Chapter 5 Review

T&E Cards

(Travel & Entertainment); Not really "Credit Cards"; balance is due in full each month Diners Club; American Express You don't pay for services or goods at the time you purchase them

Chapter 13 Bankruptcy

-Debtor with regular income proposes a plan to eliminate debts over time -Information provided to the court the same as under Chapter 7 -Plan may last up to five years -Debtor makes payments to a court-appointed trustee

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

-Makes it more difficult for consumers to file a Chapter 7 bankruptcy -Forces a Chapter 13 repayment plan -Debtors must wait 8 years from their last bankruptcy to file again -Clamps down on "bankruptcy mills" that seek to game the system -Includes provisions for consumer education debt management and financial planning

Consumer Credit Counseling Services (CCCS

-Non-profit and supported by contributions from banks, merchants, etc. -Provides education about credit -Provides help with spending plan -Provides debt counseling services for those with serious financial problems -Can develop a debt consolidation plan and negotiate reduced interest rates

Fair Credit Billing Act (FCBA, 1975)

-Notify creditor of error in writing within 60 days -Pay the portion of the bill not in dispute -Creditor 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 -Disputed item won't affect your credit rating while in dispute -Can withhold payment on damaged or shoddy goods or poor services if purchased with a credit card -Must make sincere attempt to resolve problem with creditor

Effects of Bankruptcy

-Obtaining credit may be more difficult but creditors may consider the inability to file bankruptcy again for 8 years -Credit could be easier for Chapter 13 filers who have repaid some debt versus Chapter 7 filers who made no effort to repay

Warning Signs of Debt Problems

-Paying only the minimum balance each month -Trouble even paying the minimum balance -Total balance increases every month -Missing loan payments or paying late -Using savings to pay for necessities -Getting second or third payment notices -Borrowing money to pay old debts -Exceeding the credit limits on your credit cards -Denied credit due to a bad credit report

To reduce the lender's risk and thus the interest rate you can:

1. Accept a variable interest rate 2. Provide collateral to secure a loan 3. Provide up-front cash 4. Take a shorter term loan

What to do if your identity is stolen

1. Contact the three major credit bureaus: -Ask the fraud department to institute a fraud alert -Request that creditors call you for permission before opening any new accounts in your name 2. Contact creditors -Check for any accounts that have been tampered with or opened fraudulently 3. File a police report -Keep a copy

What Can You Do To Improve Your Credit Score?

1. Get copies of your credit report and verify the information 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

3 most common types of closed-end credit

1. Installment sales credit 2. Installment cash credit 3. Single lump-sum credit

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 (1977) 7. Electronic Funds Transfer Act 8. Credit Card Accountability Responsibility and Disclosure Act of 2009 (Card Act)

Following Chapter 7 Bankruptcy

1. You May No Longer Owe -Retail store charges -Bank credit card charges -Unsecured loans -Unpaid hospital or physician bills 2. You Still May Owe -Certain taxes and fines -Child support and alimony -Educational loans -Debts from willful or malicious acts

FICO Credit Score

350 to 850 Higher score = less risk

Installment Cash Credit

A direct loan of money for personal purposes, home improvements, or vacation expenses. You make no down payment and make payments in specified amounts over a set period.

Installment Sales Credit

A loan that allows you to receive merchandise, usually high-priced items such as large appliances or furniture.

Single Lump-Sum Credit

A loan that must be repaid in total on specified day, usually with 30 to 90 days.

Time Limits on Unfavorable Data in Credit Reports

Adverse data can be reported for 7 years Bankruptcy can be reported for 10 years Exceptions: Application for credit > $75,000; Application for life insurance > $150,000

Credit Bureaus

Agencies that collect information on how promptly people and businesses pay their bills; Credit bureaus obtain information from the banks, finance companies, stores, credit card companies, and other lenders.

What qualifies as a loan?

Borrowing money with an agreement to repay along with interest within a certain amount of time

Factors to consider before taking out a loan

Can you meet all your essential expenses and still afford the monthly loan payments? What do you plan to give up in order to make the payment?

U.S. Bankruptcy Act of 1978

Chapter 7 = straight bankruptcy Chapter 13 = wage earner plan

The 5 C's of Credit

Character - Will you repay the loan? Capacity - Can you repay the loan? Capital - What are your assets and net worth? Collateral - What if you don't repay the loan? Conditions - What if your job is insecure?

Risk-based pricing

Charges higher rates to riskier customers; Effective January 1, 2011, lenders must disclose details to customers if risk-based pricing is used; Customers not receiving the best rate must be advised of their credit score

Your Rights Under Consumer Credit Laws

Complain to the creditor File a complaint with the government If all else fails, sue the creditor Consumer Financial Protection Bureau (CFPB) - Credit Card Issues

Simple interest

Computed on principal only without compounding The dollar cost of borrowing Interest = Principal x rate x time

General Rules of Credit Capacity

Consumer Credit payments should not exceed 20% of your net income Debt-to-Equity Ratio Should be < 1 Debt Payments-to-Income Ratio

Open-End Credit Examples:

Credit cards Department store cards Home equity loans

Credit-Like Cards

Debit Cards Stored Value Cards Smart Cards Travel and Entertainment (T&E) Cards Smartphones

Debit Cards

Debit cards electronically subtract money from your savings or checking accounts; Most commonly used at ATMs

What should you consider before making a major purchase on credit?

Do I have the cash for the down payment? Do I want to use my savings for this purchase? Does the purchase fit my budget? Could I use the credit in some better way? Can I postpone this purchase? What are the opportunity costs of postponing this purchase? What are the dollar and psychological costs of using credit for this purchase?

How is Your Credit Score Determined?

Do you pay your bills on time? What is your outstanding debt? How long is your credit history? Have you applied for new credit recently? How many and what types of credit accounts do you have?

Advantages of Credit

Easier to return merchandise Convenient when shopping Provides a record of expenses One monthly payment Permits purchase even when funds are low A cushion for financial emergencies Needed for hotel reservations, car rentals, and shopping online Take advantage of float time/grace period Rebates, airline miles, or other bonuses Credit indicated financial stability

3 major credit bureaus

Experian, TransUnion, and Equifax

Complaining About Consumer Credit

First: Try to solve the problem directly with the creditor If that fails: Use formal complaint procedures A variety of Consumer Credit Protection Laws and Federal Agencies administer and assist with complaint procedures

Stored Value Cards

Gift Cards; Prepaid cards

ECOA (Equal Credit Opportunity Act)

Gives all applicants the same rights Credit Providers may not discriminate based on: Race or nationality - prohibits redlining Age Social Security or public assistance Sex Marital Status

Add-on interest

Interest calculated on full amount of principal Interest added to original principal Payment = total divided by number of payments to be made

Simple interest on the declining balance

Interest is paid only on the amount of original principal not yet repaid

Fair Credit Reporting Act (1971)

Law requires out-of-date information to be deleted Gives consumers access and the ability to correct misinformation Places limits on who can obtain your credit report.

Cost of Credit and Expected Inflation

Lenders incorporate the expected rate of inflation when deciding how much interest to charge

Home Equity Loan

Loan based on your home equity; Current market value of your home minus the amount you still owe on the mortgage

Sources of Consumer Credit

Loans Medium-priced loans Expensive Loans Home Equity Loans Interest is tax deductible *Should only be used for major purchases*

Debt Payments-to-Income Ratio

Monthly Debt Payments* / Net Monthly Income (*Not including house payment, which is a long-term liability)

What information is contained in Credit Files?

Name, address, SSN, DOB (Self and Spouse) Employer, position, and income (current and previous, self and spouse) Homeowner or renter Checks returned for insufficient funds

VantageScore

New scoring technique Developed collaboratively by 3 credit agencies Range = 501 to 990

Closed-End Credit

One-time loans for a specific purpose that you pay back in a specified period of time, and in payments of equal amounts

Who can obtain a credit report?

Only authorized persons have access to your report for approved legitimate business purposes

PRBC

Payment Reporting Builds Credit

Annual Percentage Rate (APR)

Percentage cost of credit on a yearly basis Key to comparing costs when shopping for rates; It is important to shop for credit

Declaring Personal Bankruptcy

Personal bankruptcy is a procedure to distribute some or all of your assets among creditors; *Bankruptcy should be the last resort, because of the damage to your credit rating*

Smart Cards

Plastic card equipped with a computer chip that can store 500 times as much data as a normal credit card

Credit Report or Credit File

Record of your complete credit history

Protecting Your Credit From Theft or Loss

Shred any papers that contain personal information Close your accounts immediately if you suspect an identity thief has accessed the account Be sure your credit card is returned after a purchase Keep a record of credit card numbers Notify your credit card company immediately if your card is lost or stolen

Chapter 7 Bankruptcy

Submit a petition to the court that lists assets and liabilities, and pay a filing fee Many, but not all, debts are forgiven Assets sold to pay creditors Can keep some assets (home, vehicle,..) Intent = a fresh start *Most personal filings are Chapter 7*

Disadvantages of consumer credit

Temptation to overspend Can create long-term financial problems and slow progress toward financial goals Potential loss of merchandise due to late or non-payment Ties up future income Credit costs money - more costly than paying with cash

Debt Collection Practices

The Federal Trade Commission enforces the Fair Debt Collection Practices Act (FDCPA): Prohibits certain practices by debt collectors; Does not eliminate legitimate debts

Avoid the Minimum Monthly Payment Trap

The longer you take to pay off the bill, the more interest you pay

What is float time/grace period?

Time before you have to pay for purchases on credit

Debt-to-Equity Ratio

Total Liabilities / Net Worth * (*Excluding home value)

Cost of Open-End Credit

Truth in Lending Act requires that open-end creditors inform consumers how the finance charge and the APR will affect their costs

Other Financial Counseling Services

Universities, local county extension agents, credit unions, military bases, and state and federal housing authorities provide nonprofit counseling services Check with your financial institution or consumer protection office for a list of reputable, low-cost financial counseling services

Protecting Your Credit Information on the Internet

Use a secure browser Keep a records of online transactions Review monthly bank and credit card statements Read the privacy and security policies of websites you visit Keep personal information private Never give your password to anyone Don't download files sent by strangers

Open-End Credit

Used as needed until line of credit max reached; You pay interest and finance charges if you do not pay your bill in full when due; also known as Revolving check credit; Bank line of credit

What to do when there's Incorrect Information in Your Credit Report File

You may request a copy of your credit information within 6- days of being denied credit; You may request a free copy of your credit report annually

Co-Signing a Loan

means guaranteeing the debt; Lender would not require a cosigner if borrower were a good risk; If borrower doesn't pay, cosigner is liable for the full amount plus any late or collection fees If payment is missed, creditor can collect from the cosigner first

How many credit cards does the average cardholder have?

over 9 credit cards

Consumer credit

the use of credit by individuals and families for personal needs, except a home mortgage; major force in our economy

Finance Charge

total amount paid to use credit; Includes interest costs and fees, such as service charges, credit-related insurance premiums, or appraisal fees.