Financial Institutions and Markets

1. Financial Institutions and Markets Consumer Buying and Credit 10-1 Consumer Loans and Credit Scores 10-2 Consumer Debt and Bankruptcy 10-3

2. 10-1 Consumer Buying and Credit Describe the steps of preparing a good buying plan. LO1-1 Discuss the advantages and disadvantages of using credit. LO1-2 Discuss the responsibilities of using credit and the obligations of borrowing money. LO1-3

3. 10-1 Consumer Buying and Credit Buying Plan impulse buying buying plan spending limit criteria Credit: Friend and Foe financing option comparison shopping Responsibilities of Credit late fee over-the-limit fee

4. Buying Plan Impulse buying occurs when you buy something on the spot, without thinking about it. 10-1 Consumer Buying and Credit A buying plan is an organized method for making good buying decisions. • It will help you stretch your resources. It will also prevent buyer’s remorse, which is regret over a buying decision.

5. Buying Plan A spending limit is a pre-set amount that you will pay for an item. 10-1 Consumer Buying and Credit Criteria are standards or rules by which something is judged. For an item you want to buy, the criteria might be features, functions, and quality of the item. You should make a list of the options and criteria that are important to you.

6. Buying Plan 10-1 Consumer Buying and Credit impulse buying buying plan spending limit criteria What is the advantage of using a buying plan? Using a buying plan helps consumers make informed decisions and avoid falling into debt.

7. Credit: Friend and Foe A financing option is a way to pay for purchases. 10-1 Consumer Buying and Credit Comparison shopping is the process of looking for the best value for the money spent. • If you can use a credit card, open an account, or borrow from a credit union, you can finance your purchase without using cash.

8. Credit: Friend and Foe 10-1 Consumer Buying and Credit financing option comparison shopping How can credit be dangerous to your financial future? Possible answer: Credit can be dangerous to my financial future if I do not use it responsibly. If I use it to buy things I don’t really need or can’t afford it could be impossible for me to borrow funds in the future to make purchases I really need.

9. Responsibilities of Credit A late fee can be a set amount, such as $35, or a percentage of the late amount. 10-1 Consumer Buying and Credit An over-the-limit fee is a fee you incur when you spend over your authorized credit limit.

10. Responsibilities of Credit 10-1 Consumer Buying and Credit late fee over-the-limit fee What are three obligations you have as a user of credit? Possible answer: Users of credit should make payments on time, stay within credit limits, and monitor accounts to find mistakes.

11. 10-2 Consumer Loans and Credit Scores List and describe the types of loans and sources of credit available to consumers. LO2-1 Explain the contents of a credit report and how to improve your credit score. LO2-2

12. 10-2 Consumer Loans and Credit Scores Loans and Sources of Credit installment loan promissory note co-signer line of credit revolving credit Credit Records, Reports, and Scores credit bureaus credit report credit score

13. Loans and Sources of Credit An installment loan is a loan that requires the consumer to make regular monthly payments for a set period of time. 10-2 Consumer Loans and Credit Scores A promissory note is a legal contract that requires the borrower to make principal payments plus interest.

14. Loans and Sources of Credit A co-signer is a person who also signs the loan agreement and agrees to pay the loan if the borrower is unable to do so. 10-2 Consumer Loans and Credit Scores A personal line of credit is a preapproved loan amount that a borrower can access as needed.

15. Loans and Sources of Credit Revolving credit is an account you can keep using until you reach your maximum limit while you make regular payments to pay down the balance. 10-2 Consumer Loans and Credit Scores • Your account may have an ongoing balance. • A minimum monthly payment is required to remain in good standing. If you make only the minimum payment, you will pay considerable interest on the outstanding balance.

16. Loans and Sources of Credit 10-2 Consumer Loans and Credit Scores installment loan promissory note co-signer line of credit revolving credit How is installment credit different from revolving credit? Installment credit requires the regular payment of a preset amount of money that will pay down the debt until it is satisfied. Revolving credit also requires regular payments but not a preset amount and the debt can be carried at various levels indefinitely.

17. Credit Records, Reports, and Scores Credit bureaus are businesses that gather, score, and sell credit information about consumers to their business members. 10-2 Consumer Loans and Credit Scores • There are three national credit bureaus that maintain files and supply credit information, ratings, and scores. • Credit bureaus enter data into your credit record based on your social security number. Local and regional credit bureaus access these computer networks and make the information widely accessible.

18. Credit Records, Reports, and Scores A credit report is a statement of your credit history issued by a credit bureau. 10-2 Consumer Loans and Credit Scores • It is a complete record of your borrowing and repayment performance. • It states how many accounts you have open, current balances or those accounts, and current payments being made. • It states how much unused credit you have. Unused credit is the difference between your credit limit and your credit balance on each account.

19. Credit Records, Reports, and Scores Your credit score is a numeric rating that is compiled on a point system by the credit bureaus. 10-2 Consumer Loans and Credit Scores • Most credit scores are based on a system of ratings called FICO for Fair Isaac Corporation, the company that originally designed the rating system. • FICO scores, which range from 350 to 850, are calculated on five categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit from recently opened accounts (10%), and types of credit used (10%).

20. Credit Records, Reports, and Scores 10-2 Consumer Loans and Credit Scores credit bureaus credit report credit score Why is it important to be a low-risk borrower? Possible answer: By being a low risk borrower, I will be able to borrow at lower interest rates and easily when I need to.

21. 10-3 Consumer Debt and Bankruptcy List and explain ways to reduce debt and avoid the high costs of credit. LO3-1 Evaluate the costs and benefits of declaring personal bankruptcy. LO3-2

22. 10-3 Consumer Debt and Bankruptcy Managing Credit and Debt billing cycle grace period debt load equity stripping Bankruptcy as the Choice of Last Resort discharge automatic stay bankruptcy exemption

23. Managing Credit and Debt The billing cycle is the time period when the account is closed to prepare your monthly statement. 10-3 Consumer Debt and Bankruptcy The grace period is the amount of time you have to pay your credit card bill without being charged interest on new purchases.

24. Managing Credit and Debt A debt load is a person’s outstanding debt obligations at any point in time. 10-3 Consumer Debt and Bankruptcy Equity stripping is the unethical practice of extending a loan to a distressed homeowner who cannot afford the loan payments. As a result the lender soon repossesses the home. Homeowners should build equity, not cash it out as soon as it grows.

25. Managing Credit and Debt 10-3 Consumer Debt and Bankruptcy billing cycle grace period debt load equity stripping Why is it important to assess your debt load? Possible answer: People should assess their debt loads to avoid going further into debt than they are able to sustain and repay.

26. Bankruptcy as the Choice of Last Resort A discharge is a court order that pardons the debtor from having to pay previous debt obligations. 10-3 Consumer Debt and Bankruptcy A bankruptcy exemption is property that the debtor does not have to forfeit to pay creditors. An automatic stay means no further action may be taken by creditors, including collection of debts.

27. Bankruptcy as the Choice of Last Resort 10-3 Consumer Debt and Bankruptcy discharge automatic stay bankruptcy exemption When is bankruptcy a debtor’s best choice of action? Possible answer: when debts have become overwhelming and there is no possibility of repayment bankruptcy is the best alternative.