Bài giảng Personal Financial - Chapter 5B Consumer Credit #2

5B Consumer Credit #2Covered so farAdvantages and disadvantages of creditTypes and sources of creditCredit capacity (how much you can afford)Credit reports and scoresStill to coverThe cost of creditProtecting your creditConsumer credit protection lawsDebt problems and bankruptcy5-*Objective 4Determine the Cost of Credit by Calculating Interest Using Various Interest FormulasFinance charge Total dollar amount you pay to use credit Includes interest costs and fees, such as service charges, credit-related insurance premiums, or appraisal feesAnnual Percentage Rate (APR) Percentage cost of credit on a yearly basisKey to comparing costs when shopping for ratesIt is important to shop around for credit5-*Tackling the Trade-OffsTerm (length of loan) versus interest costLonger loan: higher interest rate; total costLender risk versus interest rateFixed rate: increases lender riskTo reduce the lender’s risk and thus the interest rate you can:Accept a variable interest rateProvide collateral to secure a loanProvide up-front cashTake a shorter term loan 5-*Secured Credit Cards Secured Credit Card (or Collateralized Credit Card) – Backed by collateral in the form of a savings account opened at the financial institution that issues the card.Example:Deposit $1,000 with creditor to borrow $1,000Calculating the Cost of CreditSimple interestComputed on principal only without compoundingThe dollar cost of borrowingInterest = Principal x Rate x TimeSimple interest on the declining balanceInterest is paid only on the amount of original principal not yet repaidAdd-on interestInterest calculated on full amount of principal Interest added to original principalPayment = Total divided by number of payments to be made5-*Calculating the Cost of CreditAvoid minimum monthly payment trapThe longer to pay bill, the more interest you payAvoid credit card feesAnnual Fee- fee charged each year just to have a credit card (many are increasing; why?)Transaction Fee- fee charged to use a credit card, get cash advances, or make transfersLate Fee- fee assessed for making a late paymentBounced Check Fee- fee for NSF check paymentOver-the-Limit Fee- fee charged (with cardholder’s permission) to exceed credit card limit5-*Objective 5Develop a Plan to Protect Your Credit and Manage Your Debts Fair Credit Billing Act (FCBA, 1975)Notify creditor of error in writing within 60 daysPay the portion of the bill not in disputeCreditor must respond within 30 daysCredit card company has two billing periods, but no longer than 90 days, to correct your account or tell you why they think the bill is correct5-*Protecting Your Credit Disputed item won’t affect your credit rating while in disputeCan withhold payment on damaged or shoddy goods or poor services if purchased with a credit cardMust make sincere attempt to resolve problem with creditor Contact merchant first and document itFair Credit Billing Act (FCBA, 1975)5-*Has anybody ever used FCBA procedures?Co-signing a Loan Co-signing means guaranteeing a debtLender would not require a co-signer if borrower were a good riskCan you afford it if the borrower defaults?If borrower doesn’t pay, cosigner is liable for the full amount plus any late or collection feesIf payment is missed, creditor can collect from the cosigner firstUnpaid debts will appear on the cosigner’s credit report5-*Complaining About Consumer CreditFirst: Try to solve the problem directly with the creditorIf that fails: Use formal complaint proceduresFederal government administers laws and assists with complaint proceduresFederal Reserve BoardFederal Trade Commission (FTC)5-*Consumer Credit Protection LawsTruth in Lending and Consumer Leasing ActsRequires disclosure of the cost of credit (APR)Equal Credit Opportunity Act (ECOA)Prohibits discrimination in credit-granting decisionsFair Credit Billing ActProvides rules for correcting billing errorsFair Credit Reporting ActProvides rules for accessing/correcting credit reportsYour Rights Under Consumer Credit LawsComplain to the creditorFile a complaint with the governmentIf all else fails, sue the creditor5-*Managing Your Debts Warning Signs of Debt ProblemsPaying only the minimum balance each monthTrouble even paying the minimum balanceTotal balance increases every monthMissing loan payments or paying lateUsing savings to pay for necessities Getting second or third payment noticesBorrowing money to pay old debtsExceeding the credit limits on your credit cardsDenied credit due to a bad credit report5-*Managing Your DebtsDebt Collection Practices The FTC enforces the Fair Debt Collection Practices Act (FDCPA)Prohibits certain practices by debt collectors (e.g., early or late calls, calls at work, profane language)Does not eliminate legitimate debts; just controls the way that debt collectors workDoes not apply to first-party debt collectors (original creditors); only to third-party collectors (independent companies)5-*Managing Your Debts Consumer Credit Counseling Services (CCCS)Non-profit and supported by contributions from banks, merchants, etc.Provides education about creditProvides help with spending planProvides debt counseling services for those with serious financial problemsCan develop a debt repayment plan and negotiate reduced interest rates5-*Declaring Personal BankruptcyU.S. Bankruptcy Act of 1978Chapter 7 = straight bankruptcyChapter 13 = wage earner plan Bankruptcy should be the last resort, because of the damage to your credit rating; stays in a person’s credit report 10 years vs. 7 years for other negative informationPersonal bankruptcy is a legal process to distribute some or all assets among a person’s creditors due to an inability to repay debts.5-*Chapter 7 BankruptcySubmit a petition to the court that lists assets and liabilities, and pay a filing feeMany, but not all, debts are forgivenAssets surrendered to pay creditorsCan keep some assets (home, vehicle,..), depending on state/federal exemptionsIntent = “A Fresh Start” Most bankruptcies are this type5-*After Chapter 7You May No Longer Owe:Retail store chargesBank credit card chargesUnsecured loansUnpaid hospital or physician billsYou Still May Owe... Certain taxes and finesChild support and alimonyEducational loansDebts from willful or malicious acts5-*Bankruptcy Abuse Prevention and Consumer Protection Act of 2005Makes it more difficult for consumers to file a Chapter 7 bankruptcy (means test)Debtors must wait 8 years from their last bankruptcy to file againClamps down on “bankruptcy mills” that seek to game the systemIncludes provisions for consumer education on debt management and financial planning5-*Chapter 13 BankruptcyDebtor with regular income proposes a plan to eliminate his debts over timeDebtor normally keeps most of propertyInformation provided to the court the same as under Chapter 7Plan may last up to five yearsDebtor makes payments to a court-appointed trustee5-*Obtaining Credit after BankruptcyMay be more difficultBut, creditors may consider the inability to file bankruptcy again for 8 years Could be easier for Chapter 13 filers (who have repaid some debt) versus Chapter 7 filers who made no effort to repayLikely to pay high interest rates (lower credit score)5-*CARD Act Regulations45 days’ notice before key changes in account terms (up from previous 15 days)Minimum payment illustrations on credit card bills (payoff cost and payment to repay in 36 months)“Universal default” practice was bannedTwo-cycle balance billing was banned“Teaser rates” must last at least 6 monthsConsumers must “opt in” for over-the-limit feesBills must be mailed 21 days before due dateNo more “late fee traps” (e.g., weekends, 8 am)College Students and Credit Cards(CARD Act)Credit card companies are prohibited from offering free merchandise in exchange for credit card applications (on campus, campus events)No credit cards under age 21 unless cosigner or proof of income to make paymentsMaximum amount of credit < 21: greater of $500 or 20% of annual gross income in most recently completed calendar yearAggregate limit for ALL credit cards held by someone <21: 30% of annual gross income in most recent completed calendar yearAlternatives to Credit Cards for College Students“Authorized user” on parent’s credit cards and reimburse parentsParents see everything you charge; may be feesDoes not boost students’ credit much; parent is userJoint account with parentsCredit history reported to credit bureaus; builds creditSecured credit cardsStill need to follow CARD Act cosigner/income rulesPrepaid debit cardsNot “credit”; use will not build credit history; high feesLess protection than credit cards if lost or stolenWrap UpChapter QuizConcept Check 5-4- Two Key Concepts and Credit TermsConcept 5-5- Correcting a Billing ErrorHelpful Advice for Others