College Personal Finance Chapter 6 Introduction to Consumer Credit

Equal Credit Opportunity Act (ECOA)

Makes it unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex, marital status, or age

Interest

Money paid regularly at a particular rate for the use of money lent, or delaying the repayment of a debt

Personal bankruptcy

Must be reported for 10 years

Closed ended Credit

One-time loans for a specific purpose that you pay back in a specified period of time, and in payments of equal amounts -Ex) Mortgage, auto, & installment loans for furniture, appliances, and electronics

Co-Signing a Loan

The creditor will give you a notice that tells you... -you are being asked to guarantee the debt, so consider if you can afford it if the borrower defaults -If the borrow does not pay, you must pay up to the full amount and also any late or collection fees - If a payment is missed the creditor can collect the debt from you without first trying to get it from the borrower

Line of Credit

The max. dollar amount of credit the lender has made available to you

Fair Credit Billing Act (FCBA)

To protect consumers from unfair billing practices and to provide a mechanism for addressing billing errors in "open end" credit accounts, such as credit card or charge accounts

Open ended credit

Use as needed until reaching "line of credit" max -Ex) Credit Cards, Department store cards, bank credit cards, incidental credit You pay interest and finance charges if you do not pay the bill in full when it is due Credit card companies target college students

Fair Credit Billing Act

You can withhold payment on damaged or shoddy goods or poor services if you have paid for them with a credit card, if you make a sincere attempt to resolve the problem with your creditor.

Disadvantages of Credit

-Temptation to overspend -Failure to repay loan may lead to loss of income -It does not increase total purchasing power -Credit costs money

How to improve Credit Score

1) Get copies of your credit report-review for accuracy 2) Pay your bills on time. 3) Understand how your credit score is determined 4) Learn the legal steps to improve your credit report 5) Beware of credit-repair scams

Debit Card

A card issued by a bank allowing the holder to transfer money electronically to another bank account when making a purchase

Consumer Credit

the use of credit for personal needs, except a home mortgage, by individuals and families. - A major economic force

Credit cards

type of credit

Debt to Equity

aka: Total liabilities over net worth(exclude home value) should be less than one

Home Equity Loans

-Based on the difference between current market value of your home and the amount owed on your mortgage -Borrow up to 85% of the value of the home -It is set up like a revolving line of credit

Before you make a loan ask yourself:

-Can you afford the loan? -What do you plan to give up in order to make the payment? -Are you prepared to make this^ trade off?

Credit Bureaus

-Collect Information from banks, finance companies, credit card companies, merchants, other ceditors -Ex) Experian, Trans Union and Equifax -FTC gets about 12,000 Complaints about Credit Bureaus each year

Advantages of Credit

-Current use of goods and services -Permits purchase even when funds are low -A cushion for financial emergencies -Easier to return merchandise -Convenient when shopping -One monthly payment -Safer than cash -Needed for hotel, car reservations and shopping online -Can take advantage of float time/grace period -May get rebates, airline miles, or other bonuses -Indicates financial stability

3 ways Consumers can finance purchases

-Draw on their savings -Use present earnings -Borrow against expected future income

Building and maintaining your Credit Rating

-Limit your borrowing capacity to repay -Live up to the terms of contracts -Check to see what is in your credit report

Store Value (or Gift) Cards

-Resemble a debit card -Used in lieu of paper gift certificates -Used for business purposes (travel expenses) -Bankruptcy can make the cards worthless

Use and Misuses of Credit

Before you use credit for a major purchase, as yourself some questions. -Do I have the cash for the down payment? -Do I want to use my savings for this purchase? -Does this purchase fit my budget? -Could I use the credit I'll need 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?

What Creditors look for: 5 C's

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 leader can repossess if you default on the loan? Conditions- What economic conditions could affect your ability to repay the loan?

What if your Identity is stolen?

Contact the fraud dept. of each of these 3 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 creditors to check accounts to check for accounts that have been tampered with or opened fraudulently

Fair Credit Reporting Act

Designed to give consumers the tools necessary to review their personal credit information and to correct inaccurate informationAct

Credit Card Accountability, Responsibility, and Disclosure Act

Designed to limit the manner in which credit card companies can charge their customers. It prohibits arbitrary increases in interest rates and the application of penalties to customers who make timely payments.

Credit

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

FICO Score

a number generally between 350-850 that rates how risky a borrow is

Revolving Check Credit

line of credit where the customer pays for a commitment fee and is then allowed to use the funds when they are needed. It is usually used for operating purposes and can fluctuate each month depending on the customer's current cash flow needs.

Debt payments-to-income ratio

monthly payments (not including house payment) ______________________________________________________________________ Net monthly income (this should be read as a fraction: monthly payments over net monthly income) Should not exceed a max of 20% of your net income