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

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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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 Holders and Credit Cards Held
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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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How to Calculate Debt Payments-to-Income Ratio
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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