1. Section 6.1 – What is Consumer Credit
Chapter 6
Section 6.1 – What is Consumer Credit

2. Credit…. What is it and why is it important?
Credit – is an arrangement to receive cash, goods, or services now to pay for them in the future.

4. Consumer Credit Most common type of consumer credit is credit cards.
Creditor – is the bank
Or person loaning the money to you.

5. Credit uses and misuses
Why do we use credit?
Can purchase a good or service now instead of later, even maybe at a lower price.
When not to use it, when you can’t make high monthly payments

6. Types of Credit
Closed-end Credit – is a one-time loan that you will pay back over a specified period of time.
Home mortgage
Loan for furniture
Open-Ended Credit
is credit as a loan with a certain limit on the amount of money you can borrow for a variety of goods and services. A credit card – REVOLVING CREDIT.
Line of Credit – is the maximum amount of money a creditor will allow a credit user to borrow.

7. Types of Loans Inexpensive Loans Medium Priced Loans
Loaned by friends, family, or relatives. Sometimes these are worse than other types. Look at Judge Judy !!!!
Medium Priced Loans
Loans from commercial banks, savings and loans associations, and credit unions.
Some of these organizations you must be members of in order to get loans from.

8. Types of Loans Expensive Loans
Loans that charge a high interest rate, but are very easy to get loans from.
Rent –A-Center
5/paynow_paylater.html
own.pdf

9. Types of Loans con’t Home Equity Loans
Based on the Equity of your home..
What does equity mean?
The value that you have paid into your home.
The interest on the home is tax-deductible
What does that mean
You will get a large portion of that back when you figure your taxes.
You can take the value of the money you invested into the home and use that money to purchase other things.
Downside if you miss a payment they can take make you pay back most of the loan plus the difference that you still owe.

10. Types of Credit (Cards)
Average number of credit cards people have.
Schumer Box..
Credit Card Worksheet

11. A few more terms
Grace Period – a time period during which no finance charges will be added to your account.
Finance charge – is the total dollar amount you pay to use credit.
Annual Credit Cards – American Express charges $50 a year to use their credit card.
Why would I pay $50 a year to use their card?
Credit Card Menu

12. 6.2 The Cost and Methods of Obtaining Credit….
Chapter 6
6.2 The Cost and Methods of Obtaining Credit….

13. Debt Payments to Income Ratio
Sounds difficult but what we are looking at is the relationship to how much money you make to how much money you owe.
Terms that you need to know:
Net Income – is the income you take home.
Experts say that you should spend no more than 20% of your net income on debt.
Example if you make $1000 per month in net income. You should spend no more than $200 on debt.

14. Debt to Income Ratio
Monthly Debt Payments Formula Monthly Net Income If Bob spends $180 on debt and he makes $1200 a month what is his Ratio. $180/$1200 = .15 or 15% if you stay below 20% then things should be fine.

15. Lets Practice a couple
Sally makes 60 a month babysitting, 20 a month cutting grass, and has to pay her parents 40 a month for the car accident she had. What is her ratio? (Back)
Bill makes 10 a week allowance, 80 a month working at Taco Bell and spends 15 on her MasterCard every month.

16. The Calculations
Monthly Debt Payment
Monthly Net Income
Debt to Income Ratio 40 80
.5 or 50%
Back
We would say that this ratio is bad because it is higher than the 20% it should be.
The second on is a little bit harder…… Remember that this is based on per month not per week.
Monthly Debt Payment
Monthly Net Income
Debt to Income Ratio
$15
$120
.13 or 13%
$10 a week for 4 weeks = $ $80 = $120
We would say this is a good ratio because it is under the 20% experts say we need to be under.

17. When dealing with Credit what is the cost to you?
There are two major factors that you need to deal with when you shop for the best deal in credit.
Finance Charges
A.P.R.

18. Finance Charges and Annual percentage rate
We have discussed this in the previous part of the chapter with Rent-A-Center.
Finance Charges is the total dollar amount you pay to use credit.
In most cases you will have to pay finance charges to the creditor on the amount that is unpaid.
A.P.R. – is the cost of credit on a yearly basis expressed as a percentage.

20. What do we mean……
Lets pretend that you have a MasterCard. You go on a shopping spree for spring break. At the end of the month you get the bill from MasterCard that says you owe them $900. (OUCH!!!!!)
You can not afford to pay the total amount this month. So you see in the credit card statement that you can pay the minimum amount of $20.
Credit Card Balance Payoff

21. Here is what happens…..
You send that check in for $20 for the minimum payment, but you still owe them $880. However at the end of the month they are going to charge you a finance charge of 19.8%
Original Amount
Interest Rate
New amount additional
$880
19.8%
$174.24
$974.24

22. Tackling the trade-offs
Terms versus Interest Costs
Many people take the longer terms…
It spreads the payments out over a longer time, but the payments per time are less.
HOWEVER you end up paying more in the long run.
Creditor
APR
Term of Loan
Monthly Payment
Total Finance Charge
Total Cost
Creditor A
14%
3 years
$205.07
$1,382.52
$7,382.52
Creditor B
4 years
$163.96
$1,870.08
$7,870.08

23. More Trade-Offs Lender Risk Versus Interest Rate
Things that would give you a lower interest rate..
Variable interest rate
This means that the interest rate may be low now, but if interest rates increase you will have higher monthly payments
Secured Loan
Pledge Collateral – you put something up of value – Car, house etc… so if you default on the loan the bank or lender will have something of value to sell to recover their loss.
UP-Front-Cash
You may have to put a large down payment in order to receive a lower interest rate.
Shorter Term
If you can pay off the loan in a shorter time chances are that you will receive a lower interest payment.

24. Types of Interest or Cost of Credit
Simple Interest
Is the interest computed only on the principal, the amount that you borrow.
Principal X Rate X Time = Interest
Simple Interest on the Declining Balance
You pay interest on only the amount you still owe.
So if you owe $1000 and you pay back $100 you owe the interest on the $900 left.

25. Types of interest continued
Add-On Interest
Interest is calculated on the gull amount of the original principal, no water how often you make payments.
So if you owe $1000 and you pay $100 you are still paying the interest on the $1000
Open-end Credit
Credit Card companies must give you certain criteria before they lend money to you.
How much is the finance charge
When does it start to accrue (when is the grace period over?)

26. Even more on interest…. Cost of credit with Expected inflation
If you were to borrow money from your parents…. Lets say $100 and they charged you 5% interest and then the cost of things went up 4% then actually your parents would be only getting a 1% return on their money…
Banks are much more sneakier than that. Most banks would realize that the cost of things would increase(inflation) and charge you something more like 9% , so in actuality they would still be making about 5%.

27. Applying for Credit 5 C’s of Credit
Character
Will you repay the loan
Capacity
Can you repay the loan.
Capital
What are your Assets and your Net Worth
Collateral
What if you do not repay the loan, do you have something the bank can take.
Credit History
What is your credit history?
What is your credit rating?

28. Credit and Equal Opportunity
ECOA
Equal Credit Opportunity Act
Gives all credit applicants the same basic rights.
A lender may not use race nationality, age, sex marital status, and certain other factors to discriminate against you.
You must be legal age to sign a contract in Missouri (18)
Must not be denied because of social security or public assistance.

30. Understanding Credit Reports
Family Economics & Financial Education

31. Credit Reports Credit report - a record of a consumer’s credit history
Credit history - a record of transactions involving credit use
Individuals do not have a credit report if they have not previously used credit
Affects one’s ability to acquire credit

32. Information on a Credit Report
Name and aliases
Current and past addresses
Marital status
Date of birth
Employment history
Public records
Judgments, criminal, and bankruptcy
Credit card, store card, book clubs, music clubs, etc.
Payment history
Credit card, store card, book clubs, music clubs, etc.

33. Information continued
Financial records
Loans, bounced checks, closed accounts, etc.
Loans/leases
Rent-to-own contracts, payday loans, lease agreements, etc.
Credit inquiry-
Number of credit inquiries
Credit inquiry -a request for your credit. Can be done by businesses you apply to for credit or whom pre-approve you for credit
*Medical information is not on a consumer’s credit report, but late medical payments are.

34. Building Credit History
Important for consumers to build a credit history to be able to purchase items on credit
For example – house, vehicle
Affects a young adult’s ability to make a purchase on credit in the immediate future including:
Renting an apartment
Buying a car
Purchasing electronics or other merchandise

35. Building Credit History continued
Store accounts (JcPenny or Sears charge accounts)
Credit card accounts
Even with a co-signer
Loan from financial institution
Acquire a small loan from a financial institution and pay the loan off in timely payments to develop a positive credit history

36. No Credit History Having no history of credit use
While the following are all positive financial practices, a credit history is not built if a consumer performs the following actions:
Having no history of credit use
Not having any credit accounts in own name
Paying cash for all major purchases
Paying phone and utility bills on time

37. Positive Credit Practice good banking techniques
Being responsible with credit and finances can lead to good credit
A consumer may develop and keep good credit by:
Practice good banking techniques
Keep checkbook balanced, do not bounce checks
Pay bills consistently and on time
Keep public records free of bankruptcy
Have no criminal record
Keep a reasonable or small amount of debt
Apply for credit sparingly, keeping credit inquiries low
Hold a low number or credit/store cards
Check credit report annually to remove errors
Maintain reasonable amount of unused credit

38. General Rule
Percentage of current debt compared to the total credit available is reviewed by potential lenders
Keep the amount of debt currently held at 20% of the total amount of available credit
For example - if Sue’s total amount of credit available is $1,000, her current amount of debt should not exceed $250

39. Negative Credit Bouncing checks
Being irresponsible with credit and finances can lead to poor credit
A consumer may develop or keep poor credit by:
Bouncing checks
Routinely paying bills late
Having a criminal record
Holding a large amount of debt
Holding an unreasonable amount of unused credit
Not paying utility or cell phone accounts consistently and on time
Obtaining a high number of credit inquiries
Carrying many credit/store cards
Having a public record of bankruptcy
Defaulting on a loan
Having cards over the limit

40. Credit Reporting Agency (CRA)
Keeps a record of a consumer’s credit transactions and compiles credit reports
Acquires information from several different types of lending companies
Information on credit reports differ between each individual agency
Lenders may only report to one credit agency
Consumers should contact all agencies when checking their credit report

41. CRA’s continued The three main credit reporting agencies are: Equifax
(800)
Trans Union
(800)
Experian
(800)

42. Who Reports to CRA’s? Store accounts Credit card companies
Mortgage and other loan lenders
Financial institutions
Landlords
Courts
Utility accounts
Cellular phone companies
Delinquent accounts

43. Mistakes in Credit Reports
More than 50% of the credit reports checked in a study contained errors
Consumer Reports (July 2000)
The two main errors commonly appearing in a consumer’s credit report are:
Mistaken identity – occurs when a lender reports a credit transaction and information is recorded on the wrong person’s credit report, usually of a similar name
Fraud

44. Fair Credit Reporting Act
Enacted to protect the consumer in 1971
Designed to promote accuracy and ensure privacy of information in credit reports
Consumers have the right:
To know the information in their credit report
To have errors corrected in their credit report

45. Credit Scores
A mathematical tool created to help lender evaluate the risk associated with lending a customer money
Scores range from , with 950 being the best score
Not listed on a credit report
Each CRA has an independent scoring system based upon a standard percentage of five different categories
Consumer’s scores can differ between each CRA

46. Five Standard Categories of Scores
35%-Payment history
- Timely manner in which a consumer pays debt
30%-Outstanding debt
-Amount of debt currently held
15%-Credit history
-How long the consumer has held credit accounts and how often they are used
10%-Pursuit of new credit
-How much credit is acquired over the length of the consumer’s credit history
10%-Types of credit in use
-May include credit cards, gas cards, store cards or accounts, loans, etc.

47. Credit Scores continued
Other factors calculated into a credit score may include:
Length of time at current address
Current income
Financial information
Late payments
Amount of outstanding credit
Amount of credit in use
Length of time credit has been established

48. Financial Effect of Credit Scores
Interest rate of loans
High score – can insure a lower interest rate on credit
Low score– can cause a higher interest rate on credit
Ability to receive future loans/credit
Financial lending institutions have guidelines of what score will qualify for a loan
Reflection of risk of borrower to the lender
The lower the score, the higher the possibility the consumer pays bills late
Financial security for lifetime
Takes time to improve credit, which could take time from building financial security

49. That’s all folks……

50. Back