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Credit in AmericaChapter 16

CreditManagement

Unit 4

+FUN FACTS

$159 Billion in 2007

10% - Credit Cards

20% - Ask Parents

Owes about $230

1 in 4 youths (16-18) - $1,000

Average Family: $9,000

+Advantages of Credit

Able to buy needed items now

Don’t have to carry cash

Creates a record of purchases

More convenient than writing checks

Consolidates bills into one payment

+Disadvantages of Credit

Interest (higher cost of items)

May require additional fees

Financial difficulties may arise if one loses track of how much has been spent each month

Increased impulse buying may occur

Credit, its availability, and its costs

Borrow money or use

creditBorrower

The person or company who loans money

Creditor

+Kinds of Credit

Open-Ended Credit Can be used over and over again pending customer

agreement

Open 30-Day accounts Travel-entertainment cards (American Express and

Diner’s Club) Widely Accepted nationwide and overseas Have high or no credit limits Provides instant purchasing power

+Kinds of Credit

Revolving Credit Accounts All purpose credit card: Visa, MasterCard, and Discover

Widely accepted nationwide and overseas Provide instant purchasing power

Retail store cards: department stores and gas companies

Only accepted at participating stores Provide instant purchasing power

+Applying for a Credit Card

Costs: Annual Percentage Rate (APR) Grace period (free period) Annual Fees Transaction Fees Balancing computation method for the finance charge

Features: Credit limit How widely the card is accepted What services and features are available

+Kinds of Credit

Open-Ended

Closed-Ended Credit A loan for a specific amount of time that must be repaid, in full,

including all finance charges, by a stated due date. Very expensive items: cars, furniture, and major appliances. Statement includes: Amount loaned, finance charges, payment

amount. Collateral

Service Credit Have a service performed now and pay for it later Examples: Phone, utilities, doctors, and lawyers Terms are set by individual businesses Usually paid in full with no finance charges or a budget plan

+Sources of Credit

Retail Store

Credit Card Companies

Banks and Credit Unions

Finance Companies

Pawnbrokers

Private Lenders

Other Sources of Consumer Credit

+Credit Cards Do’s and Don’ts

Shop around Look at various sources.

Read and understand the contract Read the contract carefully Don’t rush into signing anything Once a contract is signed, get a copy of it. Know the penalties for missed payments

Know your cost Figure out the total price when paying with credit. Make the largest payments possible Know the penalties for missed payments Buy on installment credit only after you have evaluated all other

possibilities. Don’t be misled into thinking small payments will be easy.

+Qualifying for Credit

5 C’s of Credit

Character – Will you repay the debt?

Capacity – Can you repay the debt?

Capital – Is the creditor fully protected if you fail to repay?

Conditions – What general economic conditions can affect your repayment or debt?

Collateral – What assets back up your promise to pay?

Major U.S. Credit Bureaus

Credit Rating and Report

Credit Score Rating

720 – 850 Excellent

680 – 720 Good

640 – 680 Fair

350 – 640 Poor

000 – 349 No Credit

+How a Credit Score is Calculated

This central site allows you to request a FREE credit report, once every 12 months from each of the nationwide consumer credit reporting companies. Equifax, Experian, and TransUnion.

+How is My Credit Score Affected?

+Credit Rating and Report

Summary of Information

Public Record Information

Credit Information

Account Detail

Requests for Credit History

Personal Information

+Consumer Protection

Truth in Lending Act (1968)Ensures consumers are fully informed about cost and conditions of borrowing.

Fair Credit Reporting Act (1970)Protects the privacy and accuracy of information in a credit check.

Equal Opportunity Act (1974)Prohibits discrimination in giving credit on the basis of sex, race, color, religion, national origin, marital status, age, or receipt of public assistance.

Fair Credit Billing Act (1974)Sets up a procedure for the quick correction of mistakes that appear on consumer credit accounts.

Fair Debt Collection Practices Act (1977)Prevents abuse by professional debt collectors, and applies to anyone employed to collect debts owed to others; does not apply to banks or other businesses collecting their own accounts.

+CARD ACT

On Feb. 22, 2010, the Credit Card Accountability Responsibility and Disclosure Act (CARD Act) took effect.

It is a comprehensive credit card reform legislation that aims to establish fair practices relating to the extension of credit under an open end consumer credit plan.

New rules credit card companies must follow to ensure CONSUMER PROTECTION.

Provisions include: Interest rates, due dates, misleading terms, set limits, minimum payment explanation

+CREDIT DEBATE

Why is credit necessary?

Advantages Disadvantages

Do we need credit?

CARD ONE CARD TWO

Card name

Locations accepted

Annual Fee

APR

Grace period

Minimum payment

Late payment fee

Other features