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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.

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Consumer Credit

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  1. Consumer Credit Chapter 11

  2. 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

  3. Paying for Credit • Principal – original amount borrowed • Interest – profit for creditor

  4. Types of credit • Secured credit – backed by a pledge of property, or collateral • Unsecured credit – not backed by collateral

  5. 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

  6. Types of credit • Single-payment – pay entire amount due in a single payment • Installment – set portion paid at regular intervals

  7. Pros and Cons of credit • Pros • Temporary expansion of income • Convenience • Financial responsibility • Cons • Interest and fees • Increased cost of merchandise • Opportunity cost

  8. More concerns about credit • Security • Impulse buying • Overspending • Reclaimed merchandise

  9. 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

  10. Credit History • Pattern of past behavior in regards to paying debt

  11. Credit application • Employment • Residence • Home ownership • Monthly housing costs • Credit references • Collateral • Bank references

  12. Equal credit opportunity act • Federal law ensuring that all consumers are given an equal chance to obtain credit. • Gender • Marital status • Race • Religion • National origin • Age • Public assistance

  13. Credit reporting or rating • Credit bureau – firm that collects information about the credit worthiness of consumers from banks, stores, and other creditors • Equifax, Experian, TransUnion • Credit report – record of a particular consumer’s transactions and payment patterns • Date account was opened • Balance owed • Payment amount • Late payments

  14. 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

  15. 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

  16. 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 worldwide • VISA • MasterCard • Discover • American Express

  17. 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

  18. Truth in lending act • Creditors must adequately inform consumers about credit terms and cost. • APR • How variable rates are calculated • When payments are due • Fees

  19. 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

  20. 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

  21. Consumer Finance companies • Businesses that specialize in making small or personal loans • Give credit to those who can not get it elsewhere • Charge 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

  22. Insurance policy loans • Life insurance – policy holder can borrow against the amount paid in premiums • Drawbacks • Death – will deduct any outstanding loan amounts before paying benefits • Companies do not remind you to pay back the loan

  23. Private loans • Friends or family members • Keep loan small • Be prepared to show proof of repayment • Agree with lender on interest rate • Agree on payment plan • Be specific – PUT IT IN WRITING! • Pay promptly. • Get and keep a signed receipt for each payment.

  24. 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

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