1.  2004 McGraw-Hill Ryerson Ltd. Kapoor Dlabay Hughes Ahmad Prepared by Cyndi Hornby, Fanshawe College Chapter 5 Introduction to Consumer Credit 5-1

2.  2004 McGraw-Hill Ryerson Ltd. Learning Objectives - Chapter 5 1.Define consumer credit and analyze its advantages and disadvantages. 2.Differentiate among various types of credit. 3.Assess your credit capacity and build your credit rating. 4.Describe the information creditors look for when you apply for credit. 5.Identify the steps you can take to avoid and correct credit mistakes. 5-2

3.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 1 Define consumer credit and analyze its advantages and disadvantages. 5-3

4.  2004 McGraw-Hill Ryerson Ltd. What is Consumer Credit? Credit is an arrangement to receive cash, goods or services now, and pay for them in the future. Consumer credit is the use of credit for personal needs, except a home mortgage. There are three ways consumers can finance current purchases. Take money from savings. Use present earnings. Borrow against future income. Trade-offs are involved in using credit. 5-4

5.  2004 McGraw-Hill Ryerson Ltd. Credit Considerations Before you use credit for a major purchase, ask yourself some questions. 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? Could I use the credit I’ll need in some better way? Can I postpone this purchase? What are the opportunity costs of postponing this purchase? What are the dollar and psychological costs of using credit for this purchase? 5-5

6.  2004 McGraw-Hill Ryerson Ltd. Advantages of Credit Current use of goods and services. Permit purchase even when funds are low. Use for financial emergencies. Convenient when shopping. Safer than cash. Can take advantage of float time. May get rebates, airline miles or other bonuses. Demonstrates financial stability. 5-6

7.  2004 McGraw-Hill Ryerson Ltd. Disadvantages of Consumer Credit Purchases are more expensive. Temptation to overspend. Ties up future income. Possible financial difficulties. Damage to family relationships. Slows progress to future goals. 5-7

8.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 2 Differentiate among various types of credit. 5-8

9.  2004 McGraw-Hill Ryerson Ltd. Types of Credit 5-9 Closed-End Credit. For a specific purpose and amount. Payments of equal amounts Mortgage, automobile and installment loans Open-End Credit. Use as needed until reaching line of credit. You pay interest and finance charges if you do not pay the bill in full when due. Department store or bank credit card, overdraft protection, bank line of credit, home equity loan.

10.  2004 McGraw-Hill Ryerson Ltd. Credit Cards Nearly 83% of Canadian households carry one or more credit cards. One-third are convenience users. They pay their balance off in full each month. The other two-thirds are borrowers. Co-branding - linking a credit card with a business offering rebates on products and services. Smart cards have an imbedded computer chip. Debit cards are not credit cards. 5-10 MasterCard

11.  2004 McGraw-Hill Ryerson Ltd. Protecting Yourself Against Credit Card Fraud Sign new cards as soon as they arrive. Treat the cards like money - keep them secure. Shred anything with your account number on it. Don’t give your number over the phone unless you initiate the call. Get your card and a receipt after every transaction and compare them to your bills when they arrive. Immediately report if lost or stolen. Notify issuer if you don’t get your billing statement. Check your credit report every few years. 5-11

12.  2004 McGraw-Hill Ryerson Ltd. Protecting Yourself Against Credit Card Fraud If you make purchases online; use a secure browser keep records of your online transactions review monthly statements for errors and unauthorized purchases read the policies of sites you visit keep your personal information private give payment information only to businesses you know and trust Never give your password to anyone online Do not download files from strangers 5-12

13.  2004 McGraw-Hill Ryerson Ltd. Home Equity Loans A loan based on the current market value of your home less the amount still owing on your mortgage Can borrow up to 85% of your equity Interest on loan is tax deductible if proceeds are being used for an investment (outside of registered plans) Usually set up as a revolving line of credit 5-13

14.  2004 McGraw-Hill Ryerson Ltd. Car Loan Automobile is your second largest investment Financing at the Dealer Affiliated with manufacturer or financial institution Significantly lower interest rates on some models Other incentives offered 5-14

15.  2004 McGraw-Hill Ryerson Ltd. Car Loan Leasing Closed-end lease: you can buy vehicle at lease end or return it to company Open-end lease: you are responsible for residual value of vehicle at lease end Vehicle owned by leasing company, you pay maintenance, repairs, insurance May have mileage restrictions Paying Cash Avoids interest charges However, investment returns may be higher than cost to borrow 5-15

16.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 3 Assess your credit capacity and building your credit rating. 5-16

17.  2004 McGraw-Hill Ryerson Ltd. Measuring Your Credit Capacity Before you take out a loan, ask yourself... Can you afford the loan? What do you plan to give up in order to make the payment? Before cosigning a loan consider... If the person doesn’t pay, you will have to. Can you afford to pay if the person does not? It can affect your credit report. Request that a copy of overdue payment notices be sent to you. 5-17

18.  2004 McGraw-Hill Ryerson Ltd. Credit Capacity Indicators * Not including housing Debt Payments-to-Income Ratio monthly payments* net monthly income should not exceed 20% 5-18

19.  2004 McGraw-Hill Ryerson Ltd. Credit Capacity Indicators Debt To Equity Ratio total liabilities net worth* = Should be < 1 *Excluding home value 5-19

20.  2004 McGraw-Hill Ryerson Ltd. Build and Maintain Your Credit Rating Your credit experiences, or lack of, is a major consideration for the creditor a good credit rating is a valuable asset use credit with discretion limit borrowing to your capacity to repay abide by the terms of the lending contracts 5-20

21.  2004 McGraw-Hill Ryerson Ltd. Your Credit File The Credit Bureau is a reporting agency that collects credit and other information about consumers and sells the date to creditors to help in evaluating applications. Your Credit file includes; Your employer and position Former address and employer Spouses name, social insurance number and employer Public records and information Cheques returned for insufficient funds Detailed credit information 5-21

22.  2004 McGraw-Hill Ryerson Ltd. Credit Bureau Regulation Most provinces have legislation to protect; consumer privacy right not to suffer from false credit or personal information Others may only view your file if written consent has been given First bankruptcy remains on your file 7 years, second bankruptcy is permanent Errors in your credit file should be corrected immediately 5-22

23.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 4 Describe the information creditors look for when you apply for credit. 5-23

24.  2004 McGraw-Hill Ryerson Ltd. What Creditors Look For: 5 C’s Character – Borrower’s attitude towards credit obligations Capacity – Borrower’s financial ability to meet credit obligations Capital – Borrower’s assets or net worth Collateral – Valuable assets that is pledged to ensure loan payments Conditions – the general economic conditions that can affect borrower’s ability to repay a loan 5-24

25.  2004 McGraw-Hill Ryerson Ltd. If you are denied credit? Ask questions if application for credit is denied If based on your credit report ask; what specific information on credit report lead to denial? Check with credit bureau to find out what information has been reported and investigate and correct any inaccurate or incomplete information 5-25

26.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 5 Identify the steps you can take to avoid and correct credit mistakes. 5-26

27.  2004 McGraw-Hill Ryerson Ltd. Avoiding & Correcting Credit Mistakes To correct mistakes or misunderstandings in your credit accounts; contact creditor first to correct error If your identity has been stolen; contact the fraud department of major credit bureaus contact creditors for accounts that have been opened fraudulently file a police report close all bank accounts immediately and cancel credit cards 5-27