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Consumer Credit Chapter 11.

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Presentation on theme: "Consumer Credit Chapter 11."— Presentation transcript:

1 Consumer Credit Chapter 11

2 The Meaning of Credit Credit – supplying of money, goods, or services at present in exchange for the promise of future payment Creditor – business that extends credit

3 Paying for Credit Principal – original amount borrowed
Interest – profit for creditor

4 Types of credit Secured credit – backed by a pledge of property, or collateral Unsecured credit – not backed by collateral

5 Types of credit Closed-end credit – one-time extension of credit for a specific amount and time period Open-end credit – line of credit – can be used repeatedly

6 Types of credit Single-payment – pay entire amount due in a single payment Installment – set portion paid at regular intervals

7 Pros and Cons of credit Pros Cons Temporary expansion of income
Convenience Financial responsibility Cons Interest and fees Increased cost of merchandise Opportunity cost

8 More concerns about credit
Security Impulse buying Overspending Reclaimed merchandise

9 Three C’s of Credit Character – a person’s reputation
Capacity – earning power and potential to pay debts from regular income Capital – items owned, or assets

10 Credit History Pattern of past behavior in regards to paying debt

11 Credit application Employment Residence Home ownership
Monthly housing costs Credit references Collateral Bank references

12 Equal credit opportunity act
Federal law ensuring that all consumers are given an equal chance to obtain credit. Gender Marital status Race Religion National origin Age Public assistance

13 Credit reporting or rating
Credit bureau – firm that collects information about the credit worthiness of consumers from banks, stores, and other creditors Equifax, Experian, TransUnion Credit report – record of a particular consumer’s transactions and payment patterns Date account was opened Balance owed Payment amount Late payments

14 Credit reporting or rating
Credit score – numerical rating, based on credit report information that represents a person’s creditworthiness Credit rating – an evaluation of a consumer’s credit history

15 Establishing credit Open checking and savings accounts. Make regular deposits and avoid overdrawn checks. Put utility bills in your name and pay promptly. Ask a cosigner to help you get a loan. Cosigner – person with established credit history who signs the contract with you

16 Types of credit cards Private label cards – can be used only at a single retailer General purpose card – can be used at millions of locations worldwide VISA MasterCard Discover American Express

17 Comparing terms Annual fee Annual percentage rate Variable APR
Computation method Minimum payment Grace period Minimum finance charge Other fees Credit limit Special features and services

18 Truth in lending act Creditors must adequately inform consumers about credit terms and cost. APR How variable rates are calculated When payments are due Fees

19 loans Home loans – closed-end installment loans, repayment plan is typically years. The home is security for the loan. Home equity loan – loan for a variety of purposes, uses equity in home as security, may be closed or open ended Home improvement loan – for repairs or improvements, closed-end loan with 5 year term

20 More loans Vehicle loan – closed-end, secured loan for the purpose of buying a vehicle, repayment terms can be from 3-6 years Personal line of credit – open-end, unsecured loan Student loans – pay for higher education, often have low interest rates and flexible repayment schedule

21 Consumer Finance companies
Businesses that specialize in making small or personal loans Give credit to those who can not get it elsewhere Charge more for loans because: Must borrow money for loans High overhead, small loans Customers are high risk Payday loans  Write check to loan company for amount needed plus a fee, they hold your check for a certain amount of time, very high fees

22 Insurance policy loans
Life insurance – policy holder can borrow against the amount paid in premiums Drawbacks Death – will deduct any outstanding loan amounts before paying benefits Companies do not remind you to pay back the loan

23 Private loans Friends or family members Keep loan small
Be prepared to show proof of repayment Agree with lender on interest rate Agree on payment plan Be specific – PUT IT IN WRITING! Pay promptly. Get and keep a signed receipt for each payment.

24 Other loans Pawnbroker – consumer trades an item of value for money, holds items for 30 days, if not repaid owned sells items Loan shark – unlicensed lenders who operate illegally and charge excessive interest, prey on consumers who are unable to get loans elsewhere

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