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Chapter 6: Credit Use and Credit Cards

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Credit Use and Credit Cards ... low as 1/36 or 1/48 of the outstanding balance. ... Areas of Interest in Calculating FICO Score Objectives Compare and contrast ... – PowerPoint PPT presentation

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Title: Chapter 6: Credit Use and Credit Cards


1
Chapter 6 Credit Use and Credit Cards
2
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.

3
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.

4
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?

6-2
5
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?

6-3
6
Credit Use and Credit Cards
  • 13 fear credit over-extension
  • 12 are concerned about payments

A RECENT SURVEY OF U.S. HOUSEHOLDS
7
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.

8
Confessions of a Shopaholic
9
Credit Use and Credit Cards
  • Consumer
  • Installment
  • Non-installment
  • Open-ended

10
Closed vs. Open-End Credit
11
Advantages of Credit
  • Current use of goods and services
  • Demonstrates financial stability
  • Use for financial emergencies
  • Convenience when shopping
  • Safer than cash

12
Reasons For Using Credit
  • Convenience
  • Emergencies
  • Identification
  • Reservations

13
Reasons For Using Credit
  • Consume expensive products earlier
  • Enjoy the good life
  • Take advantage of free credit
  • Consolidate debts
  • Protection against ripoffs and frauds

14
Volume of Consumer Credit
15
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

16
Credit Card Holders and Credit Cards Held
17
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.

18
Reasons Against Using Credit
  • Interest is costly
  • Additional fees
  • High-priced add-ons
  • Liability for lost credit cards

19
Reasons Against Using Credit
  • Tempting to overspend
  • Privacy is a concern
  • Reduces financial flexibility

20
How to Calculate Debt Payments-to-Income Ratio
21
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

22
Sample Dispute Letter
23
Open-Ended Charge Accounts
PROCESS FOR OPENING
  • Application
  • Investigation
  • Credit ratings and risk scoring

24
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

25
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

26
Managing a Charge Account
CREDIT STATEMENTS
  • Billing date/Due date
  • Transaction/Posting dates
  • Grace period/Minimum payments
  • Credit for merchandise returns/Errors/ Correcting
    errors

27
Managing a Charge Account
COMPUTATION OF FINANCE CHARGES
  • Annual Percentage Rate (APR)
  • Periodic Rate
  • Average Daily Balance

28
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

29
What If You Are Denied Credit?
30
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

31
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

32
Criteria Usedto Grant Credit
  • Character
  • Capital
  • Capacity
  • Collateral
  • Conditions

5 Cs of Credit
33
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?

34
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.

35
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
36
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

37
Five Primary Areas of Interest in Calculating
FICO Score
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