Consumer Credit

Text by Text by Vickie Bajtelsmit with Linda Rastelli

PowerPoints by Christine Mooney

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What is Consumer Credit?

• Any time you receive goods or services and pay for them later, you are buying on credit.

• Consumer credit is credit for personal needs other than home purchases.

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Advantages of Consumer Credit

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• Buy now, pay later – Being able to buy a product now, and pay later makes dreams a reality sooner, if you can afford to pay.

• Convenience & safety – Instead of carrying a credit card.

• Source of emergency cash – credit lines can be a source of cash.

Disadvantages of Consumer Credit

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• Financial statement impact – the more your borrow, relative to your total wealth, the worse your liquidity and debt ratio.

• Increased costs – you pay more for a purchase in the long run because of financing.

• Risk of overspending – availability of consumer credit allows for more of a chance to overspend.

• Higher insurance premiums – insurance companies use your credit score to determine insurance premiums.

Types of Consumer Credit

• Closed-end credit – This is credit a lender approves for a specific purpose. It is paid back with interest.

• Open-end credit – also called revolving credit, you are given a credit limit to use at any time.

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The Five C’s of Credit

Capacity – A lenders’ assessment of your ability or capacity to repay your debts.

Capital – Lenders are interested in your household net worth.

Collateral – A loan protected by collateral is safer than one that is not.

Character – Your employment and education. Conditions – Economic conditions and the

unique situation of every borrower is important to a creditor.

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What happens if you are denied credit?

• If you apply for credit and are denied, you have the right to know why. Most lenders deny credit for the following reasons:

• Adverse information in your credit report • Insufficient income relative to expenses • Insufficient collateral • Insufficient job history • Insufficient residency at current address

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Protecting Your Credit

• In seeking credit, you have the following rights:

• The right to full and accurate information

• The right to freedom from discrimination

• The right for women to be given credit. Historically, women were denied credit.

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Credit Reporting

Lenders evaluate your creditworthiness by checking your outstanding debt. This information is reported by credit bureaus.

Under the Fair Credit Reporting Act of 1971 you have the right to know what is contained in your credit report.

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Credit Reports

• The three major credit reporting agencies are: Experian, Equifax Credit Information Services and TransUnion.

• A credit report includes a list of every request for your credit report in the past two years.

• Your credit score is based on a FICO system, developed by Fair, Issac and Co., Inc.

• Each score is on a range from 300 to 850. A score of 700 to 800 is good.

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Credit Cards

• Credit cards are a type of open-end credit. They permit the holder to borrow cash in a transaction called a cash advance.

• The term credit card is used to cover a variety of different types of cards.

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Types of Credit Cards

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Type Characteristics Bank Credit Card A bank credit card allows the

holder to make purchases anywhere the card is accepted.

Retail Credit Cards Some businesses offer credit cards. These cards encourage greater spending at the stores. They often charge higher interest.

Travel & Entertainment Cards Designed primarily to allow business customers to pay expenses in line with company reimbursement programs.

Debit Cards Debit cards allow you to subtract the cost of your purchase from your checking account.

Terms & Conditions of Credit Cards

• Annual fees – Some cards charge an annual fee for the usage of the card. You should avoid cards that charge fees.

• Annual Percentage Rate (APR) – This is the most important feature of the credit card. It is calculated as follows:

APR= Total annual finance charge + annual fee/average loan balance over the year.

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Contract Terms

• Credit limit – The credit line, is the maximum amount you are allowed to borrow under the terms of your credit agreement.

• Transaction, billing & due dates – Statements are issued monthly. The date you make a purchase is called the transaction date. The lender closes reporting on the billing date.

• Most credit cards give you a grace period during which they do not calculate interest due.

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Choosing Cards Based on APR

• Credit cards generate more than 50 billion in finance charges a year.

• The finance charge is the dollar amount of interest charged by the lender in a particular billing cycle. It is calculated as follows:

• Finance Charge = Periodic rate x Account balance owed

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Calculating Interest Payments

• The Periodic Rate on credit cards is equal to the stated rate of interest divided by the number of billing periods per year, normally 12.

• In general, the best deals on cards that calculate the finance charge using either the average daily balance with a grace period or an adjusted balance method.

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Advantages of Using Credit Cards

• Method of identification

• Means of record keeping for business expenses

• Ability to make remote purchases

• Ease of returning merchandise

• Free Credit • Other

advantages, like travel insurance or frequent flier methods.

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Disadvantages of Credit Cards

• Most expensive way to borrow

• Negative effects of credit card marketing

• Loss of privacy

• Overspending when a consumer cannot afford to shop

• Fraud & Identity theft

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Copyright Notice© 2008 John Wiley & Sons, Inc.

All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information herein.

All clipart and photos courtesy of Microsoft.com, unless otherwise noted.

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