Chapter 7 Choosing a Source of Credit

What should you do if you cannot pay your bills and need help?

If you cannot pay your bills and need help, talk with your creditors and try to work out an adjusted repayment plan or seek help from a nonprofit financial counseling program

Statistics of declaring bankruptcy

Increasing number of filers are well-educated, middle-class baby boomers -Baby boomers account for 60% of personal bankruptcies -Average age is 38 -Likely to be female Women account for 36% of filers A record 2 million people declared bankrupt in 2005 Bankruptcy is unfortunately an "acceptable" tool of credit management for some

What are the 3 sources of consumer credit?

Inexpensive loans Medium-Priced loans Expensive Loans

What is simple interest?

Interest computed on principal and without compounding

What do finance charges include?

Interest costs, service charges, credit-related insurance premiums, or appraisal fees

How do you calculate add-on interest?

Interest is calculated on the full amount of the original principal Then this interest amount is immediately added to the original principal Then the total (interest plus principal) is divided by the number of payments to be made to arrive at the payment amount

Truth in Lending Laws

The federal law that requires creditors to disclose the annual percentage rate (APR) and the finance charge is a dollar amount

What is the trade-off in term vs. interest costs?

The longer the loans with smaller monthly payments result in more total interest

Chapter 7 Bankruptcy

•A person filing is called a debtor •Debtor submits a petition to the court that lists assets and liabilities, and pays a filing fee •Known as a Straight Bankruptcy •Many, but not all, debts are forgiven •Most assets are sold to pay creditors •Can keep some assets

Average daily balance method

Creditors add your balances for each day in the billing period and then divide this total by the number of days in the billing period. Then they multiply this average balance by the monthly interest rate

Suppose a relative lends you $1,000 to purchase a laptop computer. Your relative agreed to charge only 5% interest, and you agreed to repay the loan at the end of one year. Calculate the dollar amount of interest on this loan.

I= P*r*T Interest= $1,000*0.05* 1 year= $50

Consumer Credit Counseling Service

-A nonprofit which is supported by contributions from banks, credit unions, merchants, etc. -Provides debt counseling services for those with serious financial problems -Aids families by helping set up realistic budget and plan for expenditures -Provides education about credit buying and budgeting Can administer a debt repayment plan

What are the 3 types of credit insurance?

-Credit life -Credit accident and health -Credit premium

Frequent reasons for indebtedness (7)

-Emotional problems such as the need for instant gratification -The use of money to punish or get even -The expectation of instant comfort among young couples who overuse the installment plan -Keeping up with the Joneses -Overindulgence of children -Misunderstanding or lack of communication among family members -Amount of finance charges makes it difficult to repay

The Credit Card Accountability, Responsibility, And Disclosure Act Of 2009

-Limits increases in the APR in the first year -Restricts issuers from charging higher interest rates on existing balances -Teaser rates must be effective for at least 6 months -Issuers must mail statements at least 21 days before payment is due -Disclosure statement must be clear and timely -Card issuers must post card agreements on the internet -Requires statements to report the due dates, potential late fees, interest paid, monthly payment required to pay off the existing balance, and warn about the costs of making only the minimum payments -Sets a consistent due date for card payments each month -Restricts the penalties for going over the credit limit -Prohibits card issuers from issuing cards to consumers under 21 with out a cosigner or independent means to repay debt

Warning Signs of Debt Problems (16)

-Paying only the minimum balance each month -Increasing the total balance due each month -Missing or alternating payments or paying late -Intentionally using overdraft protection or taking frequent cash advances -Using savings to pay routine bills such as food -Receiving second or third payment notices -Not talking to your partner about money or talking only about money -Depending on overtime to meet routine expenses -Using up your savings -Borrowing money to pay old debts -Not knowing how much you owe -Going over your credit limit on credit cards -Having little or no savings for the unexpected -Being denied credit due to a credit report -Getting a credit card revoked by the issuer -Putting off medical or dental visits because you can't afford them now

Fair Debt Collection Practices Act

-Regulates debt collection agencies -If a debt collector calls you, within five days they must send you a written notice of amount owed, the creditors name, and your right to dispute the debt -You can dispute the debt or pay it -If you dispute debt, you may request verification of the debt within 30 days; If not sent, you can insist that communication about the debt cease •If verification sent, you may pay the debt or give notice that you will not pay

The serious consequences of debt (8)

-Robbing Peter to pay Paul can affect family health -May result in loss of job due to garnishments -May result in neglecting the educational needs of children -May result in heavy drinking -May result in neglect of children -May result in marital difficulties -May result in drug abuse -May result in bankruptcy

Bankruptcy

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

What are some ways to reduce the lender's risk and your interest rate?

Accept a variable interest rate Provide collateral to secure the loan Make a large cash down payment up front Accept a shorter-term loan

Medium-priced loans

Commercial banks, savings and loan associations, and credit unions

What is APR key to?

Comparing costs, regardless of the amount of credit or how much time you have to repay it

True or false: Declaring bankruptcy is a first resort because it severely helps your credit rating

Declaring bankruptcy is a LAST resort because it severely DAMAGES your credit rating

Credit insurance

Ensures loan is paid off in the event of death, disability, or loss of property

What does inflation do to the purchasing power of money?

Erodes it

True or false: Creditors are not required to let you know the APR and how the finance charge is calculate

False Creditors ARE required to let you know the APR and how the finance charge is calculate

True or false: The less frequent the payments, the lower the interest you will pay

False The MORE frequent your payments, the lower the interest you will pay

Expensive loans

Finance and check cashing companies Retailers such as car or appliance dealers Bank credit cards and cash advances Tax refund loans

Calculate previous balance method using the following information: APR 18% Monthly rate 1.5% Previous balance $400 Payments $300

Finance charge: 1.5%*$400= $6.00

The rule of 78s

Formula requires that you pay more interest at the beginning of the loan, when you have the use of more of the money, and pay less and less interest as the debt is reduced

Two-cycle average daily balance method

Method of computing finance charges that uses the average daily balance for two consecutive billing cycles The Credit CARD Act of 2009 bans this method

What is the minimum monthly payment trap?

Minimum monthly payment is the smallest amount you can pay and remain in good standing If you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance

Is interest paid on consumer credit tax deductible?

No

Inexpensive loans

Parents or family members Loans that use your financial assets (CDS or cash value of whole life insurance) as collateral

Previous balance method

Payments are not subtracted when calculating finance charges

Adjusted balance method

Payments are subtracted before calculating finance charges

Annual percentage rate

Percent cost of credit on a yearly balance

How do you calculate simple interest?

Principal x rate x time

Finance charge

The total dollar amount you pay to use credit.

True or false: Borrowers and Lenders are concerned about the goods and services that dollars "can" buy (purchasing power of dollars) rather than the actual credit used

True

True or false: Interest is paid only on the amount of original principal not yet repaid

True

True or false: Notify creditors if you can't make a payment and try to work out a modified payment plan

True

True or false: Premiums are high

True

True or false: The law does not set interest rates or other credit charges, but it does require disclosure so that you can compare costs

True

When is simple interest on the declining balance used?

When more than one payment is made on a simple interest loan

What happens it automobiles are repossessed?

You will owe difference between selling price and unpaid debt in addition to legal, towing, and storage charges

Chapter 13 bankruptcy

•A voluntary plan proposed to the bankruptcy court for those who want to pay a portion of their debt over a period up to five years •Known as a Wage-Earner's Plan •Payments are made to a trustee •Trustee distributes money to your creditors •Court may allow you to keep property and pay less than full amount of debts •Costs to the debtor include court costs, attorney's fees, and trustees' fees and costs

How to choose a credit counselor

•What services do you offer? •Do you offer free information? •What are your fees? •How will the debt-management plan work? •Can you get my creditors to lower or eliminate my interest and fees? •What if I can't afford to pay you? •Will you help me avoid future problems? •Will we have a contract? •Are your counselors accredited or certified?

After chapter 7 bankruptcy, you may still owe... (6)

▪Certain taxes and fines ▪Child support and alimony ▪Educational loans ▪Debts not disclosed to court ▪Debts from fraud, embezzlement, driving while intoxicated, or larceny -Debts from willful or malicious acts