Chapter 15

2. Consumer Credit Chapter 15 What steps can you take now to start building and maintaining a strong credit rating?

3. Consumer Credit Chapter 15 Section 1 What Is Consumer Credit? • Explain the meaning of consumer credit. • Differentiate between closed-end and open-end credit.

4. Consumer Credit Chapter 15 Section 1 What Is Consumer Credit? Using Consumer Credit Wisely Good credit means you have the ability to borrow funds to buy things you would otherwise have to save for. credit an arrangement to receive cash, goods, or services now and pay for them in the future

5. Consumer Credit Chapter 15 Section 1 What Is Consumer Credit? Using Consumer Credit Wisely Consumer credit is a major force in the American economy. consumer credit use of credit for personal needs

6. Consumer Credit Chapter 15 Section 1 What Is Consumer Credit? Using Consumer Credit Wisely What is a creditor? creditor an entity that lends money

7. Consumer Credit Chapter 15 Section 1 What Is Consumer Credit? Using Consumer Credit Wisely Using credit increases the amount of money you can spend now, but the cost of credit decreases the amount of money you will have in the future.

8. Consumer Credit Chapter 15 Section 1 What Is Consumer Credit? Factors to Consider Before Using Credit

9. Consumer Credit Chapter 15 Section 1 What Is Consumer Credit? Factors to Consider Before Using Credit

10. Consumer Credit Chapter 15 Section 1 What Is Consumer Credit? Types of Credit Closed-End Credit Open-End Credit closed-end credit credit as a one-time loan that is paid back over a specified period of time in payments of equal amounts open-end credit credit as a loan with a certain limit on the amount of money that can be borrowed for a variety of goods and services

11. Close-end Credit • Mortgages • Vehicle loans • Installment loans for large purchases • Generally merchandise • Lender holds the title until all payments are made • Title: document showing ownership

12. Open-end Credit • Major credit cards • Department store credit cards • Billed periodically for partial payment • Includes interest or other finance charges • Cannot exceed your line of credit line of credit maximum amount of money a creditor will allow a credit user to borrow

13. Consumer Credit Chapter 15 Section 1 What Is Consumer Credit? Sources of Consumer Credit Loans Credit Cards Inexpensive Loans Debit Cards Medium-Priced Loans Cobranding Expensive- Loans Smart Cards Home Equity Loans Store-Value Cards Travel and Entertainment (T&E) Cards

14. Consumer Credit Chapter 15 Section 1 What Is Consumer Credit? Sources of Consumer Credit Loans Inexpensive Loans Medium-Priced Loans Expensive- Loans Home Equity Loans

15. Consumer Credit Chapter 15 Section 1 What Is Consumer Credit? Sources of Consumer Credit When you have a credit card, you should know the grace period and the finance charge. grace period time period during which no finance charges will be added to an account finance charge total dollar amount paid to use credit

16. Consumer Credit Chapter 15 Section 1 What Is Consumer Credit? Sources of Consumer Credit Credit Cards Debit Cards Cobranding Smart Cards Store-Value Cards Travel and Entertainment (T&E) Cards

17. Consumer Credit Chapter 15 Section 1 What Is Consumer Credit? Look at the suggestions in Figure 3 on page 460. Which of the factors do you think might be most important in your choice of a credit card? Sample answer: tip number 2 is most important as it stresses the need to compare credit cards and their terms from several different banks before making an informed decision.

18. Consumer Credit Chapter 15 Section 2 The Costs and Methods of Obtaining Credit • Name the five Cs of credit. • Identify factors to consider when choosing a loan or credit card. • Explain how to build and protect your credit rating.

19. Consumer Credit Chapter 15 Section 2 The Costs and Methods of Obtaining Credit Can You Afford a Loan? Add up all your basic monthly expenses and then subtract the total from your take-home pay. Consider what you might give up to make a monthly loan payment.

20. Consumer Credit Chapter 15 Section 2 The Costs and Methods of Obtaining Credit Can You Afford a Loan? Debt Payments-to-Income Ratio 20% Rule The percentage of debt you have in relation to your net income You shouldn’t spend more than 20% of your income on debt payments net income income received from take-home pay, allowance, gifts, and interests

21. Debt Payments-to-Income Ratio (DPR) Example: Suppose that your monthly net income is $1,200. Your monthly debt payments include your student loan payment and a gas credit card, and they total $180. What is your debt payments-to-income ratio?

22. Consumer Credit Chapter 15 Section 2 The Costs and Methods of Obtaining Credit The Cost of Credit When shopping for credit, you should know the finance charges and annual percentage rates (APR) of the credit sources you are considering. annual percentage rate (APR) cost of credit on a yearly basis, expressed as a percentage

23. Consumer Credit Chapter 15 Section 2 The Costs and Methods of Obtaining Credit The Cost of Credit Annual Percentage Rate Table for Monthly Payments

24. Consumer Credit Chapter 15 Section 2 The Costs and Methods of Obtaining Credit The Cost of Credit Trade-Offs Term VersusInterest Costs Lender Risk Versus Interest Rate Reduce Risk by Considering: Reduce Risk by Considering: The longer the term, the lower the monthly payments Variable Interest Rate Secured Loan (Requires Collateral) The longer the term, the more interest you will pay in total Up-Front Cash Look at your needs Shorter Term collateral a form of security that helps guarantee that the creditor will be repaid

25. Consumer Credit Chapter 15 Section 2 The Costs and Methods of Obtaining Credit The Cost of Credit Calculating the Cost of Credit Simple Interest Cost of Open-End Credit Simple Interest on the Declining Balance Cost of Credit and Expected Inflation The Minimum Monthly Payment Trap Add-On Interest simple interest interest computed only on the principal minimum monthly payment smallest amount that one can pay and remain a borrower in good standing

26. Simple Interest Formula: Principal * Interest Rate * amount of time = Simple Interest Example: Janelle’s cousin agreed to lend her $1,000 to purchase a used laptop. She has agreed to charge only 5% simple interest, and Janelle has agreed to repay the loan at the end of one year. How much interest will she pay for the year?

27. Consumer Credit Chapter 15 Section 2 The Costs and Methods of Obtaining Credit Applying for Credit The Five Cs of Credit Character Capacity Capital Collateral Conditions

28. Character • Will you repay the loan? • Creditors want to know that you are trustworthy and stable • References • Background check • Questions they will consider: • Have you used credit before? • How long have you lived at your current address? • How long have you held your current job?

29. Capacity • Can you repay the loan? • Income • Debts • Questions they will consider: • What is your job, and how much is your salary? • Do you have other sources of income? • What are your current debts?

30. Capital • What are your assets and net worth? • Assets: anything of value that you own • Capital: amount of assets that exceed your debts • Questions they will consider: • What are your assets? • What are your liabilities? • Why do lenders want to know about your assets?

31. Collateral • What if you do not repay the loan? • Collateral: property of savings you pledge to secure the loan • Questions they may consider: • What assets do you have to secure the loan? (vehicle, home, etc) • Do you have any additional assets? (bonds, savings)

32. Conditions • What if your job is insecure? • Economic conditions: • Unemployment • Recession • Security of the company that employs you • This information (the 5 C’s) determines your credit score, or your credit rating

33. Consumer Credit Chapter 15 Section 2 The Costs and Methods of Obtaining Credit Applying for Credit Factors that Determine Credit Rating Income Current Debt Information About Character Debt Payment History credit rating a measure of a person’s ability and willingness to make credit payments on time

34. Consumer Credit Chapter 15 Section 2 The Costs and Methods of Obtaining Credit Applying for Credit Two Types of Credit Reports FICO Vantagescore

35. Consumer Credit Chapter 15 Section 2 The Costs and Methods of Obtaining Credit Applying for Credit Personal Credit Score

36. Consumer Credit Chapter 15 Section 2 The Costs and Methods of Obtaining Credit Applying for Credit You have a right to know why you are refused credit.

37. Consumer Credit Chapter 15 Section 2 The Costs and Methods of Obtaining Credit Your Credit Report The Three Major Credit Bureaus Where Do Credit Bureaus Get Information? • Banks • Finance Companies • Stores • Credit Card Companies • Other Lenders Experian Trans Union Equifax

38. Consumer Credit Chapter 15 Section 2 The Costs and Methods of Obtaining Credit Your Credit Report Contents of Your Credit File • Employer, Position, Income • Previous Address • Previous Employer • Spouse’s Information • Homeowner or Renter Status • Checks Returned or Insufficient Funds

39. Consumer Credit Chapter 15 Section 2 The Costs and Methods of Obtaining Credit Your Credit Report You and Your Credit File • There are time limits on unfavorable data. • Credit bureaus must ensure information in your credit file is correct. • You can sue a credit bureau or creditor that has caused you harm by not following rules established by the Fair Credit Reporting Act.

40. Consumer Credit Chapter 15 Section 2 The Costs and Methods of Obtaining Credit Your Credit Report

41. Consumer Credit Chapter 15 Section 3 Protecting Your Credit • Protect yourself from fraud and identity theft. • Identify consumer protection laws.

42. Consumer Credit Chapter 15 Section 3 Protecting Your Credit Billing Errors and Disputes

43. Consumer Credit Chapter 15 Section 3 Protecting Your Credit Billing Errors and Disputes

44. Consumer Credit Chapter 15 Section 3 Protecting Your Credit Credit and Stolen Identity If you think you are a victim of identity theft: Contact the Credit Bureaus Contact the Creditors File aPolice Report

45. Consumer Credit Chapter 15 Section 3 Protecting Your Credit Protecting Your Credit From Theft or Loss

46. Consumer Credit Chapter 15 Section 3 Protecting Your Credit Protecting Your Credit from Theft or Loss Protecting Your Credit on the Internet Use a secure browser. Keep records of online transactions. Review monthly bank and credit card statements. Read privacy and security policies of Web sites. Keep your personal information private. Never give your password to anyone online. Do not download files sent to you by strangers.

47. Consumer Credit Chapter 15 Section 3 Protecting Your Credit Cosigning a Loan cosigning agreeing to take responsibility for loan payments if the other person fails to make them

48. Consumer Credit Chapter 15 Section 3 Protecting Your Credit Complaining About Consumer Credit Consumer Protection Laws Credit Card Act Truth in Lending Act Consumer Leasing Act Equal Opportunity Act (ECOA) Fair Credit Opportunity Act Fair Credit Reporting Act Consumer Credit Reporting Reform Act

49. Consumer Credit Chapter 15 Section 3 Protecting Your Credit Complaining About Consumer Credit In Cases of Discrimination: Complain to the creditor. File a complaint with the government. If all else fails, sue the creditor.

50. Consumer Credit Chapter 15 Section 3 Protecting Your Credit The Consumer Credit Reporting Reform Act states that the burden of proof for accurate information is on the credit bureau rather than on you. How can this benefit you if you find information you feel is wrong on your credit report? Students should understand that if you dispute information on your credit report and the credit bureau cannot prove it is accurate, then they must remove the information from your report. Prior to the law, the information would have remained on the report until you could prove it was inaccurate.