Chapter 5
in case of a billing error
- First, call your creditor - If dispute exists, notify creditor of error in writing within 60 days - Include your explanation of the error and your account number to the billing inquiries address - They must respond within 30 days - Credit 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 correct - Your credit rating is not affected while item is in dispute - if you don't contact the creditor in the correct timeframe, then can report you as delinquent
Inexpensive loans
- Parents or family members - Loans that use your financial assets (CDs or cash value of whole life insurance) as collateral
disadvantages of credit
- Temptation to overspend - Failure to repay loan may result in loss of income, valuable property, and your good reputation - Misuse of credit can create serious long-term financial problems, damage to family relationships, and a slowing of progress toward financial goals - It does not increase total purchasing power - Credit costs money
defective goods or services
- You may withhold payment on any damaged or shoddy goods or poor services if you have paid for them with a credit card as long as you have made a sincere attempt to resolve the problem with the merchant
Sources of Consumer Credit
-inexpensive loans -medium-priced loans -expensive loans
cost of credit and tax considerations
-interest paid on consumer credit is not tax deductible
grace period
creditors must tell you when the finance charges begin
Credit
is an arrangement to receive cash, goods, or services now and pay for them in the future
credit rating
• A good credit rating is a valuable asset that should be nurtured and protected • Limit your borrowing to your capacity to repay • Live up to the terms of contracts • Check to see what is in your credit report as most creditors rely on credit reports in considering loan applications
What creditors look for: 5 Cs
• Character — Do you pay bills on time? • Capacity — Can you repay the loan? • Capital — What are your assets and net worth? • Collateral — What property do you have to pledge that the lender can repossess if you default on the loan? • Conditions — What economic conditions could affect your ability to repay the loan? *Additionally, age, public assistance, housing loans, and FICO and VantageScore may be assessed.
adjusted balance method
• Payments are subtracted before calculating finance charges
Calculating Debt Payments-to-income Ratio - Example If your monthly net income is $2,136 (gross income less taxes and monthly IRA contribution) and your monthly installment credit payments total $426 (includes credit cards and auto loan), then what is your debt payments-to-income ratio?
$426 / $2,136 = 19.94%
effect of bankruptcy on your job and future credit
- Different people have different experiences in obtaining credit after they file bankruptcy - Don't confuse a personal bankruptcy with a business (or Chapter 11) bankruptcy - Many people find it easier to complete bankruptcy forms with the assistance of experienced bankruptcy counsel - Monetary costs associated with filing Chapter 13 Bankruptcy include: • Court Costs • Attorneys' fees • Trustees' fees and costs
Your Rights Under Consumer Credit Laws
- If you believe you have been refused credit due to discrimination, you can • Complain to the creditor and let the creditor know you are aware of the law • File a complaint with the government • If all else fails, sue the creditor in a federal district court
consumer credit laws
- There are a variety of formal complaint procedures and you may take legal action as a creditor but you should be aware of the following important consumer credit laws: • Truth in Lending and Consumer Leasing Acts • Equal Credit Opportunity Act • Fair Credit Billing Act • Fair Credit Reporting Act • Consumer Credit Reporting Reform Act • Credit Card Accountability, Responsibility and Disclosure Act
alternative counseling services
- Universities, local county extension agents, credit unions, military bases, and state and federal housing authorities provide nonprofit counseling services - You can check with your bank or consumer protection office to see if it has a listing of reputable, low-cost financial counseling services - The nonprofit American Consumer Credit Counseling website is www.consumercredit.com - Be aware of deceptive credit counseling organizations
finance charge
-is the total dollar amount you pay to use credit. It includes interest costs, service charges, credit-related insurance premiums, or appraisal fees
Using the Simple Interest Formula Example: 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.
Interest = $1,000 × 0.05 × 1 year = $50
What's in your credit files?
The credit bureau file contains your name, address, Social Security number, and birth date. It may also include the following information: • Your employer, position, and income. • Your former address. • Your former employer. • Your spouse's name, Social Security number, employer, and income. • Whether you own your home, rent, or board. • Checks returned for insufficient funds.
APR - Annual Percentage Rate
is the percentage cost of credit on a yearly basis ◦ Your key to comparing costs, regardless of the amount of credit or how much time you have to repay it ◦ APR is the true rate of interest so you can compare rates with other sources of credit ◦ The law does not set interest rates or other credit charges, but it does require disclosure so that you can compare costs
consumer credit
is the use of credit for personal needs (except a home mortgage) by individuals and families
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 • Declaring bankruptcy is a last resort because it severely damages your credit rating - 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
cost of credit and expected inflation
• Borrowers and Lenders are concerned about the goods and services that dollars "can" buy (purchasing power of dollars) rather than the actual credit used • Inflation erodes the purchasing power of money • Each percentage point increase in inflation means a decrease of approximately 1% in the quantity of goods and services you can purchase with a dolla
medium-priced loans
• Commercial banks, savings and loan associations, and credit unions
Identity Crisis - What to do if your identity is stolen?
• Contact the fraud department of each of the three major credit bureaus - tell them to flag your file with a fraud alert - include a statement that creditors should call you for permission before opening any new accounts in your name • Contact the creditors for any accounts that have been tampered with or opened fraudulently • File a police report and keep a copy in case your creditors need proof of the crime • Tear or shred personal information before placing in trash • Close bank accounts immediately if you believe an identify thief has accessed them • Cancel checks and ATM card if compromised • Contact the Privacy Rights Clearinghouse or call 619-298-3396 • File a complaint with the Federal Trade Commission at 1-877-FTC-HELP
previous balance method
• Payments are not subtracted when calculating finance charges example: ▪ For example... APR 18% Monthly rate 1.5% Previous balance $400 Payments $300 Finance charge: = 1.5% × $400 = $6.00
closed-end credit
• Single loan for a specific purpose and a specified amount that you pay back in a specified period of time and in payments of equal amounts • Installment sales credit, installment cash credit, and single lump-sum credit • Mortgage, automobile, and installment loans for furniture or appliances
early repayment
• The Rule of 78s favors lenders • 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
average daily balance method
• The fairest method of computing finance charges • 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 • New purchases during the billing period may be included or excluded from the average daily balance calculation
simple interest on the declining balance
• Used when more than one payment is made on a simple interest loan • Interest is paid only on the amount of original principal not yet repaid • The more frequent your payments, the lower the interest you will pay
consumer credit counseling services
•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 • 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
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 creditor's 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
open-end credit
◦ Use as needed until reaching line of credit maximum ◦ You pay interest and finance charges if you do not pay the bill in full when due ◦ Credit cards issued by -department stores, bank credit cards (Visa, Mastercard: smart cards and debit cards) -incidental credit -revolving check credit (bank line of credit) -travel and entertainment cards (diners club, American express) -overdraft protection -smart phones, home equity loans
Debt Payments-to-income ratio
• Divide your monthly debt payments by your net monthly income • Do not include your house payment in your monthly debt payments total as it is a long-term liability • Consumer credit payments should not exceed a max of 20% of your net (after-tax) income
Debt to Equity Ratio
• Divide your total liabilities by your net worth • Do not include the value of your home and the amount of its mortgage in total net worth
credit insurance
• Ensures loan is paid off in the event of death, disability, or loss of property • Three types include credit life, credit accident and health, and credit property • Premiums are quite high
expensive loans
• Finance and check cashing companies • Retailers such as car or appliance dealers • Bank credit cards and cash advances • Tax refund loans
advantages to credit
• Immediate access to goods and services • Permits purchase even when funds are low • A cushion for financial emergencies • Advance notice of sales • Easier to return merchandise • Convenient when shopping • One monthly payment • Safer than cash • Needed for hotel reservations, car rentals, and shopping by phone • Can take advantage of float time and grace period • May get rebates, extended manufacturer's warranties, or emergency medical evacuation for travelers, and other bonuses • Indicates financial stability
Simple Interest
• Interest computed on principal only and without compounding • The dollar cost of borrowing • Interest = Principal × Rate of interest × Time I = P × r × T
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 • When more than one payment is made, this method results in an effective rate of interest higher than stated rate of interest
two-cycle average daily balance method
• May include or exclude new purchases • 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
avoid 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 • For example, You purchase a $2,000 sound system using a credit card with 19% interest and a 2% minimum payment. If you pay just the minimum every month, it will take you 265 months (over 22 years) to pay off the debt and will cost you nearly $4,800 in interest payments.
fair credit billing act
• Passed in 1975 • Sets procedures for promptly correcting billing mistakes, refusing to make credit card or revolving credit payments on defective goods, and promptly crediting your payments
