CHAPTER 18 CONSUMER CREDIT

CHAPTER 18

CONSUMER CREDIT

18-1 Credit Fundamentals

USING CREDITCredit – the privilege of using someone else’s money for a period of time. • Debtor – anyone who buys on credit or

receives a loan.• Creditor – the one who sells on credit or

makes a loan.


USING CREDITTypes of Credit

• Trade Credit – occurs when a company receives goods from a supplier and pays for them later.

• Loan Credit – borrowing money to use for some special purpose (home, car, school)– Installments – repay the loan in specified amount over a

period of time.• Sales Credit – the use of charge accounts and credit

cards by consumers.


USING CREDITCharge Accounts

• Regular Accounts – requires the buyer to make full payments within a stated period (25-30 days)– Used by service providers (doctors, lawyers)

• Budget Accounts – requires the customer to make fixed payments over several months.– Utilities, some stores


USING CREDITCharge Accounts

• Revolving Accounts – allows users to charge purchases at any time, but only part of the debt must be paid each month. – Credit limit – a maximum amount may be owed at

one time. – Finance charge – the total dollar cost of credit

(includes interest)


USING CREDITCredit Cards

• Bank Cards - Most processing is done through an ISO, VISA and MasterCard are the most popular.

• Charge Cards - Widely used cards, subscribers pay a yearly membership fee. (American Express)

• Affinity Cards -These cards are co-branded with an issuing bank.

• Retail Cards - Customers can only use these cards at the issuing stores.


USING CREDITInstallment Credit

• Requires periodic payments at specified times. • A contractual agreement between the buyer

and the seller.• The seller has the right to repossess an item if

payments are not made on time. • Making a down payment is usually required.


USING CREDITConsumer Loans

• Installment loan – you agree to make monthly payments in specific amounts over a period of time. – Single payment loan – pay nothing until the end of

the loan period (60-90 days)



• Promissory note – a written promise to repay based on a debtor’s excellent credit history. – Principal– Time– Date of maturity– Payee– Interest rate– maker



• Collateral – property that is used as security• Cosigner – someone responsible for payment

if you do not pay as promised.


BENEFITS OF CREDIT• Convenience• Immediate Possession• Savings• Credit Rating • Useful for Emergencies


CREDIT CONCERNS • Overbuying• Careless buying • Higher prices• Overuse of credit

18-2 Cost of Credit

FINDING INTEREST Interest – The cost of borrowing money• Principal, P – Amount of the loan• Interest Rate, R – percent of interest charged

(can also be a decimal or fraction)• Time, T – length of time for which interest will

be charged (years or months)

18-2 Cost of Credit

FINDING INTEREST Simple Interest

Simple Interest – used for single payment loans. Interest = Principal x Rate x Time

I = P x R x T

18-2 Cost of Credit


If you Borrow $100 (P) at 12 percent (R) for one year (T)

I = $100 x 0.12 x 1 = $12

18-2 Cost of Credit


Time in months – one month = 1/12 of a year

I = $100 x 0.12 x 1/12 = $1

18-2 Cost of Credit


Time in days – one year is considered 360 days

I = $100 x 0.12 x 60/360 = $2

18-2 Cost of Credit

FINDING INTEREST Maturity Dates

The date on which a loan must be repaid• When the time of the loan is stated in months, the

date of maturity is the same day of the month as the date on which the loan was made.

• When the time is in days, you must count the exact number of days to find the date of maturity.

18-2 Cost of Credit

FINDING INTEREST Installment Interest

Borrow: $100Promissory Note: $110Repayment: 12 months

($10/$100=0.10%)

18-2 Cost of Credit


Amortization Schedules: interest is calculated n the amount that is unpaid at the end of each month.

18-2 Cost of Credit


Amortization Schedules $1,047.82

18-2 Cost of Credit

FINANCE CHARGESAnnual Percentage Rate

Annual Percentage Rate (APR): a disclosure required by law. It states the percentage cost of credit on a yearly basis. Service Fees: the time and money it tales a creditor to investigate credit history, process a loan or charge account application, keeps records of payments and balances.

18-2 Cost of Credit

FINANCE CHARGESTotal Dollar Charges

To make you aware of the total cost of credit, federal law requires that the lender must tell you the finance charge. ( the total dollar cost of credit, including interest and all other charges)

18-2 Cost of Credit

FINANCE CHARGESCompare Credit Costs

• Check with several lenders to compare APR• When using a credit card, know which card

has the lowest APR• When getting a loan, shop around

18-3 Credit Application & Documents

CREDIT APPLICATION PROCESSThe Three Cs of Credit

• Character – your honesty and willingness to pay a debt when it is due. (credit history)

• Capacity – a person’s ability to pay a debt when it is due. (income)

• Capital – the value of the borrower’s possessions. (cash & Property)



CREDIT APPLICATION PROCESSDocumenting Credit Data

• Banks – report whether the applicants have the accounts listed.

• Employers – verify employment dates and salary figures.

• Landlords – verify how long tenants have been renting and if they pay rent on time.


CREDIT APPLICATION PROCESSActions to Establish Credit

• Keep good grades and attendance • Start a checking and savings account• Open a credit card and make small purchases

and pay them off on time• Have a good (steady) part-time job


CREDIT BUREAUCredit Bureau – a company that gathers information on credit users. It sell this information to businesses offering credit.


CREDIT BUREAUCredit Report

• Shows the debt you owe• How often you use credit• Whether you pay your debts on time• Length of your credit use




CREDIT DOCUMENTS Credit Contracts

• “KWYS” – Know What You are Signing– What questions should you ask before signing?


CREDIT DOCUMENTS Statement of Accounts

• Statement: a record of the transactions completed during the billing period– The balance that was due when the last statement was mailed– The amount charged during the month– The amount credited to your account for payments or for

returned items – The current balance (old balance + finance charges + purchases

– payments) – The minimum amount of your next payment and when it is due


CREDIT DOCUMENTS Avoiding Fraud

• Check all records for accuracy• Verify payments and other credits

18-4 Protection of Credit Rights

CREDIT APPLICATOIN REGULATIONS Truth in Lending Act

• Requires that you be told the cost of credit before signing the agreement

• The lender must clearly state the APR and total finance charge

• Protects consumers against unauthorized use of credit cards

• The law limits your liability to $50 for unauthorized credit card purchases made prior to notifying the card issuer


CREDIT APPLICATOIN REGULATIONS Credit Card Act of 2009

• Designed to establish fair and transparent credit card practices

• Keeps credit card companies from changing fees and interest rates without cardholder approval

• Cardholders control their credit limit• Requires a credit card statement to show how long it

would take to pay off the balance if only the minimum due is paid


CREDIT APPLICATOIN REGULATIONS Equal Credit Opportunity Act

• Prohibits its creditors from denying a person credit because of age, race, sex, or marital status.

• A creditor must give any person who is denied credit a written statement of the reasons for denial.


CREDIT USE REGULATIONSFair Credit Billing Act

• Requires prompt correction of billing mistakes• You must notify your creditor in writing within

60 days after your statements was mailed. • Requires that credit bureaus must delete any

information dealing with a personal bankruptcy that is more than 10 years old.


CREDIT USE REGULATIONSFair Credit Reporting Act

• Gives the consumer the right to know what information credit bureaus are giving to potential creditors, employers, and insurers.

• If credit is denied based on information in a credit report, the applicant must be given name, address and phone number of the credit bureau that provided the information.


CREDIT USE REGULATIONSConsumer Credit Reporting Reform Act

• Places the burden of proof for accurate credit information on the credit reporting agency rather than on you.

• The creditor must certify that disputed data is accurate.

• If a creditor or the credit bureau verifies incorrect data, you can sue for damages.


CREDIT USE REGULATIONSFair Debt Collection Practices Act

• A debt collection agency attempts to obtain money that is past due.

• A debt collector may contact you in person, by mail, telephone, telegram or fax.

• A debt collector may not contact you before 8 a.m. or after 9 p.m.


CREDIT PROBLEMS AND ASSISTANCECredit Counseling

• Credit Counselor – discusses and suggests actions to take to reduce spending and eliminate credit difficulties.


CREDIT PROBLEMS AND ASSISTANCEBankruptcy

• Bankruptcy – the legal process of reducing or eliminating an amount owned.

• This should be the final option for extreme situations only.

• This process is costly and requires legal assistance.