A Guide to Credit: Types, Accounts, Loans, and Costs

1. CHAPTER 18 CONSUMER CREDIT

2. 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.

3. 18-1 Credit Fundamentals USING CREDIT Types 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.

4. 18-1 Credit Fundamentals USING CREDIT Charge 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

5. 18-1 Credit Fundamentals USING CREDIT Charge 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)

6. 18-1 Credit Fundamentals USING CREDIT Credit 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.

7. 18-1 Credit Fundamentals USING CREDIT Installment 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.

8. 18-1 Credit Fundamentals USING CREDIT Consumer 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)

9. 18-1 Credit Fundamentals USING CREDIT Consumer 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

10. 18-1 Credit Fundamentals USING CREDIT Consumer Loans • Collateral – property that is used as security • Cosigner – someone responsible for payment if you do not pay as promised.

11. 18-1 Credit Fundamentals BENEFITS OF CREDIT • Convenience • Immediate Possession • Savings • Credit Rating • Useful for Emergencies

12. 18-1 Credit Fundamentals CREDIT CONCERNS • Overbuying • Careless buying • Higher prices • Overuse of credit

13. 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)

14. 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

15. 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

16. 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

17. 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. 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.

19. 18-2 Cost of Credit FINDING INTEREST Installment Interest Borrow: $100 Promissory Note: $110 Repayment: 12 months ($10/$100=0.10%)

20. 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.

21. 18-2 Cost of Credit FINDING INTEREST Installment Interest Amortization Schedules $1,047.82

22. 18-2 Cost of Credit FINANCE CHARGES Annual 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.

23. 18-2 Cost of Credit FINANCE CHARGES Total 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)

24. 18-2 Cost of Credit FINANCE CHARGES Compare 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

25. 18-3 Credit Application & Documents CREDIT APPLICATION PROCESS The 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)

26. 18-3 Credit Application & Documents

27. 18-3 Credit Application & Documents CREDIT APPLICATION PROCESS Documenting 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.

28. 18-3 Credit Application & Documents CREDIT APPLICATION PROCESS Actions 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

29. 18-3 Credit Application & Documents CREDIT BUREAU Credit Bureau – a company that gathers information on credit users. It sell this information to businesses offering credit.

30. 18-3 Credit Application & Documents CREDIT BUREAU Credit Report • Shows the debt you owe • How often you use credit • Whether you pay your debts on time • Length of your credit use

31. 18-3 Credit Application & Documents

32. 18-3 Credit Application & Documents

33. 18-3 Credit Application & Documents CREDIT DOCUMENTS Credit Contracts • “KWYS” – Know What You are Signing • What questions should you ask before signing?

34. 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

37. 18-3 Credit Application & Documents CREDIT DOCUMENTS Avoiding Fraud • Check all records for accuracy • Verify payments and other credits

38. 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

39. 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

40. 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.

41. 18-4 Protection of Credit Rights CREDIT USE REGULATIONS Fair 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.

42. 18-4 Protection of Credit Rights CREDIT USE REGULATIONS Fair 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.

43. 18-4 Protection of Credit Rights CREDIT USE REGULATIONS Consumer 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.

44. 18-4 Protection of Credit Rights CREDIT USE REGULATIONS Fair 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.

45. 18-4 Protection of Credit Rights CREDIT PROBLEMS AND ASSISTANCE Credit Counseling • Credit Counselor – discusses and suggests actions to take to reduce spending and eliminate credit difficulties.

46. 18-4 Protection of Credit Rights CREDIT PROBLEMS AND ASSISTANCE Bankruptcy • 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.