chapter 18 consumer credit
DESCRIPTION
18-1 Credit Fundamentals USING CREDIT Credit – the privilege of using someone else’s money for a period of time. Debtor – anyone who buys on credit or receives a loan. Creditor – the one who sells on credit or makes a loan.TRANSCRIPT
CHAPTER 18
CONSUMER CREDIT
18-1 Credit Fundamentals
USING CREDITCredit – the privilege of using someone else’s money for a period of time. • Debtor – anyone who buys on credit or
receives a loan.• Creditor – the one who sells on credit or
makes a loan.
18-1 Credit Fundamentals
USING CREDITTypes of Credit
• Trade Credit – occurs when a company receives goods from a supplier and pays for them later.
• Loan Credit – borrowing money to use for some special purpose (home, car, school)– Installments – repay the loan in specified amount over a
period of time.• Sales Credit – the use of charge accounts and credit
cards by consumers.
18-1 Credit Fundamentals
USING CREDITCharge Accounts
• Regular Accounts – requires the buyer to make full payments within a stated period (25-30 days)– Used by service providers (doctors, lawyers)
• Budget Accounts – requires the customer to make fixed payments over several months.– Utilities, some stores
18-1 Credit Fundamentals
USING CREDITCharge Accounts
• Revolving Accounts – allows users to charge purchases at any time, but only part of the debt must be paid each month. – Credit limit – a maximum amount may be owed at
one time. – Finance charge – the total dollar cost of credit
(includes interest)
18-1 Credit Fundamentals
USING CREDITCredit Cards
• Bank Cards - Most processing is done through an ISO, VISA and MasterCard are the most popular.
• Charge Cards - Widely used cards, subscribers pay a yearly membership fee. (American Express)
• Affinity Cards -These cards are co-branded with an issuing bank.
• Retail Cards - Customers can only use these cards at the issuing stores.
18-1 Credit Fundamentals
USING CREDITInstallment Credit
• Requires periodic payments at specified times. • A contractual agreement between the buyer
and the seller.• The seller has the right to repossess an item if
payments are not made on time. • Making a down payment is usually required.
18-1 Credit Fundamentals
USING CREDITConsumer Loans
• Installment loan – you agree to make monthly payments in specific amounts over a period of time. – Single payment loan – pay nothing until the end of
the loan period (60-90 days)
18-1 Credit Fundamentals
USING CREDITConsumer Loans
• Promissory note – a written promise to repay based on a debtor’s excellent credit history. – Principal– Time– Date of maturity– Payee– Interest rate– maker
18-1 Credit Fundamentals
USING CREDITConsumer Loans
• Collateral – property that is used as security• Cosigner – someone responsible for payment
if you do not pay as promised.
18-1 Credit Fundamentals
BENEFITS OF CREDIT• Convenience• Immediate Possession• Savings• Credit Rating • Useful for Emergencies
18-1 Credit Fundamentals
CREDIT CONCERNS • Overbuying• Careless buying • Higher prices• Overuse of credit
18-2 Cost of Credit
FINDING INTEREST Interest – The cost of borrowing money• Principal, P – Amount of the loan• Interest Rate, R – percent of interest charged
(can also be a decimal or fraction)• Time, T – length of time for which interest will
be charged (years or months)
18-2 Cost of Credit
FINDING INTEREST Simple Interest
Simple Interest – used for single payment loans. Interest = Principal x Rate x Time
I = P x R x T
18-2 Cost of Credit
FINDING INTEREST Simple Interest
If you Borrow $100 (P) at 12 percent (R) for one year (T)
I = $100 x 0.12 x 1 = $12
18-2 Cost of Credit
FINDING INTEREST Simple Interest
Time in months – one month = 1/12 of a year
I = $100 x 0.12 x 1/12 = $1
18-2 Cost of Credit
FINDING INTEREST Simple Interest
Time in days – one year is considered 360 days
I = $100 x 0.12 x 60/360 = $2
18-2 Cost of Credit
FINDING INTEREST Maturity Dates
The date on which a loan must be repaid• When the time of the loan is stated in months, the
date of maturity is the same day of the month as the date on which the loan was made.
• When the time is in days, you must count the exact number of days to find the date of maturity.
18-2 Cost of Credit
FINDING INTEREST Installment Interest
Borrow: $100Promissory Note: $110Repayment: 12 months
($10/$100=0.10%)
18-2 Cost of Credit
FINDING INTEREST Installment Interest
Amortization Schedules: interest is calculated n the amount that is unpaid at the end of each month.
18-2 Cost of Credit
FINDING INTEREST Installment Interest
Amortization Schedules $1,047.82
18-2 Cost of Credit
FINANCE CHARGESAnnual Percentage Rate
Annual Percentage Rate (APR): a disclosure required by law. It states the percentage cost of credit on a yearly basis. Service Fees: the time and money it tales a creditor to investigate credit history, process a loan or charge account application, keeps records of payments and balances.
18-2 Cost of Credit
FINANCE CHARGESTotal Dollar Charges
To make you aware of the total cost of credit, federal law requires that the lender must tell you the finance charge. ( the total dollar cost of credit, including interest and all other charges)
18-2 Cost of Credit
FINANCE CHARGESCompare Credit Costs
• Check with several lenders to compare APR• When using a credit card, know which card
has the lowest APR• When getting a loan, shop around
18-3 Credit Application & Documents
CREDIT APPLICATION PROCESSThe Three Cs of Credit
• Character – your honesty and willingness to pay a debt when it is due. (credit history)
• Capacity – a person’s ability to pay a debt when it is due. (income)
• Capital – the value of the borrower’s possessions. (cash & Property)
18-3 Credit Application & Documents
18-3 Credit Application & Documents
CREDIT APPLICATION PROCESSDocumenting Credit Data
• Banks – report whether the applicants have the accounts listed.
• Employers – verify employment dates and salary figures.
• Landlords – verify how long tenants have been renting and if they pay rent on time.
18-3 Credit Application & Documents
CREDIT APPLICATION PROCESSActions to Establish Credit
• Keep good grades and attendance • Start a checking and savings account• Open a credit card and make small purchases
and pay them off on time• Have a good (steady) part-time job
18-3 Credit Application & Documents
CREDIT BUREAUCredit Bureau – a company that gathers information on credit users. It sell this information to businesses offering credit.
18-3 Credit Application & Documents
CREDIT BUREAUCredit Report
• Shows the debt you owe• How often you use credit• Whether you pay your debts on time• Length of your credit use
18-3 Credit Application & Documents
18-3 Credit Application & Documents
18-3 Credit Application & Documents
CREDIT DOCUMENTS Credit Contracts
• “KWYS” – Know What You are Signing– What questions should you ask before signing?
18-3 Credit Application & Documents
CREDIT DOCUMENTS Statement of Accounts
• Statement: a record of the transactions completed during the billing period– The balance that was due when the last statement was mailed– The amount charged during the month– The amount credited to your account for payments or for
returned items – The current balance (old balance + finance charges + purchases
– payments) – The minimum amount of your next payment and when it is due
18-3 Credit Application & Documents
CREDIT DOCUMENTS Avoiding Fraud
• Check all records for accuracy• Verify payments and other credits
18-4 Protection of Credit Rights
CREDIT APPLICATOIN REGULATIONS Truth in Lending Act
• Requires that you be told the cost of credit before signing the agreement
• The lender must clearly state the APR and total finance charge
• Protects consumers against unauthorized use of credit cards
• The law limits your liability to $50 for unauthorized credit card purchases made prior to notifying the card issuer
18-4 Protection of Credit Rights
CREDIT APPLICATOIN REGULATIONS Credit Card Act of 2009
• Designed to establish fair and transparent credit card practices
• Keeps credit card companies from changing fees and interest rates without cardholder approval
• Cardholders control their credit limit• Requires a credit card statement to show how long it
would take to pay off the balance if only the minimum due is paid
18-4 Protection of Credit Rights
CREDIT APPLICATOIN REGULATIONS Equal Credit Opportunity Act
• Prohibits its creditors from denying a person credit because of age, race, sex, or marital status.
• A creditor must give any person who is denied credit a written statement of the reasons for denial.
18-4 Protection of Credit Rights
CREDIT USE REGULATIONSFair Credit Billing Act
• Requires prompt correction of billing mistakes• You must notify your creditor in writing within
60 days after your statements was mailed. • Requires that credit bureaus must delete any
information dealing with a personal bankruptcy that is more than 10 years old.
18-4 Protection of Credit Rights
CREDIT USE REGULATIONSFair Credit Reporting Act
• Gives the consumer the right to know what information credit bureaus are giving to potential creditors, employers, and insurers.
• If credit is denied based on information in a credit report, the applicant must be given name, address and phone number of the credit bureau that provided the information.
18-4 Protection of Credit Rights
CREDIT USE REGULATIONSConsumer Credit Reporting Reform Act
• Places the burden of proof for accurate credit information on the credit reporting agency rather than on you.
• The creditor must certify that disputed data is accurate.
• If a creditor or the credit bureau verifies incorrect data, you can sue for damages.
18-4 Protection of Credit Rights
CREDIT USE REGULATIONSFair Debt Collection Practices Act
• A debt collection agency attempts to obtain money that is past due.
• A debt collector may contact you in person, by mail, telephone, telegram or fax.
• A debt collector may not contact you before 8 a.m. or after 9 p.m.
18-4 Protection of Credit Rights
CREDIT PROBLEMS AND ASSISTANCECredit Counseling
• Credit Counselor – discusses and suggests actions to take to reduce spending and eliminate credit difficulties.
18-4 Protection of Credit Rights
CREDIT PROBLEMS AND ASSISTANCEBankruptcy
• Bankruptcy – the legal process of reducing or eliminating an amount owned.
• This should be the final option for extreme situations only.
• This process is costly and requires legal assistance.