Title: Chapter 6: Credit Use and Credit Cards
1Chapter 6 Credit Use and Credit Cards
2Objectives
- 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.
3Objectives
- 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.
4What 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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5What 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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6Credit Use and Credit Cards
- 13 fear credit over-extension
- 12 are concerned about payments
A RECENT SURVEY OF U.S. HOUSEHOLDS
7Credit 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.
8Confessions of a Shopaholic
9Credit Use and Credit Cards
- Consumer
- Installment
- Non-installment
- Open-ended
10Closed vs. Open-End Credit
11Advantages of Credit
- Current use of goods and services
- Demonstrates financial stability
- Use for financial emergencies
- Convenience when shopping
- Safer than cash
12Reasons For Using Credit
- Convenience
- Emergencies
- Identification
- Reservations
13Reasons For Using Credit
- Consume expensive products earlier
- Enjoy the good life
- Take advantage of free credit
- Consolidate debts
- Protection against ripoffs and frauds
14Volume of Consumer Credit
15Disadvantages 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
16Credit Card Holders and Credit Cards Held
17Helpful 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.
18Reasons Against Using Credit
- Interest is costly
- Additional fees
- High-priced add-ons
- Liability for lost credit cards
19Reasons Against Using Credit
- Tempting to overspend
- Privacy is a concern
- Reduces financial flexibility
20How to Calculate Debt Payments-to-Income Ratio
21Fair 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
22Sample Dispute Letter
23Open-Ended Charge Accounts
PROCESS FOR OPENING
- Application
- Investigation
- Credit ratings and risk scoring
24Build 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
25Avoiding 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
26Managing a Charge Account
CREDIT STATEMENTS
- Billing date/Due date
- Transaction/Posting dates
- Grace period/Minimum payments
- Credit for merchandise returns/Errors/ Correcting
errors
27Managing a Charge Account
COMPUTATION OF FINANCE CHARGES
- Annual Percentage Rate (APR)
- Periodic Rate
- Average Daily Balance
28What 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
29What If You Are Denied Credit?
30Protecting 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
31Measuring 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
32Criteria Usedto Grant Credit
- Character
- Capital
- Capacity
- Collateral
- Conditions
5 Cs of Credit
33What 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?
34Minimum 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.
35Bank CardCompetition
- Fixed or variable interest rates
- Introductory/teaser rate
- Co-branded card
- Rebates
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36Establish 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
37Five Primary Areas of Interest in Calculating
FICO Score