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    Powerpoint Slides Powerpoint Slides Presentation Transcript

    • Credit Management GENERAL ISSUES
    • 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
    • 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)
    • 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
    • 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%
    • 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)
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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.
    • 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