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  • 1. Credit Management GENERAL ISSUES
  • 2. Introduction
    • Many of you have probably received credit card offers (either on campus or through the mail) if you are a college student
    • About 90% of college sophomores have credit cards
    • Proper use of a credit card can help establish a solid credit history
    • Improper use can take years to heal
  • 3. What is Credit?
    • Receiving money, goods, or services on the basis of an agreement that the borrower will repay the lender with a specified time period at a specified rate of interest
    • Today, total consumer credit is about $2 trillion (excludes home mortgages and home equity loans)
    • Americans carry over one billion credit cards
    • Over one million Americans file for personal bankruptcy each year (twice as many as ten years ago)
  • 4. Types of Consumer Credit
    • Revolving credit
      • Consumer can make a number of different purchases, up to a certain credit limit
      • A minimum payment is due each month and interest is charged on the unpaid balance (average is 14%/year)
    • Installment loans
      • Consumer borrows a fixed amount and repays the principal plus interest at regular intervals (usually monthly)
        • Lender usually holds title to asset until final payment is made
    • Mortgage loans and home equity loans
      • Mortgage is an installment loan secured by real estate
        • Typically have a term of 15 or 30 years
  • 5. Deciding How Much to Borrow
    • Failure to set debt limits is one reason why people get in trouble with credit cards
      • Guideline: No more than 10 to 20% of your take-home pay should go toward repayment of installment or revolving credit (exclude mortgage payment)
        • National average is about 14%
  • 6. The Right Reasons for Borrowing
    • Purchasing large, important goods and services
      • House
      • Car
      • College education
    • Dealing with emergencies
      • Loss of job
      • Death of relative (plane tickets on short notice are expensive)
  • 7. The Right Reasons for Borrowing
    • Taking advantage of opportunities
      • Good sale on computer (you are saving for one anyway)
    • Convenience
      • Easy to pay with a credit card (pay off your balance every month) when doing day-to-day shopping
    • Establishing or improving your credit rating
      • Good way for a college student to establish a credit rating
  • 8. The Wrong Reasons for Borrowing
    • Living beyond your means
      • Do you have to use your credit card to pay your basic living expenses (because you can’t afford not to)?
        • Buy groceries
        • Buy clothes
        • Buy gasoline
        • Pay your taxes
  • 9. Sources of Consumer Credit
    • Financial institutions
      • Commercial banks, savings banks, credit unions
    • National credit cards
      • University alumni associations, sports franchises, etc., are issuing credit cards with their logo (can be used anywhere a regular bank-issued card is accepted)
        • These organizations receive a fee from the issuing bank
      • Retailer-specific credit cards (such as Sears and JCPenney)
        • Can only be used at a specific store
  • 10. Sources of Consumer Credit
    • Consumer Finance Companies
      • Company specializing in consumer loans
        • Example: Household Finance
        • Make relatively short-term loans
        • Charge high interest rates
        • Generally unsecured
        • Application forms are easier to fill out than a bank’s
        • Takes a short period of time to receive approval
  • 11. Sources of Consumer Credit
    • Life insurance companies and investment companies
      • Policyholders may be able to borrow against their life insurance policy (up to the amount they have paid in premiums)
    • May be able to borrow money from your investment firm via your brokerage account
  • 12. Sources of Consumer Credit
    • Personal loan from family and friends
      • Always treat these in a businesslike manner
        • Lots of potential for interpersonal conflict
    • Pawnbrokers
      • Issues loans for a very low percentage of an item’s face value
      • Item is held as security until the loan is repaid in full
      • Should be viewed as a lender of last resort
  • 13. Applying for Credit
    • How creditors evaluate loan applications
      • 1. Capacity (Cash Flow)
        • Can you afford to repay the debt?
        • Examines current income (and expected future earning potential) vs. current expenses
        • Are you a good credit risk?
      • 2. Character (Integrity
        • Do you live within your means or above it?
        • Do you pay your bills on time?
        • Do you demonstrate stability?
      • 3. Collateral (assets)
        • Property to secure a loan
    4. Capital 5. Conditions
  • 14. The Role of Credit Bureaus
    • Credit bureau – a clearinghouse for consumer credit information
      • What’s in your credit file?
        • Identifying information
        • Your credit history
          • Including whether or not you pay your bills on time
        • Information of public record
          • Bankruptcies, lawsuits, criminal convictions
      • You may request a copy of your credit record at any time
        • If you’ve recently been denied credit, the credit reporting service must provide you a copy free of charge
  • 15. What to Do If You’re Denied Credit
    • The lender must provide you with a written explanation
      • Try negotiating with the lender
        • Ask for a lower loan amount
      • Try another lender
        • Different lenders have different lending policies
          • Some are more lenient than others
  • 16. Calculating Total Finance Charges
    • Lenders are required to clearly state the finance charge and annual percentage rate (APR)
      • Finance charge – total dollar amount charged for credit
        • Function of
          • Amount you borrow
          • APR
          • Term of loan
      • Annual percentage rate – interest rate paid per dollar per year for credit
      • Principal – the amount borrowed
  • 17. Choosing the Lowest-Cost Credit Card
    • Four main areas to consider
      • Annual fee
        • Ranges from $0 to $50 annually
      • Late payment and other fees
      • Annual percentage rate
      • Grace period – how long you have to pay for new purchases without having to pay interest charges
        • Ranges from 0 days to 30 days
          • If you pay your bill in full every month, get a card with no annual fee and a grace period of at least 25 days
            • This way you won’t pay interest charges
  • 18. Choosing the Lowest-Cost Credit Card
    • Many credit card companies offer a low interest rate for a short time period (to lure you in—called a teaser rate), and then raise the interest rate substantially
    • Or the company may offer a great rate unless one payment is late and then the rate rises substantially
      • Read the fine print
  • 19. Credit Abuse
    • If you abuse your credit, it can have lasting repercussions
      • Repossession – collection of collateral by the lender
        • May not settle the debt if market value of asset doesn’t cover amount of loan still outstanding
          • Remaining debt is called deficiency judgment
      • Wage garnishment – a portion of borrower’s wages is paid directly to lender by the employer
        • Requires a court order
  • 20. Credit Abuse
    • Bankruptcy – borrower is relieved of debts, court divides assets/income among creditors
      • Action of last resort
      • Virtually eliminates chances of securing future credit
      • Over one million Americans file for bankruptcy each year
        • Most are voluntary filings
          • Chapter 7: assets are seized by court and sold, funds are prorated among creditors (after court costs/legal fees)—70% of bankruptcies
            • Creditors usually receive only small percentage of what’s owed
          • Chapter 13: individuals establish a three-year plan of debt repayment
            • Debtor retains possession of property
            • Creditors usually receive 60–70% of what’s owed
  • 21. Credit Abuse
    • Bankruptcy doesn’t eliminate all forms of debt
      • Student loans
      • Back taxes
      • Child support
      • Alimony
    • Bankruptcy shouldn’t be considered a ‘quick fix’
      • Remains on your credit record for ten years
      • Won’t get reasonable credit terms during that time
      • May be difficult to rent an apartment, obtain car insurance, etc.
  • 22. Credit Counseling and Credit Repair Services
    • A credit counselor is a trained professional who helps you develop a budget and arrange a program of debt repayment
      • Nonprofit Consumer Credit Counseling Service
        • Funded by lenders and credit card companies (vested interest in repayment)
    • Credit repair doctors often claim they can ‘erase your bad credit’
      • Can’t deliver on their promises—don’t use them

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