Chapter 4

What is Credit?◦ Principal + Interest

Installment Debt◦ Equal Payments◦ Durable Goods◦ Longer Term = Lower Payment BUT◦ More Interest◦ Mortgage

Longest Terms

Do not want to wait Spread payments over the Service Life of

item Is Satisfaction Greater than Interest paid? Checklist for Using Credit for Purchases

◦ Do I really require the item? Can I postpone purchasing?

◦ If I pay cash, what will I be giving up that I could buy with these funds?

◦ If I borrow with the satisfaction I get from using the item now outweigh the interest paid?

◦ Have I done comparison shopping for credit?◦ Can I afford to use credit now?

Commercial Banks◦ Offer widest variety of services

Savings and Loan Associations◦ Accepts deposits and lend funds

Interest rates usually slightly lower than commercial Savings Banks

◦ Serve small savers◦ Lend money for mortgages, auto and personal loans◦ Many also offer checking and other commercial functions

Credit Unions◦ Owned and operated by members◦ Offer savings, checking, and loans◦ Higher interest earnings and lower interest charges

Finance Companies◦ Installment debt for stores◦ Very High Rates◦ Loans to people with BAD credit

Charge Accounts or Charge Card◦ Buy goods from a particular company or store◦ Regular Charge Account

Set amount can be charged No interest if paid in specified amount of time

Very high interest rate if unpaid on time◦ Revolving Charge Account

Able to make additional purchases (even if unpaid balance) Interest on Unpaid Balance If paid in full no interest charged

◦ Installment Charge Account Items purchased and paid through equal payments Principal and Interest paid monthly

Credit Cards◦ Access to loans at all times without having to apply◦ Difference between Charge Cards?◦ Difference between Debit and Credit Cards?

Finance Charges?◦ Interest costs + any other costs with having

Credit Dollar and Cents cost of credit

◦ Computed in 4 Ways (Next Slide) Annual Percentage Rates

◦ Cost of Credit expressed in a yearly amount◦ Also included is any non-interest cost of credit◦ APR provides easy way to compare credit

Previous Balance Method Adjusted Balance Average Daily Balance Past Due Balance

How does a person get credit?◦ Application◦ Credit Bureau

Private Business◦ Credit Check

Income, Current debt, personal life, repayment in past Looking for history in paying debt, capacity to pay

(debt:income, length at job, unemployed), character, any collateral

What determines a person’s creditworthiness?◦ Everybody has a credit score from the credit check◦ Higher the score better potential to get loan

AnnualCreditReport.com Equifax, TransUnion, and Experian – 1 Free a year

From Each Company

Late payments High debt-to-income ratio Having many open accounts Previous Bankruptcy

◦ Stays for 10 years Unemployment Legal Trouble Secure Loan vs. Unsecured loan

◦ Cosigner?

Loan is a Promise!!◦ If you don’t repay, creditor loses $

Losses passed off to others◦ Hurts credit rating

Keep track of all charges◦ Immediately report Fraud, Lost or Stolen Card

Visit Financial Counselors for Help if Needed◦ Consolidate Loans◦ Pay High Interest First◦ Pay more than Minimum Payment

The Truth in Lending Act (1968)◦ Requires Lenders to keep borrowers informed of

credit conditions The Equal Credit Opportunity Act (1974)

◦ Cannot deny based on race, religion, national origin, gender, marital status, or age

◦ Cannot deny because income comes from public assistance

State Usury Laws◦ Limits on amount of interest that can be charged

Consumer Finance Agencies allowed higher because loans are high risk

THIS IS THE FINAL RESORT!!! What is Bankruptcy? How does Bankruptcy work?

◦ Bankruptcy Court◦ Decide what debt to keep and which to give up◦ Taxes and School Loans MUST be repaid◦ Stays on record for 10 years◦ Constitution allows Congress to make laws on

Bankruptcy