Key TermsCredit Capacity Maturity DateDebtor Capital Annual Percentage RateCreditor Credit Rating Credit InsuranceTrust Collateral Service FeesLoan Credit Secured Loan Truth-in-Lending LawSales Credit Interest Rate Equal Credit Opportunity Act

Trade Credit Principal Fair Credit Billing ActCredit References Time Factor Fair Credit Reporting ActCharacter Simple Interest Debt Repayment Plan

• The privilege of using someone else’s money for period of time

• This privilege is based on the belief that the person receiving credit will honor a promise to repay the amount owed at a future date

• Debtor• Anyone who buys on credit or receives a loan

• Creditor• The one who sells on credit or makes a loan

• Many consumers plan to use credit as a substitute for cash and pay the balance in full at the end of the month—but only 20 percent do so consistently

• The creditor believes that the debtor will honor the promise to pay later for goods and services that have been received and used, without this, our credit system could not operate

• Written agreement signed by the debtor stating time frame and interest that will be charged on the outstanding balance

• Money borrowed for some special purpose • Car• Home• Home Improvement

• Loan Credit is offered by Banks, Credit Unions, Savings and Loan Associations, and Consumer Finance Companies

• Type of credit issued at the time you buy the good or service• Charge Accounts• Credit Cards

• Sales Credit is offered by most retail and wholesale businesses

• Used by businesses when it receives goods from a wholesaler and pays for them at a later specified date

• 2/10 n/30• This means that the business can take a 2 percent discount if the

bill is paid within 10 days from the billing date or the full or net amount must be paid within 30 days

$20,000 Merchandise Order $400 Saved If Paid In 10 Days

• The American Consumer will use credit for many purposes• New Car• House• Big Ticket Items• Vacations

• Businesses or individuals from whom you have received credit in the past and / or who can help verify your credit record

The business that is considering you as a credit risk will generally ask you about your financial situation and request credit references

• The answers to the financial questions and the information received from your credit references will help the business decide whether loan or sales credit should be extended to you

• What can they ask me?• How much do you earn?• How long have you workd for your current employer

• What property do you own• Do you have any other debts?

• Character• Refers to your honesty

and willingness to pay a debt when it is due • (how you will pay your

bills in the future usually can be predicated by how you have paid them in the past)

• Utility bills• Home Mortgage• Rent Payment• Car Loan• Home Improvement

loan

• Capacity• Refers to your ability to pay a debt when it is due

• The lender must consider whether your income is large enough to permit you to pay your bills. If your income is too small or unsteady, granting you additional credit may not be wise even though you have had a good credit record in the past

• Capital• The value of the

borrower’s possessions

• Car• House/Property• Checking / Savings

Account

COLLATERAL

• Convenience• Credit can make it convenient foryou to buy, you can carry no

cash with you

• Immediate Possession• Allows you to have possession of the item immediately

• Savings• Allows you to buy an item when it goes on sale, possibly at a

much lower price

• Credit Rating• If you buy on credit and pay your bills when they are due, you gain

a reputation for being dependable

• Emergencies• Access to credit can help you in an emergency

• Over Buying• You may purchase something that is more expensive than you

can afford, as a credit customer, you may be tempted to buy items that you do not really need

• Careless Buying• You may stop checking advertisements carefully, making

comparisons based on price or quality, and causing you to buy at the wrong time or the wrong place

• Higher Prices• Stores that sell only for cash are able to sell at lower prices than

stores that offer credit, extending credit is expensive, when customers do not pay as agreed, there are collection expenses, these costs are passed on to customers in the form of higher prices

• Overuse of Credit• Buying now and paying later may sound like a good idea, but if too

many payments are to be made later, the total amount that must be paid can become a problem

• Credit card issuers lure consumers with more than 25,000 different kinds of special offers

• Varying Interest Rates• Fees• Frequent-Flyer Miles• Merchandise Discounts

• Before making a final decision whether to buy on credit, there are some questions you as a consumer should answer:

1. How am I benefiting from this use of credit?

2. Is this the best buy I can make or should I shop around some more?

3. What will be the total cost of my purchase, including the cost of charging the item?

4. What would I save if I paid cash?

5. Will the payments be too high considering my income?

• Under contract law, minors cannot be held liable for their personal debts • (In the state of Nebraska you may not have a credit

card in your name until you are 19 years of age--Age of Majority)

• A parent or guardian may cosign for a credit card which means that if the teenager becomes default in payment, the parent or guardian must pay any unpaid balance

• Charge accounts for teenagers are usually regular or revolving

• Limits on the amount that can be charged are set at a lower end than those for adults

• Collateral• Property that is used as security

• Car• House• Jewelry

• Secured Loan• A loan that is guaranteed with collateral (you give the lender the

right to sell the collateral to get back the amount of the loan in the event that you do not repay it)

• The amount of interest you must pay on a loan or charge account should be clearly understood. To determine the amount you have to pay it is necessary to know three things:

• Interest Rate• The percentage that is applied to your debt

expressed as a fraction or decimal

4.9% 5.9% 9.0% 13.2% 18.8% 22.3%

• Principal• The amount of debt to which the interest rate is applied

$2,000 $10,000 $25,000 $35,000

• Time Factor• The length of time for which interest will be charged

6 Months 1 Year 5 Years 15 Years

• Simple Interest• An expression of interest based on a one-year period of time

• The formula for computing simple interest is???

I (interest) = P (principal) x R (rate) x T (time)

If $1,000 is borrowed at 9.9% for one year how much interest will you owe ??

$99

• Interest is expressed as part of a dollar. This part of a dollar, or percentage, is called the interest rate. Before using a percentage rate in a problem, you must change it to either a common fraction or a decimal.

15.6% .156

9% .09

• In a recent year, the average credit card holder who paid finance charges spent $453 in interest!!!

• When a loan is made for a certain number of days, such as 30, 60, or 90 days, the interest is determined by days. To make the computation easy, a year is often considered 360 days.

What would the interest on a loan for $100 at 12 % for 60 days be??

Principal = $100

Rate = 12%

Time = 60 / 360

$100 x .12 = $12 60 / 360 = 0.1666666 $12 x 0.1666666 = $2

• Maturity Date• The date on which a loan must be repaid • When the time of the loan is stated in months, the date of maturity

is the same day of the month as the date on which the loan was made

• When the time of the loan is given in days, the exact number of days must be counted to find the date of maturity

DO WEEKENDS COUNT IN THIS CALCULATION??

• Annual Percentage Rate (APR)• A disclosure required by law stating the percentage

cost of credit on a yearly basis• All credit agreements, whether for sales credit or loan

credit, require disclosure of the APR

• In addition to interest, the APR includes other charges that might be hidden

• Service Fees• Charge for time and money it takes a creditor to investigate your

credit history, process your loan or charge account application

• Uncollectible accounts are frequently referred to as bad debts or doubtful accounts

• Credit Insurance• Special insurance that repays the balance of the amount owed if

the borrower dies or becomes disabled prior to the full settlement of the loan

• Some lenders may not grant credit if you do not agree to credit insurance

• Credit Insurance costs you the borrower

Avoid giving card numbers or expiration dates over the telephone unless you initiate the call Giving your card number to someone who calls you about

winning a prize often pretends to need your card number to verify your identity so you can claim the prize

Try not to give out your birth date or your social security number Both pieces of information can be used to apply for a credit

card in your name, you may not know about it until you receive the bill

• What do lenders want to know?• How much do you earn?• What kind of savings and investments do you

have?• Do you have any other sources of income?• How long have you worked for your employer?• How long have you lived at your present address?• Do you own or rent your home?

Information stored in credit databases contain some of the following information about you

Your Income Level

How many credit cards you have been issued

What the balances are on your credit card accounts

Where you are employed and for how long

Where you live and whether you are a renter or owner

Whether you have ever been in bankruptcy

Whether you pay your utility and other bills on time

• Truth-in-Lending Law (1968)• Requires that you be told the cost of a credit purchase in writing

before you sign a credit agreement

• APR / Total Finance Charge must be clearly stated• Liability to $50 for unauthorized credit card purchases

made prior to notification of the issuer

NOTIFY THE CREDIT CARD COMPANY IMMEDIATELY!!!

• Dealing With Stolen Credit Cards• You can notify the company by telephone, but you should

also put your notification in writing, citing the date of the phone call

• Equal Credit Opportunity Act• Prohibits creditors from denying credit based on the age, race,

sex, or marital status of the potential applicant

• Fair Credit Billing Act—Requires prompt correction of billing mistakes when they are brought to the attention of a business in a prescribed manner

• What Do You Do If There Is An Error? Notify the creditor in writing within 60 days after your statement was

mailed While waiting for an answer you are not required to pay the amount in

question Your complaint must be acknowledged by the creditor within 30 days

unless your statement is corrected before that time You do not pay finance charges on any amount in error If no error is found, the creditor must bill you again and may include

finance charges that have accumulated plus any minimum payments that were missed while the statement was being questioned

• The Fair Credit Billing Act also provides that you may withhold payment of any balance due on defective merchandise or services purchased with a credit card

• Fair Credit Reporting Act• Law that gives consumers the right to know what specific

information credit bureaus are providing to potential creditors, employers, and insurers

• If credit is denied on the basis of information in a credit report, the applicant must be given the name, address, and phone number of the credit bureau that provided the information

• If you find something untrue in your credit report you can have it removed and in its place a brief statement giving your side of the disputed bill payment

• If you find that you cannot pay your bills when they are due, what should you do??

Contact your creditors and explain your situation

Make a realistic proposal for when and what you can pay, don’t say “I can’t pay”

Keep any promises you make

Make a written copy of your agreement to avoid disagreements later

• Debt-Repayment Plan• An agreement developed cooperatively by a creditor and a debtor

to reduce payments to a more manageable level and still pay off the debt

1. The privilege of using someone else’s money for a period of time CREDIT

2. Type of credit offered by most retail and wholesale businesses

SALES CREDIT

3. What are the three C’s of credit?CHARACTER

CAPACITY

CAPITAL

• 4. The one who sells on credit or makes a loanCREDITOR

5. Money borrowed for some special purpose

LOAN CREDIT

6. Anyone who buys on credit or receives a loanDEBTOR

7. Businesses or individuals from whom you have received credit in the past and / or who can help verify your credit record are called?

CREDIT REFERENCES

8. When you buy on credit and pay your bills when they are due you are developing your?CREDIT RATING

9. How old must you be in the state of Nebraska to have a credit card in your name with no cosigner?

19-AGE OF MAJORITY

10. Property that is used as security

COLLATERAL (CAR / HOUSE / JEWELRY

11. The formula for computing simple interest is?INTEREST=PRINCIPAL X RATE X TIME

12. A disclosure required by law stating the percentage cost of credit on a yearly basis

ANNUAL PERCENTAGE RATE-APR13. Special insurance that repays the balance of the

amount owed if the borrower dies or becomes disabled prior to the full settlement of the loan

CREDIT INSURANCE

14. A law that requires that you be told the cost of a credit purchase in writing before you sign a credit agreementTRUTH-IN-LENDING LAW (1968)