Chapter 6:
Credit Use and Credit Cards
Objectives
• Compare and contrast installment and non-installment credit and
discuss the costs of credit.
• Discuss reasons for and against using credit.
• Describe the types of charge accounts.
Objectives
• Describe the process of opening a credit account and the procedures
lenders use to evaluate credit applicants.
• Manage your credit card and charge accounts properly.
What is Consumer Credit?
Receiving products, services or cash now, and paying
for them in the future.
Before you use credit, think about...
• Could I pay cash or make a down payment?
• Do I want to use savings for this purchase?
• Does purchase fit with my goals and budget?
6-2
What is Consumer Credit?
(continued)
• Does purchase fit with my goals and budget?
• Could I use the credit I’ll need another way?
• Can I wait to buy it?
• What are the opportunity costs of postponing the
purchase?
• What are the economic & psychological costs of
using credit for the purchase?
6-3
Credit Use and Credit Cards
• Consumer
• Installment
• Non-installment
• Open-ended
http://bcove.me/kxdg9zc4
Jean Chatzky talks about Millenials and credit cards
While the study found that just 12 percent of mobile
phone users take advantage of mobile payment
services, this number has quadrupled since 2009.
The survey also asked those who didn't use mobile
payments why they haven't adopted the technology.
Here's what they said:
•42 percent are concerned about security.
•37 percent said they didn't see any benefit
from using mobile payments.
•36 percent said it was easier to pay with
another method, such as cash or credit card.
•31 percent said they didn't have the
necessary feature on their phones.
Closed vs. Open-End Credit
Advantages of Credit
• Current use of goods and services
• Demonstrates financial stability
• Use for financial emergencies
• Convenience when shopping
• Safer than cash
Reasons For Using Credit
• Convenience
• Emergencies
• Identification
• Reservations
Reasons For Using Credit
• Consume expensive products earlier
• Enjoy the good life
• Take advantage of free credit
• Consolidate debts
• Protection against ripoffs and frauds
Charting the Economy
Consumer Credit – Student Loans
Total Consumer Credit
Disadvantages of Consumer Credit
• Purchases are more expensive
• Temptation to overspend
• Possible financial difficulties
• Possible loss of merchandise
due to late or non-payment
• Ties up future income
Example of Credit Card Payoff
Payment Information Account Summary (Interest Rate = 14.50%)
New Balance Total .....................................................................$2,113.28
Current Payment Due ......................................................................$46.00
Total Minimum Payment Due............................................................$46.00
Payment Due Date........................................................................10/1/14
Late Payment Warning: If we do not receive your Total Minimum Payment by
the date listed above, you may have to pay a late fee of up to $35.00 and
your APRs may be increased up to the Penalty APR of 27.24%.
Minimum Payment Warning: If you make only the Total Minimum
Payment each period, you will pay more in interest and it will take you longer
to pay off your balance. For example:
If you make no
additional charges
using this card
And each month you pay
You will payoff
the balance
shown on this
statement in about
And you will end
up paying an estimated
total of
Only the Total
Minimum Payment
8 years
$3,483
$73
3 years
$2,620
(Savings = $863)
Example of Credit Card Payoff (cont.)
Payment Information Account Summary (Interest Rate = 21.24%)
New Balance Total .....................................................................$3,041,.89
Current Payment Due ......................................................................$85.00
Total Minimum Payment Due............................................................$85.00
Payment Due Date........................................................................10/1/14
Late Payment Warning: If we do not receive your Total Minimum Payment by
the date listed above, you may have to pay a late fee of up to $35.00 and
your APRs may be increased up to the Penalty APR of 29.99%.
Minimum Payment Warning: If you make only the Total Minimum
Payment each period, you will pay more in interest and it will take you longer
to pay off your balance. For example:
If you make no
additional charges
using this card
And each month you pay
Only the Total
Minimum Payment
$115.26
You will payoff
the balance
shown on this
statement in about
And you will end
up paying an estimated
total of
15 years
$7,530.04
3 years
$4,149.36
(Savings = $3,380.68)
Establishing a Debt Limit
• Debt-payments-to-income method
• Ratio of debt-to-equity method
• Continuous-debt method
How to Calculate Debt Payments-to-Income Ratio
Credit Capacity Indicators
Debt To Equity Ratio
total liabilities
=
Should be < 1
net worth*
*Excluding home value
6-10
Fair Credit Reporting Act
Is your credit report accurate?
• If you are denied credit based on your report, you
can get a copy of your credit report free within 60
days of your request
• Obsolete information must
be deleted
• Only authorized persons
have access to your report
• Adverse data can be reported
for seven years or bankruptcy for ten
Sample Dispute Letter
Open-Ended Charge Accounts
PROCESS FOR OPENING:
• Application
• Investigation
• Credit ratings and risk scoring
Avoiding and Correcting Credit Mistakes
Fair Credit Billing Act
• Notify creditor of error in writing in 60 days
• Send it to the correct address
• They must respond within 30 days
• Credit card company has 90 days to resolve the
problem
• Won’t affect your credit rating while in dispute
• You can withhold payment on shoddy goods
Managing a Charge Account
CREDIT STATEMENTS:
•
•
•
•
Billing date/Due date
Transaction/Posting dates
Grace period/Minimum payments
Credit for merchandise returns/Errors/ Correcting errors
Managing a Charge Account
COMPUTATION OF FINANCE CHARGES:
• Annual Percentage Rate (APR)
• Periodic Rate
• Average Daily Balance
What Should You Do
If You are Denied Credit?
• You have the right to know the
specific reason why
• Ask yourself if you can afford the item
• Check your credit report
• You are entitled to have errors in your credit report
corrected
• You have the right to provide a 100 word
explanation
Protecting Against
Credit/Debit Card Fraud
• Sign new cards as soon as they arrive
• Treat the cards like money
• Shred anything with your account number on it
• Don’t give your number over the phone unless
you make the call
• Get a receipt after every transaction
• Check your statements for errors
Measuring Your Credit Capacity
• Ask yourself.....
• can you afford the loan?
• what do you plan to give up in order to make
the payment?
• Cosigning a loan
• if the person doesn’t pay,
you will have to
• co-signers often have to pay
• it can affect your credit report
Criteria Used
to Grant Credit
5 C’s of Credit
• Character
• Capital
• Capacity
• Collateral
• Conditions
What Creditors Look For
• Character - do you pay bills on time?
• Capacity - can you repay the loan?
• Capital - what are your assets and net worth?
• Collateral - what if you don’t repay?
• Conditions - what economic conditions would
affect your repayment of the loan?
Five Primary Areas of Interest in Calculating FICO
Score
What Your FICO Score Looks At
Payment History (35%)
Do you pay your bills on time.
Amount Owed (30%)
Debt ratio (Below 30%)
Length of Credit History (15%)
How long have your accounts been established?
Types of Credit (10%)
Credit cards, retail accounts, installment loans,
mortgage loans, etc.
New Credit (10%)
Opening several accounts in a short period of
time represents a greater risk.
It’s OK to request and check your own credit
report.
Credit Score Breakdown
Credit Score
499 and Below
500-549
550-599
600-649
650-699
700-749
750-799
800+
Percentage
2%
5%
8%
12%
15%
18%
27%
13%