FINC200 Discussion Notes
Chapter 6 - Introduction to Consumer Credit

  1. What is Consumer Credit?
    1. Definitions
      1. Credit - is an arrangement to receive cash, goods, or services now and pay for them in the future.
      2. Consumer Credit - The use of credit for personal needs (except a home mortgage) by individuals and families, in contrast to credit used for business purposes.


    2. The Importance of Consumer Credit in Our Economy
    3. Uses and Misuses of Credit
      1. Valid Uses of Credit
        1. Medical Emergency
        2. College
        3. Buy an item for less now than it will will cost later
      2. Abuses of Credit
        1. Every day living expenses
        2. Living beyond your means
        3. Questions to consider before making a major purchase:
          • Do I have the cash I need for the down payment?
          • Do I want to use my savings for this purchase?
          • Does the purchase fit my budget?
          • Could I use the credit I need for this purchase in some better way?
          • Could I postpone the purchase?
          • What are the opportunity costs of postponing the purchase (alternative transportation costs, a possible increase in the price of the car)?
          • What are the dollar costs and the psychological costs of using credit (interest, other finance charges, being in debt and responsible for making a monthly payment)
          • Do the benefits of using credit outweigh the costs?
    4. Advantages of Credit
      1. Convenience
      2. Safety
      3. Float - 21 to 25 day grace period when balance paid in full each month
      4. Rebates
      5. Cash bonuses
      6. Insurance
      7. Indicates stability
    5. Disadvantages of Credit
      1. Temptation to overspend
      2. Loss of Income
      3. Loss of reputation
      4. Long-term financial problems
      5. Damage to family relationships
      6. Delay in reaching financial goals
      7. Does not increase total purchasing power, it simply obligates future income.
      8. Credit isn't free
  2. Types of Credit
    1. Closed-end Credit - you pay back one-time loans in a specified period of time and in payments of equal amounts.
      1. Installment sales credit - a loan that allows you to receive merchandise, usually high-priced items such as large appliances or furniture. You make a down payment and usually sign a contract to repay the balance, plus interest and service charges, in equal installments over a specified period.
      2. Installment cash credit - a direct loan of money for personal purposes, home improvements, or vacation expenses. You make no down payment and make payments in specified amounts over a set period.
      3. Single lump-sum credit - a loan that must be repaid in total on a specified day, usually within 30 to 90 days. Lump-sum credit is generally, but not always, used to purchase a single item.
    2. Open-end Credit - A line of credit in which loans are made on a continuous basis and the borrower is billed periodically for at least partial payment.
      1. Some definitions:
        1. Line of Credit - The dollar amount, which may or may not be borrowed, that a lender makes available to a borrower.
        2. Incidental credit - a credit arrangement that has no extra costs and no specific repayment plan.
        3. Revolving Check Credit - A prearranged loan from a bank for a specified amount; also called a bank line of credit.
      2. Credit Cards
        1. Convenience users - the ⅓rd of all credit card users who pay off their balances in full each month
        2. Cash advances are very expensive. Interest accrues as soon as cash is accepted, and there are also finance charges to pay.
        3. Cobranding is the linking of a credit card with a business trade name offering “points” or premiums toward the purchase of a product or service.
      3. Smart Cards are embedded with a computer chip that can store 500 times the data of a credit card. Smart cards may ultimately combine credit cards, a driver's license, a health care ID with your medical history and insurance information, frequent-flier miles, and telephone cards.
      4. Debit Cards - also known as bank cards, ATM cards, cash cards, check cards
      5. Stored value cards - gift cards
      6. Travel and Entertainment Cards - monthly balance is due in full (Diners Club, American Express)
      7. Home Equity Loan - A loan based on the current market value of a home less the amount still owed on the mortgage. Depending on the value of the home, you can borrow up to 85 percent of its appraised value, less the amount you still owe on your mortgage. The interest you pay on a home equity loan is tax deductible. Uses a revolving line of credit, and usually has a variable interest rate. If you miss payments, you could lose your home.
      8. Protecting Against Card Fraud
        1. Sign your new cards as soon as they arrive.
        2. Treat your cards like money. Store them in a secure place.
        3. Shred anything with your account number before throwing it away.
        4. Don't give your card number over the phone or online unless you initiate the call.
        5. Don't write your card number on a postcard or the outside of an envelope.
        6. Remember to get your card and receipt after a transaction, and double-check to be sure it's yours.
        7. If your billing statement is incorrect or your credit cards are lost or stolen, notify your card issuers immediately.
        8. If you don't receive your billing statement, notify the company immediately.
      9. Protect yourself on the Internet
        1. Use a secure browser
        2. Keep records of your online transactions
        3. Review your monthly bank and credit card statements for any billing errors or unauthorized purchases
        4. Read the policies of Web sites you visit
        5. Keep your personal information private
        6. Give payment information only to businesses you know and trust
        7. Never give your password to anyone online
        8. Do not download files sent to you by strangers or click on hyperlinks from people you don't know

  3. Measuring Your Credit Capacity
    1. Can You Afford a Loan?
    2. General Rules of Credit Capacity
      1. Debt Payments-To-Income Ratio
        1. Monthly Debt Payments (not including mortgage payments) ÷ net monthly income
        2. This ratio should not exceed 20 percent.
      2. Debt-To-Equity Ratio
        1. Total Liabilities ÷ Net Worth
        2. Upper limit is around 1.
    3. Cosigning a Loan
      1. The cosigner is guaranteeing someone else's debt.
      2. Cosigners often pay - In most states, if you do cosign and your friend or relative misses a payment, the lender can collect the entire debt from you immediately without pursuing the borrower first.
      3. If You Do Cosign
        1. Be sure you can afford to pay the loan. If you are asked to pay and cannot, you could be sued or your credit rating could be damaged.
        2. Consider that even if you are not asked to repay the debt, your liability for this loan may keep you from getting other credit you want.
        3. Before you pledge property such as your automobile or furniture to secure the loan, make sure you understand the consequences. If the borrower defaults, you could lose the property you pledge.
        4. Check your state law. Some states have laws giving you additional rights as a cosigner.
        5. Request that a copy of overdue-payment notices be sent to you so that you can take action to protect your credit history.
    4. Building and Maintaining Your Credit Rating
      1. Credit Bureau - A reporting agency that assembles credit and other information about consumers.
        1. Experian Information Solutions
        2. TransUnion Credit Information Company
        3. Equifax Services, Inc.
      2. Who Provides Data to Credit Bureaus?
        1. Financial Institutions
        2. Merchants
        3. Credit card companies
      3. What's in your credit files?
        1. Your employer, position, and income.
        2. Your former address.
        3. Your former employer.
        4. Your spouse's name, Social Security number, employer, and income.
        5. Whether you own your home, rent, or board.
        6. Checks returned for insufficient funds.
        7. Credit transactions
        8. Payment delinquencies
        9. Any suits, judgments, or tax liens against you.
      4. Fair Credit Reporting - The Fair Credit Reporting Act Regulates the use of credit reports, requires the deletion of obsolete information, and gives consumers access to their files and the right to have erroneous data corrected.
      5. Who May Obtain a Credit Report?
        1. A prospective employer
        2. Anyone who will use it in connection with a credit transaction
        3. You -
      6. Time Limits on Adverse Data - 7 years, 10 -years if you declare personal bankruptcy
      7. Incorrect Information on Your Credit File
      8. Will canceling a credit card lower my credit score?
  4. Applying for Credit
    1. A Scenario From the Past
    2. The Five Cs of Credit Management
      1. Character - The borrower’s attitude toward his or her credit obligations.
      2. Capacity - The borrower’s financial ability to meet credit obligations.
      3. Capital - The borrower’s assets or net worth.
      4. Collateral - A valuable asset that is pledged to ensure loan payments.
      5. Conditions - The general economic conditions that can affect a borrower’s ability to repay a loan.
      6. FICO and VantageScore
    3. What if Your Application is Denied
      1. Ask Questions
      2. If the denial is based on a credit report, you are entitled to know the specific information in the credit report that led to it. After you receive this information from the creditor, you should contact the local credit bureau to find out what information it reported. The bureau cannot charge you a disclosure fee if you ask for a copy of your credit report within 60 days of being notified of a denial based on a credit report.
      3. How can I improve my credit score?
        1. First, check your credit report to ensure that it is accurate.
        2. Pay bills on time
        3. Don't overuse credit
  5. Avoiding and Correcting Credit Mistakes
    1. In Case of a Billing Error
      1. Notify creditor in writing with 60 days after the bill was mailed.
      2. Pay the parts of the bill that are not in dispute.
      3. Account must be corrected or you must be given an explanation of why the creditor believes the bill is correct within 90 days.
    2. Your Credit Rating During the Dispute
      1. A creditor may not threaten your credit rating while you are resolving a billing dispute.
      2. After explaining the bill, the creditor may report you as delinquent on the amount in dispute and take action to collect if you do not pay in the time allowed. Even so, you can still disagree in writing. Then the creditor and the credit bureau must report that you have challenged your bill and give you the name and address of each recipient of information about your account. When the matter has been settled, the creditor must report the outcome to each recipient of the information. Remember, you may also place your version of the dispute in your credit record.
    3. Defective Goods or Services
    4. Identity Crisis: What to do if Your Identity is Stolen
      1. Contact the fraud departments of each of the three major credit bureaus
      2. Contact the creditors for any accounts that have been tampered with or opened fraudulently.
      3. File a police report.
  6. Complaining About Consumer Credit
    1. Complaints About Banks
    2. Protection Under Consumer Credit Laws
    3. Your Rights Under Consumer Credit Laws