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CONSUMER economics (CREDIT)

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Presentation on theme: "CONSUMER economics (CREDIT)"— Presentation transcript:

1 CONSUMER economics (CREDIT)

2 CREDIT DEFINED WHAT IS CREDIT?
Money borrowed to buy something now – with the promise / agreement to pay for it later (WITH INTEREST) Credit is a privilege (not a right) that requires responsibility – can lead to financial ruin if not managed properly

3 ADVANTAGES OF CONSUMER CREDIT
Purchasing potential expanded (increased standard of living) Emergency Funds – (Line of Credit) Convenience – cancel payment if not satisfied Special offers – Deferred Billing Proof of purchase – more descriptive Safer than carrying cash

4 DISADVANTAGES OF CONSUMER CREDIT
Higher cost for purchases is possible – costs of accepting credit cards passed on to customers Finance charges Future income is tied up – strained budget Buying on credit may lead to overspending

5 TYPES OF CREDIT 1. Open-Ended Credit:
Ability to borrow up to a stated amount limit and pay back at your convenience (Credit Cards) Most credit cards / department store cards / gas cards / etc. 2. Closed End Credit: Installment credit – definitive payment for a definitive period of time – all finance charges, etc. are stated up front (car loan / mortgage) 3. Service Credit Service performed now – payment later (doctors / utilities / etc.)

6 CREDITWORTHINESS Determining whether applicants meet certain standards and qualify for loans (Are they a good risk?) The 5 C’s of Credit

7 THE 5 C’S OF CREDIT CHARACTER CAPACITY CAPITAL CONDITIONS COLLATERAL
Will you repay the Debt? (Credit Rating) CAPACITY Can you repay the debt? (Income Level) CAPITAL Is the creditor protected if you fail to repay? CONDITIONS Any economic conditions that may impact loan? COLLATERAL What assets are pledged in case of default?

8 Credit Ratings A measure of creditworthiness based on financial history & stability Point System – scores based on: Amount of current debt Number of late payments Current job Income level Job stability 500 = Bad / 700 = Good

9 ESTABLISH A GOOD CREDIT RATING
Always pay bills on time if possible Pay more than minimum payment Avoid overextending Avoid BANKRUPTCY Debt Consolidation – BE CAREFUL Get help (Consumer Credit Counseling) if necessary

10 Managing Credit Cards Private Label Cards
Department Store or Gasoline Station General Purpose Cards (Revolving) Visa / Mastercard / Discover Minimum payment option Charge Cards Must pay full amount each month (American Express) Prestige (Status) Cards Platinum or Gold Cards – elite credit scores Co-Branded Cards Reward Cards – American Airlines Visa Affinity Cards Often associated with a charity – donations usually made Smart Card

11 Credit Cards & Terms Usually – consumers avoid paying finance charges by paying balances off in full each month Be sure to understand the following: Annual Percentage Rate (APR) – cost of credit – usually very high for credit cards 10-21% (variable rate may apply) Grace (free) Period – avoid paying interest if balance paid during this time period Annual Fees – research – some will try to charge Transaction Fees & Late Fees – cash advances / late payment / use of “checks”/ etc. Method of calculating finance charge – may vary (read & understand all costs in credit card agreement)

12 Safeguarding Credit Cards
Sign cards immediately Carry only cards you need Keep list of all cards and info. in a safe place Notify bank immediately if lost (phone / letter) Get your card back immediately after use Do not lend your card Destroy expired card (cut) Don’t give out numbers over the phone unless verified reputable company Keep receipts and verify billing statements

13 Protecting Credit Cards Online
Deal only with companies you trust & know Check browser symbol to insure the site is secure – information is encrypted (put into a code) before transmission Review privacy policy of any online merchants

14 SOURES OF CREDIT Banks & Credit Unions Retail Stores Finance Companies
Pawnbrokers Private Lenders Other Sources (Life ins / 401k / CD / etc.)

15 FACTORS IMPACTING THE COST OF CREDIT
Interest Rates Amount of time used to pay back loan The more you borrow & the longer you take to pay back the loan more interest will be paid Ability to repay (creditworthiness) People with better credit pay lower interest rates Collateral Better collateral = lower rates Economic conditions

16 GUIDELINES TO MINIMIZE CREDIT COSTS
Only accept the amount of credit you need Don’t increase credit spending when your income increases Limit # of credit cards Pay cash for any purchase under $25 Understand the costs & the impact credit will have on your budget Compare – shop for best rates & fee structures Use credit to beat inflation (discounts & sales) Time your credit purchases to maximize grace period Take advantage of rebate programs (cash / car purchases / airline tickets / etc.)

17 Credit Laws Truth in Lending Act Fair Credit Reporting Act
Laws designed to protect consumers from unfair credit practices: Truth in Lending Act Fair Credit Reporting Act Equal Credit Opportunity Act Fair Debt Collection Practices Act

18 Truth in Lending Act Consumers must be fully informed regarding credit terms and costs Lenders must disclose information like APR, variable rates, fees, etc. Read all disclosures before applying for a credit card

19 Fair Credit Reporting Act
Consumers have a right to know what is in their credit file & who has seen your file – free within 30 days of credit denial Inaccuracies can be removed / fixed / explained Only legitimate requests for credit files should be granted

20 Equal Credit Opportunity Act
Prohibits discrimination in lending decisions Age / race / marital status / religion / etc. Credit may not be denied due to a person being on public aid (welfare / unemployment / social sec. / etc.) Applications may be in writing or oral – BUT -- certain questions are prohibited (What church do you belong to? / Are you planning on having children?) Creditors may not discourage you for applying for credit due to any reason prohibited by the ECOA Credit decisions must be made with 30 days – Denials must be in writing & must state specific reasons -- applicant may appeal Husband & wife responsible for payment – credit histories are established separately

21 Fair Debt Collection Practices Act
Designed to eliminate abusive collection practices by debt collectors (internal or external) No threats / obscenities / false statements to intimidate / etc. Limits who collectors may contact & what can be said Restricts times & frequencies that calls may be made Consumers may clarify & dispute bill appropriately


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