chapter 6: consumer credit
TRANSCRIPT
Chapter 6: Consumer Credit
Section 1: What is Consumer Credit?
Using money you don’t have, to buy things you don’t need, to impress people you don’t like...
Chapter 6: Consumer Credit
Essential Questions:
What is it?Why do I need it?How do you get it?How do I maintain it?How much does it cost?How do you protect it?
What is Credit?An arrangement to receive cash, goods, or services now and pay for them in the future.Consumer Credit – the use of credit for personal needs
What is the bright side of using credit?
Credit provides consumers the opportunity to acquire assets.Credit used in an emergency.Builds a good credit history.
What is the Dark Side of using Credit?
Using too much credit in relation to your income can be hard to recover from.
What institutions are sources of credit?
Commercial banks, S&Ls, Credit Unions, Consumer finance companies.
What is interest?
The compensation financial institutions obtain when providing credit to their customers.
Who most often wins in a credit transaction?
Generally, both the lender and borrower benefit in credit transactions.
How does risk influence the rate of interest?
Higher risk creditors are charged higher interests rates.Lower risk creditors are charged lower interests rates.
What is collateral?
A form of security to the lender in case the borrower fails to pay back the loan.
What are two types of Credit?
Open-end Credit- The ability to borrow money for a variety of goods or services up to a limit set by the company issuing the loan.Closed-end Credit – A one-time loan that is paid back over a specified period of time with payments of equal amounts.
Chapter 6: Consumer Credit
Section 2: Measuring the cost of credit & obtaining credit
How do you know you can afford Credit?
Look at your BudgetBasic monthly expenses minus take-home pay = monthly payment.$1,500-$1,000=$500
ORAre you willing to give up something in your monthly budget to make a loan payment?
How do you know you can afford Credit?
The 28/36 Rule: states that a household should spend a maximum of 28% of its gross monthly income on total housing expenses and no more than 36% on total debt service, including housing and other debt such as car loans.
Dept Payments-to-Income Ratio
Percentage of Debt in relation to net income Spend no more than 20% of net income on debt
Dept Payments-to-Income Ratio
What is the Cost of Credit?
What is APR?Why is it made available to consumers?How does APR Work?
What is the Cost of Credit?
Annual Percentage Rate (APR) how much credit cost on an annual basisFinance Charge – the total $ amount you pay to use credit
Understanding APR
APR (Annual Percentage Rate) is the average finance charge (which includes fees & other loan costs) divided by the amount borrowedAPR is provided to consumers because:It’s required by law (Federal Truth in Lending Act)It is a way for consumers to compare the cost of credit.
Understanding APR
Advertisement #130 yr Fixed7% interest1 Point$665.30 paymentapp fee $25Process Fee $250Closing Fees $750Total Fees: $2,025Loan $100,000Adj Loan $97,975APR 7.2%
Advertisement #230 yr Fixed7%0 Points$665.30app fee $25
Process Fee $250Closing Fees $750Origination Fee $1795Total Fees: $2,825.00Loan $100,000Adj Loan $96,180APR 7.39%
Costs of Making Minimum PaymentsItem Price APR Interest
PaidHow much your really paid for the item
Total years to pay off
Television $500 18% $439 $939 8
Computer $1,000 18% $1,899 $2,899 19
Furniture $2,500 18% $6,281 $8,781 34
This chart assumes you are not making additional payments & you are making your payments on time
Benefit of More than the Min. PaymentOriginal Balance
APR Monthly payments
Total # of Monthly
Payments
Total Years to Pay off
Total of Payments
$2,500 18%Min. payment 404 34 $8,781
$2,500 18% $50 94 8 $4,698
$2,500 18% $100 32 3 $3,163
This chart assumes you are not making additional payments & you are making your payments on time
How Do I Build Credit?
Establish a Savings & Checking Account.Understand the Basics of Credit ReputationPiggy-back on someone else’s good creditApply for a credit card or loanUse the credit account lightly & wisely.Monitor your credit periodically - examine your credit report annually
Credit Scores
What is a credit score?A statistically derived numeric expression of a person's creditworthiness that is used by lenders to assess the likelihood that a person will repay his or her debts. (FICO - Fair Isaac Corporation)Who provides credit scores?EquifaxExperianTransUnion
Credit Scores How are Credit Scores Determined?
Payment History (35%) inc. late payments, collections, bankruptcy...Amounts Owed (30%) inc. amounts owed, debt-to credit available ratio, proportion of credit limit used [25-30%]Length of Credit History (15%) the longer the better.New Credit (10%) inc. recent & number of applicationsType of Credit Used (10%) inc. a healthy balance of types of credit
Obtaining / Applying for Credit
The Five “C’s” of Credit.Character – Will you repay your loan?Capacity – Can you repay your loan?Capital – what are your assets and net worth?Collateral – what if you don’t pay back your loan?Credit History – what is your credit past?
Chapter 6
Section 3: Protecting Your Credit
What’s in Your Wallet: Think-Pair-share
Think about what you have in your wallet or purse.Meet with a partner to discuss what you carry in your wallet & why.What would happen if you lost these items?Share a list of common items you carry & why with the entire group.
Identity TheftA crime in which someone wrongfully obtains and uses another person's personal data in some way that involves fraud or deception, typically for economic gain.
Deter Safeguard your Info
Shred before you discardProtect your SS #Don’t give personal info over the phoneNever click on unsolicited e-mailDon’t use obvious passwordsKeep personal info in a secure place
Detect suspicious activity
Be on AlertCheck your credit reportReview your financial statements
Defend against ID Theft
Place “Fraud Alert”Close AccountsFile Police ReportReport to Federal Trade Commission
Other Tips
Remove your name from marketing listsContact credit reporting bureaus-delete name from marketing listsGo to Direct Marketing Association – name deletion list Watch what you carry in your wallet.
Other Tips
Keep Duplicate RecordsMail Payments from a safe locationMonitor your Social Security activity by ordering a Social Security Earnings and Benefits Statement – 1x per year
What to do if you’re a victim
Place a fraud alert on your credit reports, and review your credit reports. Equifax - www.Equifax.comExperian - www.Experian.comTransUnion - www.transunion.com Federal Trade Commissionhttp://www.ftc.gov/bcp/edu/microsites/idtheft/index.html
Chapter 6
Section 4: Managing Your Debts
Warning Signs of Financial Trouble
You make only the minimum monthly payment on your credit cards You’re having trouble making the min. payment on your credit cardsThe total balance on your credit card increases every month You miss loan payments or often pay late.
Warning Signs of Financial Trouble You use savings to pay for necessities such as food and utilities You receive second and third payment notices from creditors You borrow money to pay off old debtsYou exceed your credit limit on your credit cards You’re denied credit due to a bad credit bureau report
Please answer the following questions in your notes
What is Bankruptcy?Why does the law allow people to file bankruptcy?How can filing bankruptcy affect your life?Why do you think that U.S. laws allow people to file bankruptcy?What are the two types of personal bankruptcy?Repercussions of bankruptcy?
What is Bankruptcy?
Bankruptcy is a federal court process that can help you eliminate legal responsibility for many of your debts or repay them over time under the protection of the bankruptcy court.
Why does the law allow people to file Bankruptcy? Bankruptcy laws offer people in serious debt a way to make a financial fresh start.
Two Kinds of Personal Bankruptcy
Chapter 7 –“liquidation” bankruptcy - the bankruptcy court removes your responsibility for paying most of your debts that are not secured by collateral or property.
Two Kinds of Personal Bankruptcy
Chapter 13 –“reorganization” or “repayment” bankruptcy— an option if you have a source of dependable income but are unable to pay your debts.
Repercussions of Bankruptcy
Chapter 7: Loss of PropertyChapter 13: 3-5 year repayment planNot remove non-dischargeable debtRemains on Credit Report for up to 10 YearsUnless you change your financial habits, you’re at risk for repeat problems
How can filing bankruptcy affect your life?
It can have a long-term negative impact on your ability to obtain credit, find a job, get insurance or rent a place to live.
Bankruptcy Today
Bankruptcy Abuse Prevention Act & Consumer Protection Act of 2005