BUS-125 Chapter 5 study guide

three common types of close-end credit

installment sales credit, installment cash credit, and single lump-sum credit

two basic types of credit

open-end and closed-end credit

finance charge

the total dollar amount you pay to use credit. It includes interest costs and sometimes other costs such as service charges, credit-related insurance premiums, or appraisal fees.

Equal Credit Opportunity Act (ECOA)

starts all credit applicants off on the same footing. It states that race, color, age, sex, marital status, and certain other factors may not be used to discriminate against you in any part of a credit dealing.

ELECTRONIC FUND TRANSFER ACT

If a financial institution does not follow the provisions of the Electronic Fund Transfer Act, you may sue for actual damages plus punitive damages of not less than $100 or more than $1,000. You are also entitled to court costs and attorney fees in a successful lawsuit. Class-action suits are also permitted.

Information used to calculate your credit score usually includes the following:

The number and types of accounts you have (credit cards, auto loans, mortgages, etc.); Whether you pay your bills on time; How much of your available credit you are currently using; Whether you have any collection actions against you; The amount of your outstanding debt; and The age of your accounts.

CREDIT BUREAUS

A credit bureau is an agency that collects information on how promptly people and businesses pay their bills. The three major credit bureaus are Experian, TransUnion, and Equifax.

Here are some warning signs that you may be in financial trouble

- You make only the minimum monthly payment on credit cards. - You're having trouble making even the minimum monthly payment on your credit card bills. - The total balance on your credit cards increases every month. - You miss loan payments or often pay late. - You use savings to pay for necessities such as food and utilities. - You receive second and third payment due notices from creditors. - You borrow money to pay off old debts. - You exceed the credit limits on your credit cards. - You've been denied credit because of a bad credit bureau report.

What Can You Do to Improve Your Credit Score?

1. Get copies of your credit report—then make sure information is correct 2. Pay your bills on time. 3. Understand how your credit score is determined 4. Learn the legal steps to take to improve your credit report 5. Beware of credit-repair scams

FAIR CREDIT BILLING ACT

A creditor that fails to follow the rules that apply to correcting any billing errors will automatically give up the amount owed on the item in question and any finance charges on it, up to a combined total of $50. This is true even if the bill was correct. You may also sue for actual damages plus twice the amount of any finance charges.

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. Rather, you can use open-end credit to make any purchases you wish if you do not exceed your line of credit, the maximum dollar amount of credit the lender has made available to you. You may have to pay interest, a periodic charge for the use of credit, or other finance charges.

CAPITAL: WHAT ARE YOUR ASSETS AND NET WORTH?

Assets are any items of value that you own, including cash, property, personal possessions, and investments. Your capital is the amount of your assets that exceed your liabilities, or the debts you owe. Lenders want to be sure that you have enough capital to pay back a loan. That way, if you lost your source of income, you could repay your loan from your savings or by selling some of your assets. A lender might ask: What are your assets? What are your liabilities?

Determine whether you can afford a loan and how to apply for credit.

Before you take out a loan, ask yourself whether you can meet all of your essential expenses and still afford the monthly loan payments. You can make this calculation in two ways. One is to add up all your basic monthly expenses and then subtract this total from your take-home pay. If the difference will not cover the monthly payment and still leave funds for other expenses, you cannot afford the loan. A second and more reliable method is to ask yourself what you plan to give up to make the monthly loan payment. If you currently save a portion of your income that is greater than the monthly payment, you can use these savings to pay off the loan.

Advantages of credit

Credit cards permit the purchase of goods even when funds are low. Customers with previously approved credit may receive other extras, such as advance notice of sales and the right to order by phone or to buy on approval. Many retailers will accept returned merchandise without a receipt because they can look up the purchase made by a credit card. Credit cards also provide shopping convenience and the efficiency of paying for several purchases with one monthly payment.

FAIR CREDIT REPORTING

Fair and accurate credit reporting is vital to both creditors and consumers. In 1971, the U.S. Congress enacted the Fair Credit Reporting Act, which regulates the use of credit reports. This law requires the deletion of out-of-date information and gives consumers access to their files as well as the right to correct any misinformation that the files may include. The act also places limits on who can obtain your credit report.

CONDITIONS: WHAT IF YOUR JOB IS INSECURE?

General economic conditions, such as unemployment and recession, can affect your ability to repay a loan. The basic question focuses on security—of both your job and the firm that employs you.

cosigning a loan

If you cosign a loan and the borrower does not pay the debt, you may have to pay up to the full amount of the debt as well as any late fees or collection costs. The creditor can even collect the debt from you without first trying to collect from the borrower. The creditor can use the same collection methods against you that can be used against the borrower. If the debt is not repaid, that fact will appear on your credit record.

What to think about before using credit

If you decide to use credit, make sure the benefits of purchasing now (increased efficiency or productivity, a more satisfying life, etc.) outweigh the costs (financial and psychological) of using credit. Thus, credit, when effectively used, can help you have more and enjoy more. When misused, credit can result in default, bankruptcy, and loss of creditworthiness.

EQUAL CREDIT OPPORTUNITY ACT (ECOA)

If you think that you can prove that a creditor has discriminated against you for any reason prohibited by the ECOA, you may sue for actual damages plus punitive damages—a payment used to punish the creditor who has violated the law—up to $10,000.

close-end credit

One-time loans that the borrower pays back in a specified period of time and in payments of equal amounts. Mortgage loans, automobile loans, and installment loans for purchasing furniture or appliances are examples of closed-end credit. Generally, the seller holds title to the merchandise until the payments have been completed and can take possession of the item if the bill is unpaid.

CONSUMER CREDIT REPORTING REFORM ACT

The Consumer Credit Reporting Reform Act of 1977 places the burden of proof for accurate credit information on the credit bureau, rather than on you. Under this law, the creditor must prove that disputed information is accurate. If a creditor or the credit bureau verifies incorrect data, you can sue for damages.

DEBT PAYMENTS-TO-INCOME RATIO

The debt payments-to-income ratio is calculated by dividing your monthly debt payments (not including house payment, which is a long-term liability) by your net monthly income. Experts suggest that you spend no more than 20 percent of your net (after-tax) income on consumer credit payments. Thus, as Exhibit 5-4 shows, a person making $2,500 per month after taxes should spend no more than $500 on credit payments per month.

The trade-off with credit

Using credit increases the amount of money a person can spend to purchase goods and services now. But the trade-off is that it decreases the amount of money that will be available to spend in the future.

ORDER YOUR FREE CREDIT REPORTS

You can request a free credit report once a year from each of the three major credit reporting agencies: Equifax, Experian, and TransUnion. If you ask the credit bureaus directly, they will charge you a fee to obtain your report. You may want to request your credit reports one at a time, every four months, so you can monitor your credit throughout the year without having to pay for a report.

FAIR CREDIT REPORTING ACT

You may sue any credit bureau or creditor that violates the rules regarding access to your credit records or that fails to correct errors in your credit file. You're entitled to actual damages plus any punitive damages the court allows if the violation is proven to have been intentional.

WHO CAN OBTAIN A CREDIT REPORT?

Your credit report may be issued only to properly identified persons for approved purposes. It may be supplied in response to a court order or by your own written request. A credit report may also be provided for use in connection with a credit transaction, underwriting of insurance, or some legitimate business need. Friends, neighbors, and other individuals cannot be given access to credit information about you. In fact, if they even request such information, they may be subject to a fine, imprisonment, or both.

The Five Cs of Credit

character, capacity, capital, collateral, and conditions.

The Fair Credit Billing Act (FCBA)

enacted 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. This act is one of the main reasons why it is more advantageous to buy higher dollar value items with a credit card than a debit card. This act provides the consumer recourse against the retailer.

Consumer Credit Protection Laws

1. TRUTH IN LENDING AND CONSUMER LEASING ACTS 2. FAIR CREDIT AND CHARGE CARD DISCLOSURE ACT 3. EQUAL CREDIT OPPORTUNITY ACT (ECOA) 4. FAIR CREDIT BILLING ACT 5. FAIR CREDIT REPORTING ACT 6. CONSUMER CREDIT REPORTING REFORM ACT 7. ELECTRONIC FUND TRANSFER ACT 8. CREDIT CARD ACCOUNTABILITY RESPONSIBILITY AND DISCLOSURE ACT OF 2009 (CARD ACT) 9. CREDIT CARD ACCOUNTABILITY RESPONSIBILITY AND DISCLOSURE ACT OF 2009 (CARD ACT)

DEFECTIVE GOODS AND SERVICES

According to the Fair Credit Billing Act, he may tell his credit card company to stop payment for the bike because he has made a sincere attempt to resolve the problem with the store.

Other Factors Considered in Determining Creditworthiness

Age, public assistance, housing loans, and interests rates.

Consumir credit history

Consumer credit dates back to colonial times. Although credit was originally a privilege of the affluent, farmers came to use it extensively. No direct finance charges were imposed; instead, the cost of credit was added to the prices of goods. With the advent of the automobile in the early 1900s, installment credit, in which the debt is repaid in equal installments over a specified period of time, exploded on the American scene.

COLLATERAL: WHAT IF YOU DON'T REPAY THE LOAN?

Creditors look at what kinds of property or savings you already have because these can be offered as collateral to secure the loan. If you fail to repay the loan, the creditor may take whatever you pledged as collateral. A creditor might ask: What assets do you have to secure the loan (such as a vehicle, your home, or furniture)? Do you have any other valuable assets (such as bonds or savings)?

TRUTH IN LENDING AND CONSUMER LEASING ACTS

If a creditor fails to disclose information as required under the Truth in Lending Act or the Consumer Leasing Act, or gives inaccurate information, you can sue for any monetary loss you suffer. You can also sue a creditor that does not follow rules regarding credit cards. In addition, the Truth in Lending Act and the Consumer Leasing Act permit class action of all the people who have suffered the same injustice.

Consumer Financial Protection Bureau

If you are unable to find a resolution to a credit card situation, you may still have one more option. The Consumer Financial Protection Bureau (CFPB) has created a one-stop complaint website for credit card issues. You must visit the website, describe the circumstances of your complaint, and indicate any monies lost due to the issue

Disadvantages of credit

Perhaps the greatest disadvantage of using credit is the temptation to overspend, especially during periods of inflation. Buying today and paying tomorrow, using cheaper dollars, seems ideal, but continual overspending can lead to serious trouble. Whether or not credit involves security (or collateral)—something of value to back the loan—failure to repay a loan may result in loss of income, valuable property, and your good reputation. It can even lead to court action and bankruptcy. Misuse of credit can create serious long-term financial problems, damage family relationships, and delay progress toward financial goals. Therefore, you should approach credit with caution and avoid using it more than your budget permits.

Credit cards

These cards are extremely popular. The average cardholder has more than nine ______ cards, including bank, retail, and gasoline cards. Cardholders who pay off their balances in full each month are often known as convenience users. Cardholders who do not pay off their balances every month are known as borrowers.

credit rating (credit file)

a measure of a person's ability and willingness to make credit payments on time. The factors that determine a person's credit rating are income, current debt, information about character, and how debts have been repaid in the past. If you always make your payments on time, you will probably have an excellent credit rating. If not, your credit rating will be poor, and a lender probably won't extend credit to you. A good credit rating is a valuable asset that you should protect.

CHARACTER: WILL YOU REPAY THE LOAN?

Creditors want to know your character—what kind of person they are lending money to. They want to know that you're trustworthy and stable. They may ask for personal or professional references, and they may check to see whether you have a history of trouble with the law. Some questions a lender might ask to determine your character are: Have you used credit before? How long have you lived at your present address? How long have you held your current job?

Medium-priced loan

Often you can obtain medium-priced loans—loans with moderate interest—from commercial banks, savings and loan associations, and credit unions. Borrowing from credit unions has several advantages. They provide personalized service, and usually they're willing to be patient with borrowers who can provide good reasons for late or missed payments. However, you must be a member of a credit union in order to get a loan.

DEBT-TO-EQUITY RATIO

The debt-to-equity ratio is calculated by dividing your total liabilities by your net worth. In calculating this ratio, do not include the value of your home and the amount of its mortgage. If your debt-to-equity ratio is about 1—that is, if your consumer installment debt roughly equals your net worth (not including your home or the mortgage)—you have probably reached the upper limit of debt obligations.

annual percentage rate (APR)

The percentage cost (or relative cost) of credit on a yearly basis. The APR yields a true rate of interest for comparisons with other sources of credit.

Credit

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

If you're having trouble paying your bills and need help, you have several options

You can contact your creditors and try to work out an adjusted repayment plan, or you can contact a nonprofit financial counseling program.

CAPACITY: CAN YOU REPAY THE LOAN?

Your income and the debts you already have will affect your capacity—your ability to pay additional debts. If you already have a large amount of debt in proportion to your income, lenders probably won't extend more credit to you. Some questions a creditor may ask about your income and expenses are: What is your job, and how much is your salary? Do you have other sources of income? What are your current debts?

TERM VERSUS INTEREST COSTS

Many people choose longer-term financing because they want smaller monthly payments, but the longer the term for a loan at a given interest rate, the greater the amount you must pay in interest charges. Consider the following analysis of the relationship between the term and interest costs.

Inexpensive loans

Parents or other family members are often the source of the least expensive loans—loans with low interest. They may charge only interest they would have earned on the money if they had deposited it in a savings account.

The Federal Trade Commission enforces the Fair Debt Collection Practices Act

This act prohibits certain practices by debt collectors—businesses that collect debts for creditors. The act does not erase the legitimate debts that consumers owe, but it does control the ways in which debt collection agencies may do business.

FAIR CREDIT AND CHARGE CARD DISCLOSURE ACT

This act was initially written as an amendment to the Truth in Lending Act. This act requires that solicitations for credit cards in the mail, over the phone, in print, or online must provide the necessary terms of the account. This includes finance charges as well as cash advance or annual fees. This also includes any changes to the account.

What If Your Application Is Denied?

If your credit application is denied, the ECOA gives you the right to know the reasons. If the denial is based on a credit report from the credit bureau, you're entitled to know the specific information in the report that led to the denial. After you receive this information, you can contact the credit bureau and ask for a copy of your credit report. The bureau cannot charge a fee for this service as long as you ask to see your files within 60 days of notification that your credit application has been denied. You're entitled to ask the bureau to investigate any inaccurate or incomplete information and correct its records

Protecting Your Credit from Theft or Loss

Some thieves will pick through your trash in the hope of coming across your personal information. You can prevent this from happening by tearing or shredding any papers that contain personal information before you throw them out. Another tactic that an identity thief may use is skimming. Skimming involves the recording of the data on the magnetic strip of a credit or debit card. Thieves also target ATM machines by adding a device on the machine that will capture your personal identification number (PIN). This allows them to make fake cards and have access to your account. The best way to avoid falling victim is to carefully look at the machine to see if there are extra wires, strings, or cords that should not be there. Notify the bank immediately if your card is not returned.

WHAT'S IN YOUR CREDIT FILES?

A typical 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 previous address Your previous employer Your spouse's name, Social Security number, employer, and income Whether you rent or own your home Checks returned for insufficient funds

PROTECTING YOUR CREDIT RATING

According to law, a creditor may not threaten your credit rating or do anything to damage your credit reputation while you're negotiating a billing dispute. In addition, the creditor may not take any action to collect the amount in question until your complaint has been answered.

revolving check credit

Also called a bank line of credit, this is a prearranged loan for a specified amount that you can use by writing a special check. Repayment is made in installments over a set period. The finance charges are based on the amount of credit used during the month and on the outstanding balance.

Expensive loans

The easiest loans to obtain are also the most expensive. Finance companies and retail stores that lend to consumers will frequently charge high interest rates, ranging from 12 to 25 percent. Banks also lend money to their credit card holders through cash advances—loans that are billed to the customer's credit card account. Most cards charge higher interest for a cash advance and charge interest from the day the cash advance is made. As a result, taking out a cash advance is much more expensive than charging a purchase to a credit card

THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005

The law will help make credit more affordable, because when bankruptcy is less common, credit can be extended to more people at better rates. Debtors seeking to erase all debts will now have to wait eight years from their last bankruptcy before they can file again. The law will also allow us to clamp down on bankruptcy mills that make their money by advising abusers on how to game the system. The director of the Executive Office for U.S. Trustees develop a financial management training curriculum to educate individual debtors on how to better manage their finances, and test, evaluate, and report to Congress on the curriculum's effectiveness. Debtors complete an approved instructional course in personal financial management. The clerk of each bankruptcy district maintain a list of credit counseling agencies and instructional courses on personal financial management.

Summary of credit

The use of credit provides immediate access to goods and services, flexibility in money management, safety and convenience, a cushion in emergencies, a means of increasing resources, and a good credit rating if you pay back your debts in a timely manner. But remember, the use of credit is a two-sided coin. An intelligent decision as to its use demands careful evaluation of your current debt, your future income, the added cost, and the consequences of overspending.

CREDIT CARD ACCOUNTABILITY RESPONSIBILITY AND DISCLOSURE ACT OF 2009 (CARD ACT)

This act became effective in February 2010. It changed many of the rules by which the credit card companies could provide credit and administer accounts. Credit card companies must now provide 45 days' notice of rate increases. Also, the time between receiving the statement and the payment due date has been extended to 21 days. Additionally, the credit card companies must apply payments first to the debts that carry the higher interest rates, such as cash advances. They must also provide a more detailed statement that includes the time and total interest amount to pay off the balance if only the minimum payment is made. The rules by which the credit card companies can extend credit to persons under the age of 21 have also changed. Young people must be able to show proof of income or have a signature by a person willing to accept responsibility for the account.

CHAPTER 13 BANKRUPTCY

a debtor with a regular income proposes a plan for using future earnings or assets to eliminate his or her debts over a period of time. In such a bankruptcy, the debtor normally keeps all or most of his or her property. A debtor must provide the same information that is required to file a Chapter 7 bankruptcy. During the period when the plan is in effect, which can be as long as five years, the debtor makes regular payments to a Chapter 13 trustee, or representative, who then distributes the money to the creditors. Under certain circumstances, the bankruptcy court may approve a plan that permits the debtor to keep all property, even though he or she repays less than the full amount of the debts.

Credit Scores

a number that reflects the information in your credit report. The score summarizes your credit history and helps creditors predict how likely it is that you will repay a loan and make timely payments. Lenders use credit scores in deciding whether to grant you credit, what terms you are offered, or the interest rate you will pay on a loan.

CHAPTER 7 BANKRUPTCY

an individual is required to draw up a petition listing his or her assets and liabilities. A person who files for relief under the bankruptcy code is called a debtor. The debtor submits the petition to a U.S. district court and pays a filing fee. Chapter 7 is a straight bankruptcy in which many, but not all, debts are forgiven. Most of the debtor's assets are sold to pay off creditors. Certain assets, however, receive some protection. Among the assets usually protected are Social Security payments, unemployment compensation, and the net value of your home, vehicle, household goods and appliances, tools used in your work, and books. The courts must charge a $350 case filing fee; it includes a $75 miscellaneous administrative fee, and a $15 trustee fee. If the debtor is unable to pay the fees even in installments, the court may waive the fees. The release from debt does not affect alimony, child support, certain taxes, fines, certain debts arising from educational loans, or debts that you fail to disclose properly to the bankruptcy court. Furthermore, debts arising from fraud, driving while intoxicated, or certain other acts or crimes may also be excluded.