Unit 6

1. Unit 6 Consumer Credit

2. Unit 6 Vocabulary • Due Date • Finance (Handling) Charge • Five C’s of Credit • Installment Loan • Installment Purchase (Sales) Contract • Line of Credit • New Balance • Principal • Prorate • Secured Loan • Service (Carrying) Charge • Simple Interest • Unpaid Balance • Annual Percentage Rate (APR) • Average Daily Balance • Balance Due • Billing (Closing) Date • Borrower • Capital • Collateral • Credit • Credit Bureau • Credit Card • Credit Card Statement • Credit History • Creditor • Down Payment

3. Unit Essential Question • What are the history, advantages, disadvantages, laws, costs, and consumer responsibilities of credit?

4. The Vernacular of Credit • Credit:The privilege of buying something now, with the agreement to pay later, or borrowing money with the promise to pay it back later. • Balance Due: The amount that remains due on a loan, including both principal and interest.

5. The Vernacular of Credit • Billing (Closing) Date:The last date of the month that any purchase you made with your credit card or any payment made on your account is recorded. • Borrower: The person who borrows money or uses credit. • Capital: The property you possess that is worth more than your debts.

6. The Vernacular of Credit • Collateral:Personal property (bonds, stocks, automobiles, livestock, proceeds from an insurance policy, and so on) pledged to a lender to secure a loan. • Creditor: Person or company to whom one owes money or goods. • Due Date:The date on or before which payment is due.

7. The Vernacular of Credit • Financing (Handling) Charge:The amount a borrower must pay for the use of credit, including interest and service charges. • Installment Purchase (Sales) Contract: A written agreement to make regular payments on a specific purchase.

8. The Vernacular of Credit • Principal: Amount of money borrowed or the unpaid balance of a revolving credit account • Prorate:To divide proportionately over a period of time. • Secured Loan: A loan wherein the borrower pledges property or other assets to assure the creditor of repayment.

9. The Vernacular of Credit • Service (Carrying) Charge:Amount charged to borrowers or customers by merchants or banks for servicing an account or loan. • Credit Card:A card that allows the person to whom it is issued to receive purchases and service, but pay for them later.

10. The Vernacular of Credit • Credit Card Statement:Monthly statement received from the credit card company. It contains all the pertinent information regarding your account for that month. • Line of Credit:A pre-established amount that can be borrowed on demand.

11. Essential Question 1Credit • What is the history of credit in America?

12. History of Credit • The need for credit arose when America changed from a bartering economy to a currency exchange economy. • Pre 1900 • Credit was rare • General Stores offered farmers credit “on account” with no interest to be paid in full after the harvest. • Money borrowed from a bank usually had a very high interest rate of 25 – 50 percent.

13. History of Credit • Early 1900s • Lenders began to understand the advantages of credit and interest rates dropped. • As the United States shifted from an agricultural economy to an industrial economy, lending institutions started asking for collateral to secure loans. • The expanded use of credit lead to job creation and economic growth.

14. History of Credit • 1920 – 1980 • Buying on credit became the American way. • The overuse of credit, especially in the stock market, helped cause the great depression when the market crashed in 1929. • World War II pulled the United States out of the depression and into thirty years of economic growth and revitalization of credit-mania. • Again, the ramped use of credit helped put the United States into a deep recession with the oil crisis of the mid-70s.

15. History of Credit • With double digit inflation and double digit interest, Americans could not afford to buy a house or automobile, even on credit. • Major and powerful consumer protection legislation was passed and private and government agencies formed to enforce the laws and protect the consumer form fraudulent and excessive interest rates. • The late-70s saw the economy start to recover and a new occupation emerge – credit counseling.

16. History of Credit • The 1980s • The recession and slow recovery that followed claimed many people and businesses as a record number declared bankruptcy. • A better understanding of credit developed and it was seen as the villain for the great depression and great recession. • Tax laws changed to discourage the use of credit and encourage savings. • Along with this change came a new occupational cluster – Financial and Investment Planners and Advisors

17. History of Credit • Credit Today • Over 80 percent of all purchases made in the United States are made through the use of credit. • Major industries such as automobiles use credit as a major marketing tool. • Certain types of credit are easy to get such as credit cards. Other types of credit, such as mortgages, are harder to get. • The United States is again facing a credit crisis similar to that of 1929 and 1976. It is just a matter of time.

18. Essential Question 2Credit • What are the advantages and disadvantages of using credit in today’s changing economy?

19. Advantages and Disadvantages of Credit • Advantages of Credit • Increases buying power • Increases standard of living • Provides emergency funds • Assists with budgeting • Get better service, preferred status • Have better receipts (proof of purchase) • More convenient, faster, and safer than cash.

20. Advantages and Disadvantages of Credit • Disadvantages of Credit • Financial cost of credit make it more expensive than cash. • Decreases amount of comparison shopping by limiting customers to stores that accept credit. • Future income is tied up in paying off credit. • Can lead to overspending.

21. Essential Question 3Credit • What are the five C’s of credit and how do they impact your credit rating or creditworthiness?

22. Creditworthiness • Establishing Credit • Determining creditworthiness (the five C’s of credit) • Character: Will you repay the debt? A person who is stable and has a responsible attitude toward paying bills and meeting obligations. • Capacity: Can you repay the debt? You need to have enough money left over each month after paying fixed expenses to meet the debt obligation.

23. Creditworthiness • Establishing Credit • Determining creditworthiness (the five C’s of credit) • Capital: Is the creditor fully protected if you fail to repay? Your net worth (assets minus liabilities) must be greater than the debt to ensure it can be paid back in full. • Conditions: What economic conditions can affect your repayment of debt? Employment history, job security, employer, whether or not you’re married, legal history, etc. are all examples of things considered by a creditor.

24. Creditworthiness • Establishing Credit • Determining creditworthiness (the five C’s of credit) • Collateral: If your capacity to pay suddenly changes, what can you sell to give creditors their money? Property or possessions you own that can be used to secure the debt. If the debt is not paid as agreed, the collateral is repossessed and sold to pay the debt.

25. Creditworthiness • Establishing Credit • Any time you go into debt, you establish credit. • Credit History:A complete record of your credit performance. • Credit Bureau:A company that accumulates, stores and distributes credit information. There are three major Credit Bureaus in the U.S. • Equifax • TRW Credit Data • TransUnion

26. Creditworthiness • Establishing Credit • http://www.creditratings101.com/credit-scores/fico-score/ • Credit ratings: • Excellent or A rating: • Pays bills before the due date. • Has used credit successfully for many years. • Has not missed any payments. • Pays greater than the minimum amount required. • Pays debts off early.

27. Creditworthiness • Establishing Credit • Credit ratings: • Good or B rating: • Pays bills on time or during the ten day grace period. • Has not missed any payments. • Fair rating: • Usually pays bills within the grace period, but occasionally takes longer. • Late charges are necessary, but normally no reminder is needed. • Person is described as slow in paying, but fairly reliable.

28. Creditworthiness • Establishing Credit • Credit ratings: • Poor rating: • Payments are not regular. • Months are often missed. • Reminders are frequently sent. • This person has failed entirely to pay back a debt, has filed bankruptcy, or has other wise shown he or she is not a good credit risk. • Is usually denied credit.

29. Essential Question 4Credit • What provisions of the major credit laws affect you the most?

30. Credit Laws • Consumer Credit Protection Act • Also known as the Truth-in-Lending Act • Requires the creditor to disclose the following facts to the debtor in writing: • Cash price • Down payment • Trade-in price • Amount financed • Finance charge • Annual percentage rate • Insurance costs, filing fees, other miscellaneous added costs of any kind

31. Credit Laws • Amount(s) and date(s) of payment • Method of calculating unearned interest in case of early payoff • Any other information that may be applicable • Three day grace period in which the purchaser is allowed to change his or her mind. • Limited liability to $50 after a credit card has been lost or stolen. • No liability if the card is reported lost prior to any fraudulent charges being incurred.

32. Credit Laws • Fair Credit Reporting Act • You have a right to your credit report. • You have to know who has accessed your credit report over the last two years. • You have a right to know why you have been denied credit.

33. Credit Laws • Fair Credit Billing Act • The consumer must report billing errors within 60 days of receipt of the statement. • The statement must showed an itemized list of transactions. • The creditor must acknowledge your complaint within 30 days. • The creditor must correct the error or explain why the bill is correct with in 90 days of receipt of the letter.

34. Credit Laws • Equal Credit Opportunity Act • Credit cannot be denied based on discriminatory reasons (race, sex, religion, marital status, age, national origin, if you receive public assistance, unemployed, etc.) • Husbands and wives are considered co-borrowers and are equally responsible for the payment of debt and receive equal credit for the payment of that debt.

35. Credit Laws • Fair Debt Collection Practices Act • Designed to eliminate abusive collection practices. • Intimidation is prohibited when there is a legitimate reason for nonpayment. • Very restricted on when debt collectors are allowed to make telephone calls or visits to a place of employment. • Debt collectors must verify the accuracy of the bill and give the consumer the opportunity to clarify and dispute it.

36. Essential Question 5Credit • What are your responsibilities to yourself, responsibilities to creditors, and the creditor’s responsibilities to you?

37. Responsibilities of Consumer Credit • Your Responsibilities to Yourself • Use credit wisely • Have the right attitude – good faith and reputation • Your Responsibilities to Creditors • Limit your spending to what you can afford to pay • Read and understand the agreements • Contact the creditor when there is a problem

38. Responsibilities of Consumer Credit • Creditors’ Responsibilities to You • Truthful and informative – represents their goods and services honestly • Sound lending and credit policies • Uses established credit reporting agencies • Does not allow a customer to over-extend themselves • Applies fair and reasonable credit charges

39. Essential Question 6Credit • What are the costs associated with credit and how do you calculate them under varying conditions?

40. The Cost of Credit • The cost of credit can be determined by using the simple interest formula, APR formula, previous balance method, adjusted balance method, or the average daily balance method.

41. The Cost of Credit • Computing Simple Interest • Computed using the formula I = PRT. • I - Interest • P - Principal • R - Rate • T – Time • Finance Charge:The amount you pay if the last balance has not been paid in full. • Is calculated using the simple interest formula. • The principal is the unpaid balance. • Time is always equal to one.

42. The Cost of Credit • Unpaid Balance:Any of the last balance that was not paid. Is calculated by: • Unpaid Balance = Last Balance – Payment • New Balance:The amount owed after adding the finance charge and new purchases to the unpaid balance. Is calculated by: • New Balance = Unpaid Balance + Finance Charge + New Charges

43. The Cost of Credit • Examples: • Find the unpaid balance, finance charge, and new balance. • Last Balance: $1,043.23 • Payments: $180 • Finance Rate: 1.5% • New Charges: $137.21 • Find the unpaid balance, finance charge, and new balance. • Last Balance: $80.45 • Payments: $0 • Finance Rate: 1% • New Charges: $99.85 • Find the unpaid balance, finance charge, and new balance. • Last Balance: $1,643.87 • Payments: $250 • Finance Rate: 1.25% • New Charges: $37.75

44. The Cost of Credit • Adjusted Balance Method: The finance charge is applied only to the amount owed after you’ve paid your bill each month.

45. The Cost of Credit • Adjusted Balance Method(APR = 18%)

46. The Cost of Credit • Previous Balance Method: The finance charge is imposed on the entire amount owed from the previous month.

47. The Cost of Credit • Previous Balance Method (APR = 18%)

48. The Cost of Credit • Average Daily Balance Method: The finance charge is based on the balance of each day of the billing cycle added together then divided by the number of days of the billing cycle.

50. The Cost of Credit • Installment Loan: A loan to be repaid in fixed payments including principle and interest. • Down Payment: An amount given as security for a loan to ensure that other remaining payments will be made.