Chapter 5 Introduction to Consumer Credit

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Chapter 5Introduction to Consumer Credit
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Learning Objectives - Chapter 5
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1. Define consumer credit and analyze its advantages
   and disadvantages.
2. Differentiate among various types of credit.
3. Assess your credit capacity and build your credit
   rating.
4. Describe the information creditors look for when
   you apply for credit.
5. Identify the steps you can take to avoid and
   correct credit mistakes.

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Learning Objective 1Define consumer credit
and analyze its advantages and disadvantages.
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What is Consumer Credit?
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• Credit is an arrangement to receive cash, goods
  or services now, and pay for them in the future
• Consumer credit is the use of credit for personal
  needs, except a home mortgage
• There are three ways consumers can finance
  current purchases
• Take money from savings
• Use present earnings
• Borrow against future income
• Trade-offs are involved in using credit

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• Consumer credit is the amount of credit used by
  consumers to purchase non-investment goods or
  services that are consumed and whose
  value depreciates quickly
• Includes automobiles, recreational vehicles
  (RVs), education, boat and trailer loans
• Excludes debts taken out to purchase real estate
  or margin on investment accounts

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• Common forms of consumer credit include
• Credit cards
• Store cards
• Motor (auto) finance
• Personal loans (installment loans)
• Consumer lines of credit
• Retail loans (retail installment loans)
• Mortgages

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• The cost of credit is the additional amount, over
  and above the amount borrowed, that the borrower
  has to pay
• Includes interest, arrangement fees and any other
  charges
• Some costs are mandatory, required by the lender
  as a part of the credit agreement
• Other costs may be optional. The borrower chooses
  whether or not they are included as part of the
  agreement

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Credit Considerations
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• Before you use credit for a major purchase, ask
  yourself some questions
• 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?
• Could I use the credit Ill need in some better
  way?
• Can I postpone this purchase?
• What are the opportunity costs of postponing this
  purchase?
• What are the dollar and psychological costs of
  using credit for this purchase?

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Advantages of Credit
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• Current use of goods and services
• Permit purchase even when funds are low
• Use for financial emergencies
• Convenient when shopping
• Safer than cash
• Can take advantage of float time
• May get rebates, airline miles or other bonuses
• Demonstrates financial stability

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Disadvantages of Consumer Credit
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• Purchases are more expensive
• Temptation to overspend
• Ties up future income.
• Possible financial difficulties
• Damage to family relationships
• Slows progress to future goals

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Learning Objective 2Differentiate among
various types of credit.
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Types of Credit
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• Closed-End Credit
• For a specific purpose and amount.
• Payments of equal amounts
• Mortgage, automobile and installment loans
• Open-End Credit
• Use as needed until reaching line of credit.
• You pay interest and finance charges if you do
  not pay the bill in full when due
• Department store or bank credit card, overdraft
  protection, bank line of credit, home equity loan

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Open-End Credit
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• Credit Limit
• The dollar amount which may or may not be
  borrowed that lender makes available to a
  borrower
• Interest
• A periodic charge for use of credit
• Personal Line of Credit
• A prearranged loan from a bank for a maximum
  specified amount

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Credit Cards
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MasterCard

• Nearly 83 of Canadian households carry one or
  more credit cards.
• One-third are convenience users. They pay their
  balance off in full each month.
• The other two-thirds are borrowers.
• Co-branding - linking a credit card with a
  business offering rebates on products and
  services.
• Smart cards have an imbedded computer chip.
• Debit cards are not credit cards.

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Credit Card in Vietnam

• According to Visa International, only 88,000 of
  85mil people in Vietnam (1) are using Visa
  credit cards with the transaction turnover of
  115millions
• Meanwhile, the percentages of populations using
  Visa cards are much higher in other countries
• 68.5 in Singapore
• 10.6 in Thailand
• 20.3 in Malaysia

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• ANZ and HSBC are well known as banks that issue
  international credit cards
• Both the banks have high technology and a lot of
  experience in international and domestic credit
  cards

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• Domestic banks also issue credit cards
• For example, Vietcombank began issuing MasterCard
  in 1996
• After 10 years of development, the international
  card market now has 10 banks-issuers, including
  Vietcombank, ACB, ANZ, Eximbank, EAB and HSBC
• There are three main brand name cards
• Visa, MasterCard and American Express

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Protecting Yourself Against Credit Card Fraud
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• Sign new cards as soon as they arrive.
• Treat the cards like money - keep them secure.
• Shred anything with your account number on it.
• Dont give your number over the phone unless you
  initiate the call.
• Get your card and a receipt after every
  transaction and compare them to your bills when
  they arrive.

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Protecting Yourself Against Credit Card Fraud
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• Immediately report if lost or stolen.
• Notify issuer if you dont get your billing
  statement
• Check your credit report every few years
• If you make purchases online
• use a secure browser
• keep records of your online transactions

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Protecting Yourself Against Credit Card Fraud
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• If you make your purchases online
• review monthly statements for errors and
  unauthorized purchases
• read the policies of sites you visit
• keep your personal information private
• give payment information only to businesses you
  know and trust
• Never give your password to anyone online
• Do not download files from strangers

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Personal Lines of Credit
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• Revolving line of credit
• Interest rate linked to lenders prime rate
• Withdraw up to specified limit using debit card
  or cheques
• Repay minimum stated or more
• Secured with assets
• GICs or home equity

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• Line of credit
• Any credit source extended to a government,
  business or individual by a bank or other
  financial institution
• A line of credit may take several forms
• Overdraft protection
• Demand loan
• Special purpose
• Export packing credit
• Term loan
• Discounting, purchase of commercial bills

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• The lender determines a line of credit based
  largely on the individual's credit worthiness and
  income potential
• Most people encounter a line of credit when
  dealing with credit cards or home equity loans

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Home Equity Loans
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• A loan based on the current market value of your
  home less the amount still owing on your mortgage
• Can borrow up to 85 of your equity
• Interest on loan is tax deductible if proceeds
  are being used for an investment (outside of
  registered plans)
• Usually set up as a revolving line of credit

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Home Equity Loans vs. Second Mortgage

• Similar to a 2nd mortgage, a home equity line of
  credit establishes a maximum amount of money a
  homeowner can borrow
• In a second mortgage, the bank lends the entire
  amount of money and the borrower makes regular
  payments based on the balance due
• A line of credit arrangement allows the homeowner
  to borrow smaller amounts of money to pay off
  contractors or bills without incurring a large
  debt up front

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Closed End Credit

• Mortgage and Mortgage Loans
• Mortgage
• A contract to buy a real estate, plan
• A pledge of property to secure payment of a debt
• Mortgage Loans
• A debt
• Loans to value is 80 at max
• Ex
• Home Mortgage
• Plant Mortgage

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Closed End Credit
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• CAR LOAN
• Automobile is your second largest investment
• Financing Sources
• Financing at the Dealer
• Affiliated with manufacturer or financial
  institution
• Significantly lower interest rates on some models
• Other incentives offered (no down payment, no
  late charge.)

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Car Loan

• 2. Leasing
• Closed-end lease
• You can buy vehicle at lease end or return it to
  company
• Open-end leas
• You are responsible for residual value of vehicle
  at lease end
• Vehicle owned by leasing company, you pay
  maintenance, repairs, insurance
• May have mileage restrictions

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• 3. Paying Cash
• Advantages
• Least expensive
• Avoids interest charges
• Used by people with limited/poor credit line
• Disadvantages
• Investment returns higher than cost to borrow
• Using saving money to buy or borrowing
• Using saving money to buy or investing
• Automobile depreciations
• 15-20 on the first year
• 50 after three years

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Learning Objective 3Assess your credit
capacity and building your credit rating.
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Measuring Your Credit Capacity
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• Before you take out a loan, ask yourself...
• Can you afford the loan?
• Ability to make principal and interest payments
• Extra money after covering up the loan
• What do you plan to give up in order to make the
  payment?
• Saving or investing money

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Credit Capacity

• The maximum amount of debt a person or entity can
  be expected to assume and repay based on
  financial ability
• Based on a formula that factors existing debt
  payments and net income to arrive at a percent of
  net income that is available for debt repayment

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Credit Capacity Indicators
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Not including housing
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• Ex
• Monthly credit payments are 760 and net income
  is 3,800
• Debt-payments ratio
• 760/3,800 0.20 20

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Credit Capacity Indicators
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Debt To Equity Ratio
total liabilities

Should be lt 1
net worth
Excluding home value
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• Ex
• Long-term debt of 3,000 and owners equity of
  12,000
• The debt/equity ratio
• 3000 / 12000 0.25
• If the ratio is greater than 1, the majority of
  assets are financed through debt
• If it is smaller than 1, assets are primarily
  financed through equity

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Co-Signing a Loan
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• You are considered as a co-debtor or co-owner of
  the loan
• Guaranteeing a debt
• If borrower doesnt pay the debt you will have to
  
• Including fees and collection costs
• Statistics show that 3 out of 4 co-signors have
  to pay

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• If you do co-sign a loan
• Be sure you can afford to pay
• Cover the debt of others when they default
• Liability can keep you from getting other credit
• Credit line will be affected
• Could lose the property you pledge as security
• Lost of automobile or furniture
• Understand provincial laws
• Rights as a co-singer
• Request copy of all over due notices

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Build and Maintain Your Credit Rating
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• Your credit experiences, or lack of, is a major
  consideration for the creditor
• a good credit rating is a valuable asset
• use credit with discretion
• limit borrowing to your capacity to repay
• abide by the terms of the lending contracts

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Your Credit File

• The Credit Bureau is a reporting agency that
  collects credit and other information about
  consumers and sells the date to creditors to help
  in evaluating applications.
• Your Credit file includes
• Your employer and position
• Former address and employer
• Spouses name, social insurance number and
  employer
• Public records and information
• Cheques returned for insufficient funds

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• Credit Bureaus
• Equifax Canada
• www.equifax.ca
• Trans Union Canada
• www.tuc.ca
• Experian
• www.experiance.com
• Others

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Credit Bureau Regulation
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• Most provinces have legislation to protect
• Consumer privacy
• Right not to suffer from false credit or personal
  information
• Others may only view your file if written consent
  has been given
• First bankruptcy remains on your file 7 years,
  second bankruptcy is permanent
• Errors in your credit file should be corrected
  immediately

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Credit Bureaus in Vietnam

• The State Bank of Vietnam's Credit information
  center, established in 1999, remains the
  country's sole credit bureau
• The credit bureau targets small- and medium-size
  enterprises (SMEs) and individuals

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• Vietnam's first private credit information
  company (PCB) officially began providing services
  in 2010 with more than 20 banks committing to
  supply information
• The company was established by the Private Credit
  Bureau Investment Joint Stock Company (PCB)
• Total charter capital of 50 billion VND (2.7
  million USD) was contributed by 11 Vietnamese
  commercial banks ACB, ABBank, Vietinbank, BIDV,
  Southeast Asia Bank, Techcombank, Vietcombank,
  SB, VIB, Vietbank and VPBank

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• Vietnam has a population of more than 86 million
  and over 480,000 SMEs
• Only 5 of the population and 30 of the SMEs
  have engaged in credit transactions with banks
• A low rate in the region, as the rates in
  Thailand and Malaysia are 70 to 80

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Credit Scoring
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• Used by lenders to assess the risk of prospective
  borrowers
• Data is credit report is summarized in a credit
  score
• Helps to predict creditworthiness
• Higher the score the better

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Credit Scoring
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• The following categories are weighted
• Payment history
• Length of credit history
• Amounts owed
• Types of credit used
• Number of recent applications for credit

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• Improve your score
• Managing your debt responsibly
• Pay your debt on time
• Avoid over spending on credit limit
• Avoid certain types of credit
• Not applying for too many credit cards at the
  same time

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Learning Objective 4Describe the information
creditors look for when you apply for credit.
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What Creditors Look For 5 Cs
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• Character Borrowers attitude towards credit
  obligations
• Capacity Borrowers financial ability to meet
  credit obligations
• Capital Borrowers assets or net worth
• Collateral Valuable assets that is pledged to
  ensure loan payments
• Conditions the general economic conditions that
  can affect borrowers ability to repay a loan

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If you are denied credit?
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• Ask questions if application for credit is denied
• If based on your credit report ask
• what specific information on credit report lead
  to denial?
• Check with credit bureau to find out what
  information has been reported and investigate and
  correct any inaccurate or incomplete information

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Learning Objective 5Identify the steps you
can take to avoid and correct credit mistakes.
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Avoiding Correcting Credit Mistakes
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• To correct mistakes or misunderstandings in your
  credit accounts
• contact creditor first to correct error
• If your identity has been stolen
• contact the fraud department of major credit
  bureaus
• contact creditors for accounts that have been
  opened fraudulently
• file a police report
• close all bank accounts immediately and cancel
  credit cards

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Summary of Learning Objectives
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• Define consumer credit and analyze its advantages
  and disadvantages
• Is borrowing money to obtain goods and services
  for personal needs
• Advantages include
• Purchase goods when you need them and pay for
  them gradually
• Ability to deal with financial emergencies
• Convenience in shopping
• Establishment of credit rating
• Disadvantages include
• Credit costs money
• Encourages overspending
• Ties up future income

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Summary of Learning Objectives
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• Differentiate among various types of credit
• Closed end (installment) credit
• Pay back one time loan in a stated period of time
  and with a specified number of payments
• Open end (revolving) credit
• Take loans on a continuous basis and is billed
  for partial payments periodically
• Assess your credit capacity and build your credit
  rating
• Debt payment to income ratio
• Debt to equity ratio
• Creditor seeks information from credit bureaus

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Summary of Learning Objectives
5-36

• Describe the information creditors look for when
  you apply for credit
• Character
• Capacity
• Capital
• Collateral
• Conditions

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Summary of Learning Objectives
5-36

• Identify the steps you can take to avoid and
  correct credit mistakes
• If billing error occurs notify creditor in
  writing within 60 days
• If your dispute is not settled place your version
  in your credit file
• Can withhold payment for defective goods or
  services as long as you attempt to solve dispute
  with merchant