Borrowing Money and Buying on Credit

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					 Borrowing Money and Buying on Credit
                                        Chapter 30

      The extra cost for credit is the finance charge or interest.
      The creditor is the one who sells the goods on credit or lends the money.
      The debtor buys the goods on credit or borrows the money.

Open-End Credit

      Opening a charge account at a business
      Can keep an outstanding balance at all times and pay a small amount each month
       (revolving charge account)
      A credit card is used to obtain money, goods, or services on credit
      Open-end credit is credit that can be increased by the debtor, up to a limit set by
       the creditor.

Closed-End Credit

      Credit to buy an item and pay for it in monthly installments
      Closed-end credit is extended only for a specific amount of money and cannot be
       increased by making additional purchases.

Usury: charging a greater amount of interest on a loan than is allowed by law.

Borrowing Money

      Considerations for a loan include:
            1. Borrower's reputation for paying bills
            2. Borrower's income
            3. Amount of debt
            4. Competency to contract
            5. Dependents
            6. Use of the money
      If a loan is discounted, the interest is subtracted from the total amount of the loan
       at the time it is approved.
      A cosigner agrees to pay the loan if the borrower fails to.
      A secured loan is one in which creditors obtain an interest in something of value,
       called collateral, from which they will be paid if the debtor does not pay.
            o The lender who owns the interest is called the secured party.
            o If the debtor fails to pay, the secured party has the right to repossess (take
                back) the property; if the debtor has paid at least 60%, he or she is entitled
                to any surplus from the sale and has the right to buy the goods back.
      Regulation Z of the Truth in Lending Act lets borrowers know the exact cost of
       using credit and regulates the use of credit cards.
           o  Must disclose the finance charge and the annual percentage rate
      Adjusted-balance method: adding finance charges after subtracting payments
       made.
      Previous-balance method: no credit is given for payments
      Average-daily-balance method: add the balances for each day of the billing period
       and then divide by the number of days in the billing period

Credit Cards

      Able to charge as much as 22% interest
      A grace period is an interest-free period before payment is due.
      If lost, cardholders are responsible only for $50 made before notifying the
       company of the loss.

Equal Credit Opportunity

      The Equal Credit Opportunity Act of 1975 was passed to prevent discrimination
       against credit applicants because of gender, marital status, age, religion, race,
       national origin, or receipt of public assistance income.

Credit Protection Laws

Fair Credit Reporting Act

      Deals with unfavorable reports issued by credit bureaus
      Upon rejection, the company must indicate the source of their credit report.

Fair Credit Billing Act

      Establishes a procedure for the prompt handling of billing disputes
      You must notify the creditor of an error within 60 days; the creditor has 30 days
       to respond and 90 days to investigate and correct the problem.

Fair Debt Collection Practices Act

      It is illegal for creditors to use deceptive means to collect debts or obtain
       information.
      It is a federal offense for debt collectors to threaten consumers with violence
      Protects debtors from undue embarrassment

Bankruptcy

Chapter 7 (Liquidation): provides a way to liquidate, or turn the debtor's belongings
into cash to pay creditors
Chapter 11 (Reorganization): provides a method for businesses to reorganize their
financial affairs and still remain a business

Chapter 13 (Adjustment of Debts): permits a debtor to develop a repayment plan and,
upon completion of payments, to receive a discharge from most remaining debt

Exemptions: $7,500 equity in a personal residence and $1,200 in one car