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