1. Chapter 6: Credit Use and Credit Cards

2. Objectives
Compare and contrast installment and non-installment credit and discuss the costs of credit.
Discuss reasons for and against using credit.
Describe the types of charge accounts.

3. Objectives
Describe the process of opening a credit account and the procedures lenders use to evaluate credit applicants.
Manage your credit card and charge accounts properly.

4. What is Consumer Credit?
Receiving products, services or cash now, and paying for them in the future.
Before you use credit, think about...
Could I pay cash or make a down payment?
Do I want to use savings for this purchase?
Does purchase fit with my goals and budget?
6-2

5. What is Consumer Credit?
(continued)
Does purchase fit with my goals and budget?
Could I use the credit I’ll need another way?
Can I wait to buy it?
What are the opportunity costs of postponing the purchase?
What are the economic & psychological costs of using credit for the purchase?
6-3

6. Credit Use and Credit Cards
A RECENT SURVEY OF U.S. HOUSEHOLDS:
1:3 fear credit over-extension
1:2 are concerned about payments

7. Credit Use and Credit Cards
Credit is any situation in which goods, services or money are received in exchange for a promise to pay a definite sum of money at a future date.

8. Confessions of a Shopaholic

9. Credit Use and Credit Cards
Consumer
Installment
Non-installment
Open-ended

10. Closed vs. Open-End Credit

11. Advantages of Credit Current use of goods and services
Demonstrates financial stability
Use for financial emergencies
Convenience when shopping
Safer than cash

12. Reasons For Using Credit
Convenience
Emergencies
Identification
Reservations

13. Reasons For Using Credit
Consume expensive products earlier
Enjoy the good life
Take advantage of free credit
Consolidate debts
Protection against ripoffs and frauds

14. Volume of Consumer Credit

15. Disadvantages of Consumer Credit
Purchases are more expensive
Temptation to overspend
Possible financial difficulties
Possible loss of merchandise due to late or non-payment
Ties up future income

16. Credit Card Holders and Credit Cards Held

17. Helpful Tips About Credit
Always budget your credit spending carefully.
Shop around for the lowest credit rates.
Use credit only when doing so is to your advantage.
Buy items on credit that will last at least until the last payment is due.
Pay your bills on time
Understand the credit contract before signing it.
Notify the creditor if, for any reason, you can not make your payment.
Keep an eye on your credit card when you give it to a salesperson.
Tear up any carbons after you sign the receipt.
Never give your credit card to anyone over the phone unless you initiated the call.
Keep your receipt after you make charges. Compare them with your monthly statement.
Keep a list of your credit card numbers and the issuers’ phone number in a safe place.
Report stolen cards at once.
After reporting a stolen card via telephone, follow up with a telegram or registered letter.

18. Reasons Against Using Credit
Interest is costly
Additional fees
High-priced add-ons
Liability for lost credit cards

19. Reasons Against Using Credit
Tempting to overspend
Privacy is a concern
Reduces financial flexibility

20. How to Calculate Debt Payments-to-Income Ratio

21. Fair Credit Reporting Act
Is your credit report accurate?
If you are denied credit based on your report, you can get a copy of your credit report free within 60 days of your request
Obsolete information must be deleted
Only authorized persons have access to your report
Adverse data can be reported for seven years or bankruptcy for ten

22. Sample Dispute Letter

23. Open-Ended Charge Accounts
PROCESS FOR OPENING:
Application
Investigation
Credit ratings and risk scoring

24. Build and Maintain Your Credit Rating
Establish a steady work record
Pay all bills promptly
Opening a checking account and don’t bounce checks
Get a cosigner on a loan and pay back the loan as agreed
Open a savings account and make regular deposits
Check to see what is in your file

25. Avoiding and Correcting Credit Mistakes
Fair Credit Billing Act
Notify creditor of error in writing in 60 days
Send it to the correct address
They must respond within 30 days
Credit card company has 90 days to resolve the problem
Won’t affect your credit rating while in dispute
You can withhold payment on shoddy goods

26. Managing a Charge Account
CREDIT STATEMENTS:
Billing date/Due date
Transaction/Posting dates
Grace period/Minimum payments
Credit for merchandise returns/Errors/ Correcting errors

27. Managing a Charge Account
COMPUTATION OF FINANCE CHARGES:
Annual Percentage Rate (APR)
Periodic Rate
Average Daily Balance

28. What Should You Do If You are Denied Credit?
You have the right to know the specific reason why
Ask yourself if you can afford the item
Check your credit report
You are entitled to have errors in your credit report corrected
You have the right to provide a 100 word explanation

29. What If You Are Denied Credit?

30. Protecting Against Credit/Debit Card Fraud
Sign new cards as soon as they arrive
Treat the cards like money
Shred anything with your account number on it
Don’t give your number over the phone unless you make the call
Get a receipt after every transaction
Check your statements for errors

31. Measuring Your Credit Capacity
Ask yourself.....
can you afford the loan?
what do you plan to give up in order to make the payment?
Cosigning a loan
if the person doesn’t pay, you will have to
co-signers often have to pay
it can affect your credit report

32. Criteria Used to Grant Credit
Character
Capital
Capacity
Collateral
Conditions
5 C’s of Credit

33. What Creditors Look For
Character - do you pay bills on time?
Capacity - can you repay the loan?
Capital - what are your assets and net worth?
Collateral - what if you don’t repay?
Conditions - what economic conditions would affect your repayment of the loan?

34. Minimum Payments Equals Permanent Debt
Credit card issuers often require a minimum monthly repayment as low as 1/36 or 1/48 of the outstanding balance. Such a payment is mathematically guaranteed to keep the user in “perma-debt.”

35. Bank Card Competition www.e-wizdom.com/cc/index.html
Fixed or variable interest rates
Introductory/teaser rate
Co-branded card
Rebates

36. Establish a Credit History
Establish both checking and savings accounts
Install telephone and bill to home address
Request, acquire, and use an oil-company card
Apply for bank credit card
Ask bank for small short-term cash loan
Pay off student loans

37. Five Primary Areas of Interest in Calculating FICO Score