance companies Home equity loans – loan based on the equity (Current market value – what you owe); interest is tax deductible; use for education, home improvements, or medical bills

Credit Cards Convenience users Borrowers Debit cards Smart cards Travel & Entertainment cards

Can You Afford a Loan? Before you take out a loan you need to be sure you can afford it This can be answered by subtracting totaling all your bills from your net income Consider what you would give up to make the monthly loan payment Debt payments-to-income is the % of debt you have in relation to your net income Net income = take-home pay + allowance + gifts + interest, etc) 15 to 20% is the most you should spend on debt Remember Emergency Expenses

Cost of Credit Two key factors are finance charge and the Annual Percentage Rate (APR) Finance charge is the amount you pay to use credit Finance charge is calculated using APR How much credit costs on a yearly basis, expressed as a percentage 18% means you pay $18 per year on each $100 you owe

Trade-offs Term versus interest costs Longer term = smaller monthly payments Higher interest rate Lender risk versus interest rates Minimum down payment at time of purchase Low fixed payments with a large final payment Variable Interest Rate – based on the changing rates of the banking system Secured Loan – COLLATERAL (a form of security to guarantee the creditor will be repaid) Up-Front Cash – large down payment Shorter Term

Calculating the Cost of Credit Simple interest Simple interest on the declining balance Add-on interest Cost of open-end credit Cost of Credit & Expected Inflation Avoid the MINIMUM monthly payment trap—the smallest amount you can pay

Applying for Credit Character – will you repay the loan? The Five Cs of Credit: Character – will you repay the loan? Capacity – Can you repay the loan? Capital – What are your assets and net worth? Collateral – What if you don’t repay the loan? Credit History – What is your credit history?

Credit Rating Is a measure of a person’s ability and willingness to make payments on time The factors that determine your credit rating are income, current debt, information about character, and how debts have been paid in the past

Your Credit Report The record of your complete credit history is called your credit report, or credit file Records are collected and maintained by credit bureaus There are three major credit bureaus: Experian Trans Union Equifax They maintain over 200 million credit files based on information from lenders

What’s in Your Credit File? Name, address, social security number (SS#) and birth date; it may also include: Employer, position, and income Previous address Previous employer Spouse’s name, SS#, employer, and income Whether you rent or own your home Checks returned for insufficient funds Detailed credit information about your credit purchases or any loans, any lawsuits or judgments against you

Fair Credit Reporting Fair Credit Reporting – 1971 U.S. Congress enacted the Fair Credit Reporting Act This law requires: The deletion of out of date information Gives consumers access to their files Consumers the right to correct misinformation Limits on who can obtain your credit report

Protecting Your Credit Billing Errors and Disputes Notify creditor in writing and include information to support your case Pay portion of the bill not in question Creditor must acknowledge your letter within 30 days and within two billing cycles they must adjust or tell why the bill is correct Creditor cannot damage your credit rating while settling a billing dispute

Stolen Identity Contact the Credit Bureaus Contact the Creditors You may not know your identity was stolen You may get bills for credit cards you never opened or charges for items you did not purchase Contact the Credit Bureaus Contact the Creditors File a Police Report

Protect Your Credit SHRED any papers with personal information before you throw them out Close bank accounts, issue stop payment on any lost or stolen checks, cancel debit card (MAC) Keep a record of your credit card number and notify the credit card company immediately

Internet Take the following steps to avoid fraud or deception on the Internet Use a secure browser Keeps records of online transactions Review monthly bank and credit card statements Read Web site privacy and security policies Do NOT share your personal information Never give your password to anyone online Don’t download files sent from any stranger

Co-Sign a Loan Co-signing a loan means that you agree to be responsible for loan payments if the other party fails to make them

Consumer Credit Protection Laws Truth in Lending & Consumer Leasing Acts Equal Credit Opportunity Act (ECOA) Fair Credit Billing Act Fair Credit Reporting Act Consumer Credit Reporting Reform Act

Managing Your Debts Warning signs of debt problems: You only make the minimum monthly payment You have trouble making the minimum payments Balance on credit cards increases every month Miss loan payments or pay late You use your savings for necessities You receive 2nd and 3rd late payment notices You borrow money to pay off old debts You exceed credit limits on your credit cards You are denied credit because of a bad credit bureau report

Debt Collection Practices Federal Trade Commission enforces the Fair Debt Collection Practices Act (FDCPA) Prohibits certain practices by debt collectors (businesses that collect debts for creditors) It does NOT erase debts you owe, but it controls the ways collection agencies do business

Financial Counseling You can contact your creditors and work out a payment plan You can contact a nonprofit financial counseling program Consumer Credit Counseling Service (CCCS) is a nonprofit agency which provides debt counseling Set-up a realistic budget Budget planning and unwise credit buying

Personal Bankruptcy Bankruptcy is a legal process in which SOME or ALL of the assets of a debtor are distributed among creditors because a debtor is unable to pay their debts Bankruptcy may also include a plan for the debtor to repay creditors on an installment basis Should be a last RESORT because it damages your credit rating

Chapter 7 - Bankruptcy Chapter 7 – Straight Bankruptcy Draw a petition listing assets and liabilities Person who files is called a debtor Debtor submits the petition and pays a fee Most assets are sold to pay creditors Protected assets: SS payments, unemployment compensation, net value of your home, vehicle, household goods, tools and books You are not released from alimony, child support, certain taxes, fines, student loans, debts from bankruptcy court, and other crimes

Chapter 13 - Bankruptcy Chapter 13 – Wager Earner Plan Bankruptcy Proposes a plan for using future earnings or assets to eliminate your debts over a period of time Debtor keeps most of their property Period can be as long as 5 years and the debtor makes regular payments to a trustee or represetative

Effects of Bankruptcy After bankruptcy it may be difficult to obtain credit especially with a Chapter 7 Bankruptcy because no debt has been repaid It may be easier to obtain credit with a Chapter 13 Bankruptcy because the debtor has repaid some of their debts Bankruptcy reports are kept on file in credit bureaus for TEN years