Bài giảng Personal Financial - Chapter 5A Consumer Credit #1

5A Consumer Credit #1 Credit – An arrangement to receive cash, goods, or services now and pay for them in the future. Types of credit ???Objective 1Analyze Advantages and Disadvantages of Using Consumer CreditCredit Based on trust in people’s ability and willingness to pay bills when dueConsumer Credit Use of credit by individuals for personal needs, except a home mortgageDates back to colonial times; exploded after invention of cars (installment loans; traveling)A major force in our economy5-*Uses and Misuses of Credit Before you use credit for a major purchase, ask:Do I have the cash for the down payment? Do I want to use my savings for this purchase?Does the purchase fit my budget?Could I use the credit I’ll need in some better way?Can I postpone this purchase?What are the opportunity costs of postponing this purchase?What are the dollar and psychological costs of using credit for this purchase?5-*Advantages of CreditCurrent use of goods and servicesPermits purchase even when funds are lowA cushion for financial emergenciesAdvance notice of salesEasier to return merchandiseConvenient when shoppingProvides a record of expenses5-*More Advantages of CreditOne monthly paymentSafer than carrying cashNeeded for hotel reservations, car rentals, and shopping onlineTake advantage of “float” time/grace periodRebates, airline miles, cash-back rewards, or other “perks”Credit indicates financial stability5-*Disadvantages of Consumer CreditTemptation to overspendCan create long-term financial problems and slow progress toward financial goalsPotential loss of merchandisedue to late or non-paymentTies up future incomeCredit costs money - more costly than paying with cash5-*Objective 2Assess the Types & Sources of Consumer CreditTwo Basic Types of Consumer CreditClosed-End CreditOne-time loans for a specific purpose paid back in a specified period of timeOpen-End CreditUse as needed until line of credit max reached5-*Examples of each?Closed-End CreditOne-time loans for a specific purpose that you pay back in a specified period of time, and in payments of equal amountsMortgage, automobile, and installment loans for furniture, appliances and electronics3 most common types of closed-end creditInstallment sales credit- loan for high-priced itemsInstallment cash credit- loan of cash for personal useSingle-lump credit- loan repaid on a specific day5-*Open-End CreditUse as needed until line of credit max reachedCredit cardsDepartment store cardsHome equity loansYou pay interest and finance charges if you do not pay the bill in full when dueRevolving Check Credit (Bank Line of Credit)- pre-arranged loan for a specified amount; can be accessed with special checks5-*Sources of Consumer CreditLoansBorrowing money with an agreement to repay, along with interest, within a certain amount of time (e.g., 3 years)Inexpensive loansParents or family membersMedium-priced loansCommercial banks, savings and loan associations, and credit unionsExpensive loansFinance and check cashing companies Retailers (e.g., department store credit cards)Bank credit cards and cash advances5-*Sources of Consumer CreditHome Equity LoansLoan based on home equityCurrent market value of your home minus the amount you still owe on the mortgageInterest is tax-deductibleShould only be used for major purchasesCredit CardsAverage cardholder has > 9 credit cardsConvenience users vs. borrowersFinance charge = total amount paid to use credit5-*Sources of Consumer CreditDebit CardsDebit cards electronically subtract money from savings or checking accountsMost commonly used at ATMsWidely accepted at stores alsoStored Value CardsGift cardsPrepaid cards5-*Sources of Consumer CreditSmart CardsPlastic card equipped with a computer chip that can store 500 times as much data as a normal credit card (e.g., health info)Travel and Entertainment (T&E) cardsNot really “credit cards”; balance is due in full each monthDiners Club; American ExpressYou don’t pay for goods or services at the time of purchase 5-*Objective 3 Determine Whether You Can Afford a Loan and How to Apply for CreditBefore you take out a loan, ask yourself... Can you meet all your essential expenses and still afford the monthly loan payments?Add up basic monthly expenses and subtract from take-home pay; will the difference cover the monthly payment? (NO? Can’t afford it!)What do you plan to give up in order to make the payment?5-*General Rules of Credit Capacity *Not including a house payment, which is a long-term liabilityDebt Payments-to-Income Ratio Monthly Debt Payments*Net Monthly IncomeConsumer credit payments should not exceed a maximum of 20% of your net income.5-*General Rules of Credit CapacityDebt To Equity RatioTotal Liabilities Net Worth*=Should be < 1*Excluding home value5-*The lower the ratio, the better; e.g., 0.5 or 0.25The Five C’s of CreditCharacter - Do you pay bills on time?Capacity - Can you repay the loan?Capital - What are your assets  and net worth?Collateral - What assets do you have to secure the loan?Conditions- Lenders will review how general economic conditions will affect your ability to repay your loan5-*FICO & VantageScoreFICO Credit Score300 to 850 rangeHigher score = less riskAvailable from for a fee; can sometimes get for free from lendersVantageScoreNew scoring techniqueDeveloped collaboratively by 3 credit agenciesRange = 501 to 9905-*Credit Scoring FactorsBill payment history, weighted to emphasize past 12 months (35%)Proportion of outstanding debt to available credit limits (30%)Length of credit history (15%)Number of recent credit inquiries (10%)Mix of types of credit used (10%)Factors of CreditworthinessECOA (Equal Credit Opportunity Act) Gives all applicants the same rights. Credit providers may not discriminate based on:AgeSocial Security or public assistanceHousing loans (redlining)If you are denied credit, you have the right to know the reasons You can request a copy of your credit report within 60 days if you are denied credit based on what is in your files5-*Your Credit ReportCredit ReportsRecord of your complete credit historyCredit BureausAgencies that collect information on how promptly people and businesses pay their billsExperian, Trans Union and Equifax are the 3 major credit bureausCredit Bureaus obtain information from banks, finance companies stores, credit card companies and other lenders5-*Four Main Parts to a Credit ReportIdentifying Information: name, SS Number, current/previous addresses, birthdate, employerPublic Record Information from Local Courthouse: liens, foreclosures, bankruptcy Other Credit History Information: list of loans and credit cards, timeliness of payments, defaults and negative information (7 years)Inquiries: Usually 2 years; self-initiated and promotional (for marketing purposes)Your Credit ReportWho can obtain a credit report?Only authorized persons have access to your report for approved legitimate business purposes Examples???Time Limits on Unfavorable DataAdverse data can be reported for 7 yearsBankruptcy can be reported for 10 years 5-*Wrap UpConcept Check 5-1- Reasons to Borrow and Advantages/DisadvantagesConcept Check 5-2- Definition of Terms; Difference Between Credit and Debit CardsConcept Check 5-3- Definition of Terms