Announcements. Mid Term FIN 401 : Wednesday November 2 OPEN BOOK Test: Bring the following Calculator Paper to work out your answers Text book PPT slides with your notes. Lesson 14 Chapter 12. Introduction to Consumer Credit. What is Consumer Credit?.
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Announcements Mid Term FIN 401 : Wednesday November 2 OPEN BOOK Test: Bring the following Calculator Paper to work out your answers Text book PPT slides with your notes
Lesson 14 Chapter 12 Introduction to Consumer Credit
What is Consumer Credit? Credit is = an arrangement to receive cash, goods or services now, and pay for them in the future. Consumer credit = the use of credit for personal needs, with the exception of home mortgages by individuals and families. Three ways consumers can finance purchases. • Draw on their savings. • Use present earnings. • Borrow against expected future income. There are good and bad aspects to each of the above choices. Consumer credit plays an important role in keeping the economy active, by encouraging the exchange of goods and services.
Use and Misuse of Credit Before you use credit for a major purchase, ask yourself some questions. • Do I really need this item? • Can I do without this item? • Can I borrow one of these things from a family member or friend when I need it? • Can I purchase it as a partnership with someone else?
If you decide to purchase one, ask yourself… Do I have the cash for the down payment? Do I want to use my savings for this purchase? Does this purchase fit my budget? Could I use the credit I’ll need in some better way? Can I postpone this purchase? What are the opportunity costs of postponing this purchase? What are the dollar and psychological costs of using credit for this purchase?
In class exercise Think of something that you would like to purchase. Ask yourself the questions on the previous two slides. For example, Mr. Silver really wants to have good quality bicycle to ride while he is here in China. It will be good exercise plus it will mean that he can take riding vacations with his friends and see parts of Asia that would otherwise only be seen from a bus or car. Also, it promotes a healthy lifestyle and he will feel better because of it. The bicycle he wants is approximately 10,000 RMB. 3-5 minutes later, let’s discuss the answers. Bonus mark sheet distributed to those who answer the questions.
Advantages of Credit • Immediate use of “Goods and Services”. • Access to funds that you do not have (living within your means). • A cushion for financial emergencies. • Advance notice of sales (flyer inserts of special deals are offered with balance statements). • Easier to return merchandise. • Convenient when shopping. • One monthly payment (Convenience of record keeping and reconciliation). • Safer than cash.
Advantages of Credit (continued) • Needed for: Car and Hotel reservations, Shopping online. • To take advantage of float time/grace period. • Rebate programs: Airline miles, Cash bonus programs (purchases refunded – usually 1%, 2% or 5%) • Other New bonus Offerings come up all the time. • Indicates financial stability.
Disadvantages of Consumer Credit • Temptation to overspend (Impulse shopping). • Can create long-term financial problems by slowing your progress toward financial goals. • Late payments are reported to the Credit Bureau and your financial reputation is visible for anyone to see. • Potential loss of merchandise due to late or non-payment (Repossession). • Ties up future income (lost opportunity). • Credit is more expensive than paying with cash.
How to Protect Yourself From Identity Theft • Only provide your Social Insurance Number when necessary. • Remove your name from junk mail, telemarketing lists. • Protect yourself by shredding old credit slips, account statements, and credit offers you receive in the mail (shredder or burn). • Stop preapproved credit card offers by calling 1-888-567-8688.
Types of Credit Mortgage, cars,furniture, appliances (fridge, stove) and electronics (TV, stereo). Credit cards, departments store cards, bank credit cards, incidental credit. Closed-End Credit One-time loans. With a start and end date. Payments of equal amounts. Open-End Credit Best paid in full each month. Abused when used until the credit limit is exhausted. You pay interest and finance charges if you do not pay the bill in full when due.
Credit Cards • 8/10ths U.S. households have one or more credit cards. • Only 1/3rd pay the full balance (amount owing) each month. • 2/3rds are borrowers and paying finance charges of approx 18%. • Cash Advances are common. The interest charges on cash advances usually start the same day as the money is borrowed. Interest on credit card purchases usually start 30 days after the purchase, explaining why it is beneficial to pay the balance in full every month. 5. Co-branding of credit cards with a business results in rebate offers on products and services. • Debit cards: automatically takes the money from your bank account. • New Security Feature: Smart cards. imbedded computer chip.
Protecting Yourself Against Credit Card Fraud • Sign new cards when they arrive. • Treat cards like money - keep them in a safe place. • Shred anything with your account number on it. • Don’t give your number over the telephone unless you made the outgoing call. • Do not put your information on postcards. • Get receipts after every purchase / transaction: file them and compare (reconcile) to your invoice, checking for errors. • Notify the card issuer IMMEDIATELY if you don’t get your billing statement, or if your card is lost or stolen. • Check your credit report once each year.
When You Make Purchases Online • Use a secure browser. • Keep records of online transactions. • Review monthly statements online. • Stay up to date with policies of the websites you visit concerning refunds, site security, and privacy. • Keep personal information private, unless you know who is gathering it and why. • Shop at businesses you know and trust. • Never give out your password to anyone online. • Don’t download files sent by strangers.
Measuring Your Credit Capacity Before you take out a loan, ask yourself: • Can you afford the loan? • What do you plan to give up in order to make the payment?
monthly payments* net monthly income General Rules of Credit Capacity Debt Payments-to-Income Ratio Consumer credit payments should not exceed a max of 20% of your net income. *Not including house payment which is a long-term liability Note: Formulas will be provided when you are tested.
Cosigning a Loan Cosigning a loan means that you agree to repay the borrowed money if the other person (your friend) fails to pay it. The creditor (lender) will give you a notice that tells you… • You are being asked to guarantee the debt (be sure that you can afford to pay it if your friend cannot). • If the borrower (your friend) does not pay, you will have to pay the outstanding balance owed, and any late or collection fees. • If a payment is missed the creditor (lender) can collect the debt from you, without first trying to get it from the borrower.
Cosigning a Loan (continued) If you do cosign, consider... • Can you afford to pay the loan? If not, your credit rating may be damaged. • Your own credit ratio for this debt may prevent you from getting other credit that you need. • If you put up collateral (house, car, etc.) you could lose it if the loan goes into default. • Check the laws in your province to learn about cosigner’s rights. • Request that a copy of overdue payment notices be sent to you.
Build and Maintain Your Credit Rating • Limit your borrowing to your capacity to repay. • Live up to the terms of contracts. • Check to see what is in your credit report once each year. • Credit bureaus collect information (Trans Union and Equifax are the two largest credit reporting agencies in North America). • Credit Bureaus get monthly information from banks, finance companies, credit card companies, merchants and other creditors.
Credit Reporting Act • Is your credit report accurate? • You can get a free copy of your credit report just by asking. It usually takes about 15 days to receive it. • Credit card companies must correct inaccurate or incomplete information. • Only authorized persons have access to your report. • Information is maintained for 7 years. If you have gone bankrupt, provincial and state laws vary on how long it must be available to lenders. In Canada, a first occurrence is 7 years and a second bankruptcy is 14 years.
What If You are Denied Credit? • Check your credit file at the credit bureau. • Ask the creditor to clarify reason for denial. • If you believe the reason for credit denial is invalid, make a formal appeal (Gather the information you require to prove that you have honoured the financial obligation they are saying you failed to pay). If your credit is bad and you still want to borrow: • Apply to another creditor with different standards. • Take steps to improve your creditworthiness.
What Creditors Look For: 5 Cs • Character – Do you pay bills on time? • Capacity – Can you repay the loan? • Capital – What are your assets and net worth? • Collateral – What property do you have to pledge that the lender can repossess if you default on the loan? • Conditions – What economic conditions could affect your ability to repay the loan?
Avoiding and Correcting Credit Mistakes • Notify creditor of error in writing immediately upon noticing an error. • Include your explanation of the error and your account number to the billing inquiries address. • They must respond within 30 days. • Credit card company has two billing periods but no longer than 90 days to correct your account or tell you why they think the bill is correct. • Your credit rating is not affected while item is in dispute.
Avoiding and Correcting Credit Mistakes Laws that protect you include the right to: • Withhold payment on damaged or products and services that were represented as a higher quality IF you make a sincere / honest attempt to resolve the problem with your creditor. • Ask for details about the product or service that you are considering. If the seller avoids giving you all the information that you require, take your business elsewhere (to another company)
What if Your Identity is Stolen? • Contact the fraud department of each of the three major credit bureaus; tell them to flag your file with a fraud alert, including a statement that creditors should call you for permission before opening any new accounts in your name. • Contact creditors to check for accounts that have been tampered with or opened fraudulently. • File a police report and keep a copy. • Report it to the provincial or state agency responsible for tracking this information.
Lending Rights LAWS 1. Lending Rights LAWS require creditors (lenders) to provide you with accurate and complete credit costs and terms (Previously studied - APR vs. EAR). 2. Provides specific cost disclosure requirements for the APR and total finance charges. 3. Regulates disclosure of other terms and conditions. 4. Regulates advertising of credit terms.
Fair Debt Collection Practices “Act” Collection Agencies… • Cannot be abusive or threatening. • Cannot call you at work if you tell them not to. • Cannot tell your boss and friends. • Cannot call you at odd hours (2AM in the morning). • Must follow set procedures (although they do not have to share their internal company procedures with you, if you know the law, you will know the consequences that will apply to you). • The “Act” does not apply to creditors (lenders) attempting to collect the debt, from you, themselves (but they cannot break the law).
Protection Under Other Consumer Credit Laws Equal Credit Opportunity Act. Explains your rights if you have been refused credit due to discrimination based on sex, marital status, age, race, religion, national origin. Consumer Credit Reporting Reform Act. Places burden of proof for reporting on credit issuers. In Canada, credit reports are free.
Bonus Marks Pick up a consumer loan application from a bank or online. Give a 2 minute class presentation, explaining… • Which of the questions on the application fit under each of the 5 C’s of credit? • Discussing one some of the major points, which you think are most important to know, from within agreement.
Bonus Marks Call or stop by a financial institution in your area and get rate quotes for new and used cars. In one paragraph, discuss and compare the rates that you found. If you have formed any opinions, state them.
Bonus Marks Find a Credit Card Company in China (online or brochure). Look at the different cards they offer. Describe, in paragraph format, or bullets or chart, the features that are important to you in choosing a credit card?