Chapter 5 - Consumer Credit

FICO credit score range

300 to 850

common credit score range

501 to 990

travel and entertainment (T&E) card

Diners Club or American Express cards with a balance due in full each month

major credit bureaus

Experian, TransUnion, and Equifax

debt payments-to-income ratio

a calculation for dividing monthly debt payments (excluding house payment) by net monthly income; experts recommend spending no more than 20 percent of net income on consumer credit payments based on the average family expenses without major emergencies

borrower

a cardholder who does not pay off their balance every month

convenience user

a cardholder who pays off their balance in full each month

installment cash credit

a direct loan of money for personal purposes, home improvements, or vacation expenses

bankruptcy

a legal process in which some or all the assets of a debtor are distributed among the creditors because the debtor is unable to pay his or her debts

open-end credit

a line of credit in which loans are made on a continuous basis and the borrower is billed periodically for at least partial payment

home equity loan

a loan based on home equity, the difference between the current market value of a home and the amount still owed on the mortgage

installment sales credit

a loan that allows a person to receive merchandise, usually high-priced items, like large appliances or furniture

cash advance

a loan that is billed to the customer's credit card account

single-lump sum credit

a loan that must be repaid in total on a specified day, usually within 30 to 90 days

expensive loan

a loan with a high interest rate, often ranging from 12 to 25 percent

inexpensive loan

a loan with low interest with the source often being family members

medium-priced loan

a loan with moderate interest with the source often being commercial banks, savings and loan associations, and credit unions if a member

credit rating

a measure of a person's ability and willingness to make credit payments on time

Consumer Credit Counseling Services (CCCS)

a non-profit that provides debt counseling services to families and individuals

credit score

a number that reflects the information in a credit report

closed-end credit

a one-time loan that a borrower pays back in a specified period of time and in payments of equal amounts (mortgage loans, automobile loans, and installment loans)

interest

a periodic charge for the use of credit

smart card

a plastic card equipped with a computer chip that can store 500 times as much data as a normal credit card, like credit card balances, a driver's license, health care identification, and medical history

debit card

a plastic card that electronically subtracts money from savings or checking accounts to pay for goods and services

revolving check credit (bank line of credit)

a prearranged loan from a bank for a specified amount that can be used by writing a special check

credit report (file)

a record of complete credit history

condition

affects a borrower's ability to repay a loan

cosigning

agreeing to be responsible for loan payments if another party fails to make them

credit bureau

an agency that collects information on how promptly people and businesses pay their bills

credit

an arrangement to receive cash, goods, or services now and pay for them in the future

collateral

an asset that is pledged to ensure loan payments

debt-to-equity ratio

calculated by dividing total liabilities by net worth

complaining about consumer credit

if it is believed a lender is not following the consumer credit protection laws, try first to solve the problem directly with the lender, and if that fails, use formal complaint procedures

installment credit

in which debt is repaid in equal installments over a specified period of time

loan

involves borrowing money with an agreement to repay it, as well as interest, within a certain amount of time

the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

under this law, Americans who can pay will be required to pay back at least a portion of their debts (President George W. Bush)

Equal Credit Opportunity Act

o age may be requested by a creditor on the application, but a person cannot be turned down or experience a decrease in credit because of age o a person may not be denied credit because they receive Social Security or public assistance, but this income may be considered in determining creditworthiness o redlining, discrimination based on the race or nationality of people in the neighborhood in which a person lives or want to buy a home, is banned on housing loans o if lenders use risk-based pricing, they must disclose important details to customers

stored value card, gift card, or prepaid card

provides immediate money

character

refers to the borrower's attitude towards his or her credit obligations

Fair Credit Billing Act (FCBA)

sets procedures for promptly correcting billing mistakes, refusing to make credit card payments on defective goods, and promptly crediting payments

Equal Credit Opportunity Act (ECOA)

states that race, color, age, sex, marital status, and certain other factors may not be used to discriminate in any part of a credit dealing

chapter 7 bankruptcy

straight bankruptcy

mobile commerce

the ability to purchase using a mobile device with a significant increase in interest from consumers, retailers, and finance companies

capacity

the borrower's ability to pay additional debts

capital

the borrower's assets or net worth

simple interest

the interest computed on principal only and without compounding

line of credit

the maximum dollar amount of credit a lender has made available

add-on interest method

the method of calculating interest on the full amount of the original principal, no matter how frequently you make payments

declining balance method

the method of computing interest when simple interest is paid back in more than one payment

annual percentage rate (APR)

the percentage cost (or relative cost) of credit on a yearly basis

finance charge

the total dollar amount paid to use credit

consumer credit

the use of credit for personal needs (except a home mortgage) by individuals and families for personal needs

chapter 13 bankruptcy

wage earner plan bankruptcy

Fair Credit Reporting Act

Ø 1971 Ø requires out-of-date information to be deleted Ø gives consumers access to their files, as well as the ability to correct misinformation places limits on who can obtain credit report

consumer credit protection laws

Ø Truth in Lending and Consumer Leasing Acts Ø Fair Credit and Charge Card Disclosure Act Ø Equal Credit Opportunity Act (ECOA) Ø Fair Credit Billing Act Ø Fair Credit Reporting Act Ø Consumer Credit Reporting Reform Act Ø Electronic Funds Transfer Act Ø Credit Card Accountability Responsibility and Disclosure Act of 2009 (Card Act)

billing errors and disputes

Ø a creditor may not threaten credit rating or do anything to damage credit reputation while a person is negotiating a billing dispute Ø creditor may not take any action to collect the amount in question until complaint has been answered Ø if a sincere effort to resolve a problem with an item purchased has been made, but the store is not cooperative, a person can ask for their credit card company to stop payment

sources of consumer credit

Ø commercial banks Ø consumer finance companies Ø credit unions Ø life insurance companies

advantages of credit

Ø consumer credit enables people to enjoy goods and services now, like a car, a home, an education, or it can provide for emergencies Ø credit cards permit the purchase of goods, even when funds are low, and provide shopping convenience Ø credit allows shopping and traveling without carrying a large amount of cash

what to do if identity is stolen

Ø contact the credit bureaus Ø contact creditors Ø file a police report

uses and misuses of credit

Ø do I have the cash I need for the down payment? Ø do I want to use my savings for this purchase? Ø does the purchase fit my budget? Ø could I use the credit I need for this purchase in some better way? Ø could I postpone the purchase? Ø what are the opportunity costs of postponing the purchase? Ø what are the dollar costs and psychological costs of using credit?

how to improve credit score

Ø get copies of credit report and verify the information Ø pay bills on time Ø understand how credit score is determined Ø learn the legal steps to take to improve credit report Ø beware of credit-repair scams

Consumer Financial Protection Bureau (CFPB)

Ø if a person is unable to find a resolution to a credit card situation, the Consumer Financial Protection Bureau (CFPB) has created a one-stop shop complaint website for credit card issues Ø website allows a person to submit complaint and monitor progress of complaint throughout investigation

if application is denied

Ø if denied credit, the ECOA gives the right to know the reasons Ø if denied is based on a credit report the credit bureau, a person is entitled to a free credit report within 60 days Ø a person is entitled to ask the bureau to investigate any inaccurate or incomplete information and correct its records

warning signs of debt problems

Ø paying only the minimum balance each month Ø trouble paying the minimum balance Ø total balance on credit cards increases every month Ø missing loan payments or paying late Ø using savings to pay for necessities Ø getting second or third payment due notices Ø borrowing money to pay old debts Ø exceeding the credit limits on your credit cards Ø being denied credit due to a bad credit report

protecting credit from theft or loss

Ø shred any papers that contain personal information Ø check machines carefully to avoid skimming Ø close accounts immediately if an identity thief is suspected to have accessed an account Ø stop payments of checks if fraud is suspected Ø be sure credit card is returned after a purchase Ø keep a record of credit card numbers Ø notify credit card company immediately if card is lost or stolen

disadvantages of credit

Ø temptation to overspend can create serious long-term financial problems, damage family relationships, and delay progress toward financial goals Ø failure to repay may result in loss of income, valuable property, and good reputation, as well as court action and bankruptcy Ø it ties up future income since credit costs money and paying for purchases over a period of time is more costly than paying with cash

debt collection practices

Ø the Federal Trade Commission enforces the Fair Debt Collection Practices Act (FDCPA), which prohibits certain practices by debt collectors, businesses that collect debts for creditors Ø does not erase the legitimate debts that consumers owe controls the ways in which debt collection agencies may do business

protecting credit information on the internet

Ø use a secure browser Ø keep records of online transactions Ø review monthly bank and credit card statements Ø read the privacy and security policies of websites visited Ø keep personal information private Ø never give password to anyone online Ø do not download files sent by strangers