Nobody plans to fail......._4_ by fanzhongqing


									5B         Consumer Credit #2
   Covered so far…
     Advantages and disadvantages of credit
     Types and sources of credit
     Credit capacity (how much you can afford)
     Credit reports and scores
   Still to cover…
     The cost of credit
     Protecting your credit
     Consumer credit protection laws
     Debt problems and bankruptcy
                  Objective 4
        Determine the Cost of Credit by
       Calculating Interest Using Various
               Interest Formulas
• Finance charge
  – Total dollar amount you pay to use credit
  – Includes interest costs and fees, such as service
    charges, credit-related insurance premiums, or
    appraisal fees
• 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 around for credit
       Tackling the Trade-Offs

• Term (length of loan) versus interest cost
  – Longer loan: higher interest rate; total cost
• Lender risk versus interest rate
  – Fixed rate: increases lender risk
• To reduce the lender’s risk and thus the
  interest rate you can:
  – Accept a variable interest rate
  – Provide collateral to secure a loan
  – Provide up-front cash
  – Take a shorter term loan
       Secured Credit Cards

Secured Credit Card (or Collateralized
Credit Card) – Backed by collateral in the
form of a savings account opened at the
financial institution that issues the card.

                      Deposit $1,000 with
                      creditor to borrow $1,000
   Calculating the Cost of Credit
• Simple interest
  – Computed on principal only without compounding
  – The dollar cost of borrowing
  – Interest = Principal x Rate x Time
• Simple interest on the declining balance
  – Interest is paid only on the amount of original
    principal not yet repaid
• 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                                            5-5
    Calculating the Cost of Credit
• Avoid minimum monthly payment trap
  – The longer to pay bill, the more interest you pay
• Avoid credit card fees
  – Annual Fee- fee charged each year just to have a
    credit card (many are increasing; why?)
  – Transaction Fee- fee charged to use a credit card, get
    cash advances, or make transfers
  – Late Fee- fee assessed for making a late payment
  – Bounced Check Fee- fee for NSF check payment
  – Over-the-Limit Fee- fee charged (with cardholder’s
    permission) to exceed credit card limit
                  Objective 5
   Develop a Plan to Protect Your Credit
         and Manage Your Debts

       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
          Protecting Your Credit
      Fair Credit Billing Act (FCBA, 1975)

• 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
  – Contact merchant first and document it

    Has anybody ever used FCBA procedures?
            Co-signing a Loan

   Co-signing means guaranteeing a debt
– Lender would not require a co-signer if borrower
  were a good risk
– Can you afford it if the borrower defaults?
   • 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
   • Unpaid debts will appear on the cosigner’s
     credit report
 Complaining About Consumer Credit

• First: Try to solve the problem
  directly with the creditor
• If that fails: Use formal complaint
• Federal government administers
  laws and assists with complaint
  – Federal Reserve Board
  – Federal Trade Commission (FTC)
 Consumer Credit Protection Laws
• Truth in Lending and Consumer Leasing Acts
   – Requires disclosure of the cost of credit (APR)
• Equal Credit Opportunity Act (ECOA)
   – Prohibits discrimination in credit-granting decisions
• Fair Credit Billing Act
   – Provides rules for correcting billing errors
• Fair Credit Reporting Act
   – Provides rules for accessing/correcting credit reports
Your Rights Under Consumer Credit Laws
   – Complain to the creditor
   – File a complaint with the government
   – If all else fails, sue the creditor                      5-11
             Managing Your Debts
         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
          Managing Your Debts

           Debt Collection Practices
The FTC enforces the Fair Debt Collection
Practices Act (FDCPA)
– Prohibits certain practices by debt collectors
  (e.g., early or late calls, calls at work, profane language)

– Does not eliminate legitimate debts; just
  controls the way that debt collectors work
– Does not apply to first-party debt collectors
  (original creditors); only to third-party
  collectors (independent companies)
      Managing Your Debts
Consumer Credit Counseling Services
– 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 repayment plan and
  negotiate reduced interest rates
    Declaring Personal Bankruptcy

 U.S. Bankruptcy Act of 1978
 Chapter 7 = straight bankruptcy
 Chapter 13 = wage earner plan

 Personal bankruptcy is a legal process to distribute
 some or all assets among a person’s creditors due
 to an inability to repay debts.

   Bankruptcy should be the last resort, because of the
 damage to your credit rating; stays in a person’s credit
report 10 years vs. 7 years for other negative information
         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 surrendered to pay creditors
•   Can keep some assets (home, vehicle,..),
    depending on state/federal exemptions
•   Intent = “A Fresh Start”
•   Most bankruptcies are this type
               After Chapter 7
• You May No Longer Owe:
  – Retail store charges
  – Bank credit card charges
  – Unsecured loans
  – Unpaid hospital or physician bills

• You Still May Owe...
  – Certain taxes and fines
  – Child support and alimony
  – Educational loans
  – Debts from willful or malicious acts
Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005
– Makes it more difficult for consumers to file a
  Chapter 7 bankruptcy (means test)
– 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 on
  debt management and financial planning

        Chapter 13 Bankruptcy
• Debtor with regular income proposes a plan
  to eliminate his debts over time
• Debtor normally keeps most of property
• 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

Obtaining Credit after Bankruptcy
• May be more difficult
• But, creditors may consider the inability to
  file bankruptcy again for 8 years
• Could be easier for Chapter 13 filers (who
  have repaid some debt) versus Chapter 7
  filers who made no effort to repay
• Likely to pay high interest rates (lower credit

CARD Act Regulations

• 45 days’ notice before key changes in account
  terms (up from previous 15 days)
• Minimum payment illustrations on credit card
  bills (payoff cost and payment to repay in 36 months)
• “Universal default” practice was banned
• Two-cycle balance billing was banned
• “Teaser rates” must last at least 6 months
• Consumers must “opt in” for over-the-limit fees
• Bills must be mailed 21 days before due date
• No more “late fee traps” (e.g., weekends, 8 am)
   College Students and Credit Cards
              (CARD Act)
• Credit card companies are prohibited from
  offering free merchandise in exchange for credit
  card applications (on campus, campus events)
• No credit cards under age 21 unless cosigner or
  proof of income to make payments
• Maximum amount of credit < 21: greater of $500
  or 20% of annual gross income in most recently
  completed calendar year
• Aggregate limit for ALL credit cards held by
  someone <21: 30% of annual gross income in
  most recent completed calendar year
      Alternatives to Credit Cards for
             College Students
• “Authorized user” on parent’s credit cards and
  reimburse parents
  – Parents see everything you charge; may be fees
  – Does not boost students’ credit much; parent is user
• Joint account with parents
  – Credit history reported to credit bureaus; builds credit
• Secured credit cards
  – Still need to follow CARD Act cosigner/income rules
• Prepaid debit cards
  – Not “credit”; use will not build credit history; high fees
  – Less protection than credit cards if lost or stolen
Wrap Up

• Chapter Quiz
• Concept Check 5-4- Two Key Concepts
  and Credit Terms
• Concept 5-5- Correcting a Billing Error
• Helpful Advice for Others

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