Chapter 5
Introduction to
Consumer Credit
Kapoor
 2004 McGraw-Hill Ryerson Ltd.
Dlabay
Hughes
Ahmad
Prepared by Cyndi Hornby, Fanshawe College
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Learning Objectives - Chapter 5
1. Define consumer credit and analyze
its advantages and disadvantages.
2. Differentiate among various types of
credit.
3. Assess your credit capacity and build
your credit rating.
4. Describe the information creditors
look for when you apply for credit.
5. Identify the steps you can take to
avoid and correct credit mistakes. 5-2
 2004 McGraw-Hill Ryerson Ltd.
Learning Objective # 1
Define consumer credit and
analyze its advantages and
disadvantages.
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What is Consumer Credit?
Credit is an arrangement to receive cash,
goods or services now, and pay for them in the
future.
Consumer credit is the use of credit for
personal needs, except a home mortgage.
There are three ways consumers can finance
current purchases.
Take money from savings.
Use present earnings.
Borrow against future income.
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Trade-offs are involved in using credit.
 2004 McGraw-Hill Ryerson Ltd.
Credit Considerations
Before you use credit for a major purchase, ask yourself
some questions.
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?
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?
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Advantages of Credit
Current use of goods and services.
Permit purchase even when funds are low.
Use for financial emergencies.
Convenient when shopping.
Safer than cash.
Can take advantage of float time.
May get rebates, airline miles
or other bonuses.
Demonstrates financial stability.
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Disadvantages of Consumer
Credit
Purchases are more expensive.
Temptation to overspend.
Ties up future income.
Possible financial difficulties.
Damage to family relationships.
Slows progress to future goals.
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Learning Objective # 2
Differentiate among various
types of credit.
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Types of Credit
Closed-End Credit.
For a specific purpose and amount.
• Payments of equal amounts
• Mortgage, automobile and installment loans
Open-End Credit.
Use as needed until reaching line of credit.
You pay interest and finance charges if you
do not pay the bill in full when due.
Department store or bank credit card,
overdraft protection, bank line of credit, home
equity loan.
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Credit Cards
MasterCard
Nearly 83% of Canadian households carry one or
more credit cards.
One-third are convenience users. They pay their
balance off in full each month.
The other two-thirds are borrowers.
Co-branding - linking a credit card with a business
offering rebates on products and services.
Smart cards have an imbedded computer chip.
Debit cards are not credit cards.
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Protecting Yourself
Against Credit Card Fraud
Sign new cards as soon as they arrive.
Treat the cards like money - keep them secure.
Shred anything with your account number on it.
Don’t give your number over the phone unless you
initiate the call.
Get your card and a receipt after every transaction
and compare them to your bills when they arrive.
Immediately report if lost or stolen.
Notify issuer if you don’t get your billing statement.
Check your credit report every few years.
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Protecting Yourself
Against Credit Card Fraud
If you make purchases online;
use a secure browser
keep records of your online transactions
review monthly statements for errors and
unauthorized purchases
read the policies of sites you visit
keep your personal information private
give payment information only to businesses you
know and trust
Never give your password to anyone online
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Do not download files from strangers
 2004 McGraw-Hill Ryerson Ltd.
Home Equity Loans
A loan based on the current market
value of your home less the amount still
owing on your mortgage
Can borrow up to 85% of your equity
Interest on loan is tax deductible if
proceeds are being used for an
investment (outside of registered plans)
Usually set up as a revolving line of
credit
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Car Loan
Automobile is your second largest
investment
Financing at the Dealer
Affiliated with manufacturer or financial
institution
Significantly lower interest rates on some
models
Other incentives offered
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Car Loan
Leasing
Closed-end lease: you can buy vehicle at
lease end or return it to company
Open-end lease: you are responsible for
residual value of vehicle at lease end
Vehicle owned by leasing company, you
pay maintenance, repairs, insurance
May have mileage restrictions
Paying Cash
Avoids interest charges
However, investment returns may be
higher than cost to borrow
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Learning Objective # 3
Assess your credit capacity
and building your credit
rating.
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Measuring Your Credit Capacity
Before you take out a loan, ask yourself...
Can you afford the loan?
What do you plan to give up in order to make
the payment?
Before cosigning a loan consider...
If the person doesn’t pay, you will have to.
Can you afford to pay if the person does not?
It can affect your credit report.
Request that a copy of overdue payment
notices be sent to you.
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Credit Capacity Indicators
Debt Payments-to-Income Ratio
monthly payments*
net monthly income
should not exceed 20%
*Not including housing
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Credit Capacity Indicators
Debt To Equity Ratio
total liabilities
=
Should be < 1
net worth*
*Excluding home value
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Build and Maintain Your Credit
Rating
Your credit experiences, or lack of, is a
major consideration for the creditor
a good credit rating is a valuable asset
use credit with discretion
limit borrowing to your capacity to repay
abide by the terms of the lending contracts
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Your Credit File
The Credit Bureau is a reporting agency that
collects credit and other information about
consumers and sells the date to creditors to help
in evaluating applications.
Your Credit file includes;
 Your employer and position
 Former address and employer
 Spouses name, social insurance number and
employer
 Public records and information
 Cheques returned for insufficient funds
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 Detailed credit information
 2004 McGraw-Hill Ryerson Ltd.
Credit Bureau Regulation
Most provinces have legislation to protect;
consumer privacy
right not to suffer from false credit or personal
information
Others may only view your file if written
consent has been given
First bankruptcy remains on your file 7 years,
second bankruptcy is permanent
Errors in your credit file should be corrected
immediately
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Learning Objective # 4
Describe the information
creditors look for when you
apply for credit.
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What Creditors Look For: 5 C’s
Character – Borrower’s attitude towards
credit obligations
Capacity – Borrower’s financial ability to
meet credit obligations
Capital – Borrower’s assets or net worth
Collateral – Valuable assets that is pledged
to ensure loan payments
Conditions – the general economic
conditions that can affect borrower’s ability to
repay a loan
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If you are denied credit?
Ask questions if application for credit is denied
If based on your credit report ask;
what specific information on credit report lead to
denial?
Check with credit bureau to find out what
information has been reported and investigate
and correct any inaccurate or incomplete
information
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Learning Objective # 5
Identify the steps you can
take to avoid and correct
credit mistakes.
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Avoiding & Correcting Credit
Mistakes
To correct mistakes or misunderstandings in
your credit accounts;
contact creditor first to correct error
If your identity has been stolen;
contact the fraud department of major credit
bureaus
contact creditors for accounts that have been
opened fraudulently
file a police report
close all bank accounts immediately and cancel
credit cards
 2004 McGraw-Hill Ryerson Ltd.
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