Chapter 6: Credit Use and Credit Cards

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Chapter 6 Credit Use and Credit Cards
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Objectives

• Compare and contrast installment and
  non-installment credit and discuss the costs of
  credit.
• Discuss reasons for and against using credit.
• Describe the types of charge accounts.

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Objectives

• Describe the process of opening a credit account
  and the procedures lenders use to evaluate credit
  applicants.
• Manage your credit card and charge accounts
  properly.

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What is Consumer Credit?

• Receiving products, services or cash now, and
  paying for them in the future.
• Before you use credit, think about...
• Could I pay cash or make a down payment?
• Do I want to use savings for this purchase?
• Does purchase fit with my goals and budget?

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What is Consumer Credit?
(continued)

• Does purchase fit with my goals and budget?
• Could I use the credit Ill need another way?
• Can I wait to buy it?
• What are the opportunity costs of postponing the
  purchase?
• What are the economic psychological costs of
  using credit for the purchase?

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Credit Use and Credit Cards

• 13 fear credit over-extension
• 12 are concerned about payments
• Most people use installment credit 12 times
  during their life.
• Yet, only 13 shop for credit terms!

A RECENT SURVEY OF U.S. HOUSEHOLDS
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Credit Use and Credit Cards

• Credit is any situation in which goods, services
  or money are received in exchange for a promise
  to pay a definite sum of money at a future date.

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Credit Use and Credit Cards

• Consumer
• Installment
• Non-installment
• Open-ended

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Closed vs. Open-End Credit
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Advantages of Credit

• Current use of goods and services
• Demonstrates financial stability
• Use for financial emergencies
• Convenience when shopping
• Safer than cash

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Reasons For Using Credit

• Convenience
• Emergencies
• Identification
• Reservations

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Reasons For Using Credit

• Consume expensive products earlier
• Enjoy the good life
• Take advantage of free credit
• Consolidate debts
• Protection against ripoffs and frauds

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Volume of Consumer Credit
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Charting the Economy
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Consumer Credit Student Loans
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Total Consumer Credit
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Disadvantages of Consumer Credit

• Purchases are more expensive
• Temptation to overspend
• Possible financial difficulties
• Possible loss of merchandisedue to late or
  non-payment
• Ties up future income

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Credit Card Circulation

• 176.8 million credit cardholders in 2008.
• 159 million credit cardholders in the U.S. in
  2000
• 173 million credit cardholders in the U.S. in
  2006
• Average credit cardholder has 3.5 credit cards.
• Only 2 of undergraduates have no credit history.
• 50 of college undergraduates have 4 or more
  credit cards.
• 76 of undergraduates have credit cards.
• Average undergrad has 2,200 in credit card debt.
• Average undergrad will amass about 20,000
  student debt.

http//www.creditcards.com/credit-card-news/credit
-card-industry-facts-personal-debt-statistics-1276
.php
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Helpful Tips About Credit

• Always budget your credit spending carefully.
• Shop around for the lowest credit rates.
• Use credit only when doing so is to your
  advantage.
• Buy items on credit that will last at least until
  the last payment is due.
• Pay your bills on time
• Understand the credit contract before signing it.
• Notify the creditor if, for any reason, you can
  not make your payment.
• Keep an eye on your credit card when you give it
  to a salesperson.
• Tear up any carbons after you sign the receipt.
• Never give your credit card to anyone over the
  phone unless you initiated the call.
• Keep your receipt after you make charges.
  Compare them with your monthly statement.
• Keep a list of your credit card numbers and the
  issuers phone number in a safe place.
• Report stolen cards at once.
• After reporting a stolen card via telephone,
  follow up with a telegram or registered letter.

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Reasons Against Using Credit

• Interest is costly
• Additional fees
• High-priced add-ons
• Liability for lost credit cards

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Reasons Against Using Credit

• Tempting to overspend
• Privacy is a concern
• Reduces financial flexibility

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Establishing a Debt Limit

• Debt-payments-to-income method
• Ratio of debt-to-equity method
• Continuous-debt method

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How to Calculate Debt Payments-to-Income Ratio
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Credit Capacity Indicators
Debt To Equity Ratio
total liabilities

Should be lt 1
net worth
Excluding home value
6-10
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Fair Credit Reporting Act

• Is your credit report accurate?
• If you are denied credit based on your report,
  you can get a copy of your credit report free
  within 60 days of your request
• Obsolete information must be deleted
• Only authorized persons have access to your
  report
• Adverse data can be reported for seven years or
  bankruptcy for ten

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Sample Dispute Letter
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Open-Ended Charge Accounts
PROCESS FOR OPENING

• Application
• Investigation
• Credit ratings and risk scoring

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Build and Maintain Your Credit Rating

• Establish a steady work record
• Pay all bills promptly
• Opening a checking account and dont bounce
  checks
• Get a cosigner on a loan and pay back the loan as
  agreed
• Open a savings account and make regular deposits
• Check to see what is in your file

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Avoiding and Correcting Credit Mistakes
Fair Credit Billing Act

• Notify creditor of error in writing in 60 days
• Send it to the correct address
• They must respond within 30 days
• Credit card company has 90 days to resolve the
  problem
• Wont affect your credit rating while in dispute
• You can withhold payment on shoddy goods

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Managing a Charge Account
CREDIT STATEMENTS

• Billing date/Due date
• Transaction/Posting dates
• Grace period/Minimum payments
• Credit for merchandise returns/Errors/ Correcting
  errors

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Managing a Charge Account
COMPUTATION OF FINANCE CHARGES

• Annual Percentage Rate (APR)
• Periodic Rate
• Average Daily Balance

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What Should You DoIf You are Denied Credit?

• You have the right to know the specific reason
  why
• Ask yourself if you can afford the item
• Check your credit report
• You are entitled to have errors in your credit
  report corrected
• You have the right to provide a 100 word
  explanation

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What If You Are Denied Credit?
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Protecting Against Credit/Debit Card Fraud

• Sign new cards as soon as they arrive
• Treat the cards like money
• Shred anything with your account number on it
• Dont give your number over the phone unless you
  make the call
• Get a receipt after every transaction
• Check your statements for errors

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Measuring Your Credit Capacity

• Ask yourself.....
• can you afford the loan?
• what do you plan to give up in order to make the
  payment?
• Cosigning a loan
• if the person doesnt pay,you will have to
• co-signers often have to pay
• it can affect your credit report

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Criteria Usedto Grant Credit

• Character
• Capital
• Capacity
• Collateral
• Conditions

5 Cs of Credit
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What Creditors Look For

• Character - do you pay bills on time?
• Capacity - can you repay the loan?
• Capital - what are your assets and net worth?
• Collateral - what if you dont repay?
• Conditions - what economic conditions would
  affect your repayment of the loan?

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Minimum PaymentsEquals Permanent Debt

• Credit card issuers often require a minimum
  monthly repayment as low as 1/36 or 1/48 of the
  outstanding balance. Such a payment is
  mathematically guaranteed to keep the user in
  perma-debt.

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Bank CardCompetition

• Fixed or variable interest rates
• Introductory/teaser rate
• Co-branded card
• Rebates

www.e-wizdom.com/cc/index.html www.bestcreditoffer
s.com www.bankrate.com/brm/rate/cc_home.asp
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Establish aCredit History

• Establish both checking and savings accounts
• Install telephone and bill to home address
• Request, acquire, and use an oil-company card
• Apply for bank credit card
• Ask bank for small short-term cash loan
• Pay off student loans

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Five Primary Areas of Interest in Calculating
FICO Score
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What Your FICO Score Looks At
Payment History (35) Do you pay your bills on
time. Amount Owed (30) Debt ratio Length of
Credit History (15) How long have your accounts
been established? Types of Credit (10) Credit
cards, retail accounts, installment loans,
mortgage loans, etc. New Credit (10) Its OK
to request and check your own credit report.
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Credit Score Breakdown
Credit Score Percentage 499 and
Below 2 500-549
5 550-599
8 600-649
12 650-699
15 700-749
18 750-799 27 800
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