Many of you have probably received credit card offer

1
Credit Management

• GENERAL ISSUES

2
Introduction

• Many of you have probably received credit card
  offers (either on campus or through the mail) if
  you are a college student
• About 90 of college sophomores have credit cards
• Proper use of a credit card can help establish a
  solid credit history
• Improper use can take years to heal

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What is Credit?

• Receiving money, goods, or services on the basis
  of an agreement that the borrower will repay the
  lender with a specified time period at a
  specified rate of interest
• Today, total consumer credit is about 2 trillion
  (excludes home mortgages and home equity loans)
• Americans carry over one billion credit cards
• Over one million Americans file for personal
  bankruptcy each year (twice as many as ten years
  ago)

4
Types of Consumer Credit

• Revolving credit
• Consumer can make a number of different
  purchases, up to a certain credit limit
• A minimum payment is due each month and interest
  is charged on the unpaid balance (average is
  14/year)
• Installment loans
• Consumer borrows a fixed amount and repays the
  principal plus interest at regular intervals
  (usually monthly)
• Lender usually holds title to asset until final
  payment is made
• Mortgage loans and home equity loans
• Mortgage is an installment loan secured by real
  estate
• Typically have a term of 15 or 30 years

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Deciding How Much to Borrow

• Failure to set debt limits is one reason why
  people get in trouble with credit cards
• Guideline No more than 10 to 20 of your
  take-home pay should go toward repayment of
  installment or revolving credit (exclude mortgage
  payment)
• National average is about 14

6
The Right Reasons for Borrowing

• Purchasing large, important goods and services
• House
• Car
• College education
• Dealing with emergencies
• Loss of job
• Death of relative (plane tickets on short notice
  are expensive)

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The Right Reasons for Borrowing

• Taking advantage of opportunities
• Good sale on computer (you are saving for one
  anyway)
• Convenience
• Easy to pay with a credit card (pay off your
  balance every month) when doing day-to-day
  shopping
• Establishing or improving your credit rating
• Good way for a college student to establish a
  credit rating

8
The Wrong Reasons for Borrowing

• Living beyond your means
• Do you have to use your credit card to pay your
  basic living expenses (because you cant afford
  not to)?
• Buy groceries
• Buy clothes
• Buy gasoline
• Pay your taxes

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Sources of Consumer Credit

• Financial institutions
• Commercial banks, savings banks, credit unions
• National credit cards
• University alumni associations, sports
  franchises, etc., are issuing credit cards with
  their logo (can be used anywhere a regular
  bank-issued card is accepted)
• These organizations receive a fee from the
  issuing bank
• Retailer-specific credit cards (such as Sears and
  JCPenney)
• Can only be used at a specific store

10
Sources of Consumer Credit

• Consumer Finance Companies
• Company specializing in consumer loans
• Example Household Finance
• Make relatively short-term loans
• Charge high interest rates
• Generally unsecured
• Application forms are easier to fill out than a
  banks
• Takes a short period of time to receive approval

11
Sources of Consumer Credit

• Life insurance companies and investment companies
• Policyholders may be able to borrow against their
  life insurance policy (up to the amount they have
  paid in premiums)
• May be able to borrow money from your investment
  firm via your brokerage account

12
Sources of Consumer Credit

• Personal loan from family and friends
• Always treat these in a businesslike manner
• Lots of potential for interpersonal conflict
• Pawnbrokers
• Issues loans for a very low percentage of an
  items face value
• Item is held as security until the loan is repaid
  in full
• Should be viewed as a lender of last resort

13
Applying for Credit

• How creditors evaluate loan applications
• 1. Capacity (Cash Flow)
• Can you afford to repay the debt?
• Examines current income (and expected future
  earning potential) vs. current expenses
• Are you a good credit risk?
• 2. Character (Integrity
• Do you live within your means or above it?
• Do you pay your bills on time?
• Do you demonstrate stability?
• 3. Collateral (assets)
• Property to secure a loan

4. Capital 5. Conditions
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The Role of Credit Bureaus

• Credit bureau a clearinghouse for consumer
  credit information
• Whats in your credit file?
• Identifying information
• Your credit history
• Including whether or not you pay your bills on
  time
• Information of public record
• Bankruptcies, lawsuits, criminal convictions
• You may request a copy of your credit record at
  any time
• If youve recently been denied credit, the credit
  reporting service must provide you a copy free of
  charge

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What to Do If Youre Denied Credit

• The lender must provide you with a written
  explanation
• Try negotiating with the lender
• Ask for a lower loan amount
• Try another lender
• Different lenders have different lending policies
• Some are more lenient than others

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Calculating Total Finance Charges

• Lenders are required to clearly state the finance
  charge and annual percentage rate (APR)
• Finance charge total dollar amount charged for
  credit
• Function of
• Amount you borrow
• APR
• Term of loan
• Annual percentage rate interest rate paid per
  dollar per year for credit
• Principal the amount borrowed

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Choosing the Lowest-Cost Credit Card

• Four main areas to consider
• Annual fee
• Ranges from 0 to 50 annually
• Late payment and other fees
• Annual percentage rate
• Grace period how long you have to pay for new
  purchases without having to pay interest charges
• Ranges from 0 days to 30 days
• If you pay your bill in full every month, get a
  card with no annual fee and a grace period of at
  least 25 days
• This way you wont pay interest charges

18
Choosing the Lowest-Cost Credit Card

• Many credit card companies offer a low interest
  rate for a short time period (to lure you
  incalled a teaser rate), and then raise the
  interest rate substantially
• Or the company may offer a great rate unless one
  payment is late and then the rate rises
  substantially
• Read the fine print

19
Credit Abuse

• If you abuse your credit, it can have lasting
  repercussions
• Repossession collection of collateral by the
  lender
• May not settle the debt if market value of asset
  doesnt cover amount of loan still outstanding
• Remaining debt is called deficiency judgment
• Wage garnishment a portion of borrowers wages
  is paid directly to lender by the employer
• Requires a court order

20
Credit Abuse

• Bankruptcy borrower is relieved of debts, court
  divides assets/income among creditors
• Action of last resort
• Virtually eliminates chances of securing future
  credit
• Over one million Americans file for bankruptcy
  each year
• Most are voluntary filings
• Chapter 7 assets are seized by court and sold,
  funds are prorated among creditors (after court
  costs/legal fees)70 of bankruptcies
• Creditors usually receive only small percentage
  of whats owed
• Chapter 13 individuals establish a three-year
  plan of debt repayment
• Debtor retains possession of property
• Creditors usually receive 6070 of whats owed

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Credit Abuse

• Bankruptcy doesnt eliminate all forms of debt
• Student loans
• Back taxes
• Child support
• Alimony
• Bankruptcy shouldnt be considered a quick fix
• Remains on your credit record for ten years
• Wont get reasonable credit terms during that
  time
• May be difficult to rent an apartment, obtain car
  insurance, etc.

22
Credit Counseling and Credit Repair Services

• A credit counselor is a trained professional who
  helps you develop a budget and arrange a program
  of debt repayment
• Nonprofit Consumer Credit Counseling Service
• Funded by lenders and credit card companies
  (vested interest in repayment)
• Credit repair doctors often claim they can erase
  your bad credit
• Cant deliver on their promisesdont use them