Your SlideShare is downloading. ×
Powerpoint Slides
Upcoming SlideShare
Loading in...5

Thanks for flagging this SlideShare!

Oops! An error has occurred.

Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Powerpoint Slides


Published on

  • Be the first to comment

  • Be the first to like this

No Downloads
Total Views
On Slideshare
From Embeds
Number of Embeds
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

No notes for slide


  • 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