Consumer Credit

CONSUMER CREDIT

Chapter 11

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

PAYING FOR CREDIT Principal – original amount borrowed

Interest – profit for creditor

TYPES OF CREDIT Secured credit – backed by a pledge of

property, or collateral

Unsecured credit – not backed by collateral

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

TYPES OF CREDIT Single-payment – pay entire amount

due in a single payment

Installment – set portion paid at regular intervals

PROS AND CONS OF CREDIT Pros

Temporary expansion of income

ConvenienceFinancial

responsibility

Cons Interest and fees Increased cost of

merchandiseOpportunity cost

MORE CONCERNS ABOUT CREDIT Security Impulse buying Overspending Reclaimed merchandise

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

CREDIT HISTORY Pattern of past behavior in regards to

paying debt

CREDIT APPLICATION Employment Residence Home ownership Monthly housing costs Credit references Collateral Bank references

EQUAL CREDIT OPPORTUNITY ACT Federal law ensuring that all consumers

are given an equal chance to obtain credit.GenderMarital statusRaceReligionNational originAgePublic assistance

CREDIT REPORTING OR RATING Credit bureau – firm that collects

information about the credit worthiness of consumers from banks, stores, and other creditorsEquifax, Experian, TransUnion

Credit report – record of a particular consumer’s transactions and payment patternsDate account was openedBalance owedPayment amountLate payments

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

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

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 worldwideVISAMasterCardDiscoverAmerican Express

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

TRUTH IN LENDING ACT Creditors must adequately inform

consumers about credit terms and cost.APRHow variable rates are calculatedWhen payments are dueFees

LOANS Home loans – closed-end installment

loans, repayment plan is typically 15-20-30 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

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

CONSUMER FINANCE COMPANIES Businesses that specialize in making

small or personal loansGive credit to those who can not get it

elsewhereCharge 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

INSURANCE POLICY LOANS Life insurance – policy holder can borrow

against the amount paid in premiumsDrawbacks

Death – will deduct any outstanding loan amounts before paying benefits

Companies do not remind you to pay back the loan

PRIVATE LOANS Friends or family members

Keep loan smallBe prepared to show proof of repaymentAgree with lender on interest rateAgree on payment planBe specific – PUT IT IN WRITING!Pay promptly.Get and keep a signed receipt for each

payment.

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