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Personal & Family Finance

Section 4

Credit and Loans

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How many of you already have a credit card?

Is it in your name, or your parents’ names?

Do you know the rate on the card?

Is there an annual fee?

Do you pay it off each month?

If you make monthly payments do you pay the minimum amount?

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How many of you know what a credit report is?

How many of you know what a credit rating is?

How many of you are concerned about your credit?

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Reasons for Using Credit

As a shopping convenience To increase total consumption benefits As an inflation hedge As a source of emergency funds

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Disadvantages of Using Credit

Temptation to overspend Credit costs Less flexibility with future budgets

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How to Get Credit (& Keep it)

You should consider what the lender looks for. You should begin a credit record. You should review your credit report annually. You should repair a bad credit record.

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What the Lender Looks for

Lenders often use the five C’s of credit to determine the credit worthiness of an applicant. These are:

1. Character: have you met your previous obligations?

2. Capital: do you have sufficient financial assets?

3. Capacity: can you meet your future obligations?

4. Collateral: pledging an asset to the loan

5. Conditions: of nation or community

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Begin a Credit Record

Open checking and savings accounts Open a retail charge account with a local store or

major oil company Qualify for a small installment loan Make sure that your credit record follows you Have a telephone installed Don’t apply for too much credit

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Special Concerns for Married Women

Always use your own name, such as Nancy Hall. Don’t use social titles, such as Mrs. Edward Hall. Make sure that all credit information is reported

under your name as well as your husband’s. Inform creditors that you wish to maintain your own

credit history. Know the difference between a joint and individual

credit account.

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Credit Accounts

Joint credit account Both spouses are responsible for the debt. Divorced or separated spouses should cancel joint

accounts. Individual credit account

Only you are responsible for debt (not your spouse). Account will appear only on your credit report (not on

your spouse’s credit report).

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The Role of the Credit Bureau

The credit bureau does not decide who receives credit.

It acts as a clearinghouse for information on the past use of credit.

The credit bureau stores information on legal actions against you.

They store all credit inquiries for the last year and all employment related inquiries for the last two years.

It sells this information to lenders.

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If You Are Denied Credit

You are entitled to one free report from the reporting agency that supplied the report upon which the decision was based.

Review the report and correct any mistakes. Submit your own written statement on any disputed

items. Have old adverse information removed from report. Have anyone who received the report notified of any

corrected entries.

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The Truth in Lending Act

Requires that the lender provide the following information for revolving charge account:

Annual percentage rate (APR) applied to balance Method for calculating interest Grace period, if any, before interest will be charged Minimum monthly payment Penalties for late payment Permission to investigate credit history

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Interest Computation Methods

For revolving credit cards, interest is calculated several ways. These are:

Previous balance method Adjusted balance method Average daily balance method

Including current purchases Excluding current purchases

Two-cycle average daily balance method

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Interest Charges on Balances

Illustrations: Previous balance method $8.75 Adjusted balance method $8.16 Average daily balance method

Including current purchases $9.70 Excluding current purchases $8.35

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Major Issuers of Credit Cards

Bank credit cards are issued by MasterCard, Visa, and Discover.

Travel and entertainment cards are issued by American Express.

Other cards are issued by: Department store chains Major gasoline retailers.

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Credit Card Cost Comparison

Annual membership fee Variable rate information Balance computation

method Late payment fee Return check charge Copy charge

Annual percentage rate Grace period Cash advance fee Over-the-limit penalty Replacement fee Fees for optional services Minimum finance fee Transaction fee

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Credit Card Benefit Comparison

Credit limit Total disability insurance Unemployment insurance Accident insurance Rental car collision

insurance Warranty protection Merchandise loss protection

Credit life insurance Rebates & discounts Frequent flyer miles

Rebates Discounts

Credit card registry Purchase price protection

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Protection Against Credit Card Fraud

Sign a new credit card immediately upon receipt. Record card numbers, expiration dates, and phone

number for card company in case you need to call. Destroy old bills, receipts, and credit cards. Check sales receipt and compare with credit card

statement monthly. Be careful giving out your credit card number. Report lost or stolen cards immediately.

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Correcting Credit Card Mistakes Notify the creditor in writing within 60 days of the

billing date. Pay all parts of the bill that are not in dispute. Creditor will notify you within 30 days of its decision. If no error is found, you must pay or you will be

reported as delinquent. If you still challenge in writing, the creditor must

report that information. You should insure that the information is provided to the credit bureau.

A creditor cannot threaten your credit rating while you are resolving a credit dispute.

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Credit Cards versus Debit Cards

With a debit card, your bank balance is immediately reduced. With a credit card, there is a grace period.

With a debit card, your protection against loss is dependent on how quickly you notify the issuer. The sooner you notify the issuer, the greater your protection. If you notify the issuer within 2 days, your loss is limited to

$500. If you wait 60 days or more, your losses may be unlimited.

With a credit card, your loss is limited to $50 for a stolen card.

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Cash Credit

Cash credit is extended in the form of cash. Sales credit is extended in connection with

purchasing a good or service. An installment contract is an agreement between you

the person selling an item. Promissory note: a contract binding a borrower to future

repayment of the amount borrowed Security agreement: establishes the creditor’s security

interest in the good for which the credit was extended

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Acceleration Clause

Late payment of even one payment can cause the entire unpaid balance to be due immediately

If this happens and you cannot make the payment, the item may be repossessed

The laws guiding repossession differ by state If the item is sold for less than the loan balance, the

borrower is obligated to pay the remaining balance If the lender sells the item, any expenses associated

with the sale are added to the loan balance

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Add-On Clause Although courts seldom enforce this clause, a

borrower should be aware of the potential danger if this clause is included in a credit agreement.

If a consumer purchases multiple items (even at different times) and finances these items, the lender can repossess all items if purchased under a add-on credit agreement. For example: In January, purchase a TV; agree to repay monthly for 1 yr In June, purchase a refrigerator using the same credit

agreement; make a payment for one month but miss the second payment; both the TV and refrigerator can be repossessed.

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Balloon Payment

The last installment payment that is generally for an amount much greater than the other monthly payments.

Borrowers do not generally prepare sufficiently for the amount needed to make this payment.

If borrower has not prepared sufficiently, they may be required to borrow money to make the payment or else have the item repossessed.

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Sources of Credit Today, there are many sources of credit so a wise

consumer needs to shop around. Be sure to understand the loan do’s and don’ts. The traditional source of credit is banking

institutions. Other sources of credit are:

Consumer finance companies Life insurance policies Margin accounts on stocks and bonds 401(k) accounts Pawnbrokers