Finance Ch. 6 Flashcards
What is consumer Credit?
Use of credit for personal needs, not mortgage though
Credit
Receive cash, goods, services now and pay later
3 ways to finance purchases
- savings
- Use present earnings
- Borrow against expected future income
Consumer credit importance
Major force in american economy
Advantages of credit
- access to goods right now
- Can buy even when funds are low
- cushion for emergencies
- Advance notice of sales
- easier to return things
- convenient
More advantages of credit
- one monthly payment
- safer than cash
- hotel reservations, car purchase
- can get rebates and other bonuses
- indicates financial stability
Disadvantages of credit
- overspend
- Failure to repay loan can cause financial damage
- doesn’t increase purchasing power
- credit costs money
Closed- end Credit
A single loan for a specific purpose and paid back in a specific period of time in payments of equal amounts
ex. mortgage, automobile, appliances etc…
Open-end credit
Used as needed until reaching line of credit max.
- pay interest charges if bill not paid in full.
ex. credit cards, bank cards, incidental credit, revolving check credit
Credit cards
7/10 people have them
Smart Cards
embedded computer chip, combine license, health care ID, insurance all in one
Debit Cards
Called bank cards, take money out of your account the minute you pay.
Gift Cards (stored value cards)
Prepaid cards, used for business expenses sometimes , don’t work if retailer goes bankrupt
Travel/entertainment cards
Monthly balance due in full. Diners club or Amex
smartphones
electronically linked to bank account, mobile commerce
Home equity loans
Based on difference between market value of home and amount due on mortgage. can borrow up to 85% of appraised value.
- interest on loan is tax deductible
- set up like revolving line of credit
Purchases online
- be careful
- don’t trust weird websites
- don’t download anything
debt payments-to-income ratio
your monthly debt payments/net monthly income *Do not include mortgage payments
*credit payments should not exceed 20% of income
Debt-to-equity ratio
Total liabilities/net worth= should be <1
Cosigning a loan
- You will have to cover any late fees if borrower doesn’t pay.
- 3/4 cosigners pay the loan eventually
Downsides or risks to cosigning a loan
- could hurt your credit if you can’t pay it
- could lose property you pledge
- ask to be sent a copy of overdue-payment records
Credit Rating
- good credit rating is valuable, should be protected
- limit borrowing to capacity
- live up to the terms
- check to see credit report
Credit Bureaus
consumer reporting agencies (CRAs) collect info about consumers.
- experian, transunion, equifax
- 36,000 complaints each year
Who provides data to credit bureaus
Get info from banks, court records, finance companies, merchants, credit card companies
What is in your credit files?
- employer, position, income
- former address
- former employer
- spouses name, ss number,,
- home status
- checks returned for insufficient funds
Fair Credit Reporting Act
5 things it does
- regulates use of credit reports
- requires deletion of obsolete information
- data correction
- only authorized people can view it
- adverse data - 7 years, bankruptcy- 10 years
Time limits in adverse data
Fico score
information in your file is used to calculate your FICO score.
- between 300 and 850
- Higher score= less risky you are
Vantagescore
- launched in 2006
- doesnt count debt paid off
- predictive scores for those with lack of credit history
- ignores bad credit history due to natural disasters
What is more important in determining your FICO credit score?
-Payment history
What if your application is denied?
- ask why
- ECOA gives you right to know why
- should contact local credit bureau
- Should ask bureau to investigate any mistakes and correct records
How to improve credit score
- get copies of your credit report
- pay bills on time
- understand how credit score is determined
- learn the legal steps to take
- beware of credit repair scams
Fair Credit Billing Act covers:
Procedure for…
- 1975
- procedure for correcting billing mistakes, refusing to make credit card or revolving credit payments on defective goods, promptly crediting your payments
In case of a Billing Error
- call creditor
- notify error in writing within 60 days
- include explanation and account number
- they must respond within 30 days
- 2 billing periods, no longer than 90 days to correct
- credit rating is not affected during this time
Defective goods or services
-you may withhold payment on damaged goods or services as long as you made an attempt to resolve with the merchant first
Identity Crisis -
what to do if your identity is stolen…
- Contact fraud department of each of the three major credit bureaus
- tell them to flag file with a fraud alert
- state that creditors should call before opening any new accounts in your name
- contact creditos for any accounts that have been tampered with
- file a police report and keep a copy
- tear or shred any personal information before throwing it away
- close bank accounts asap
- cancel check and atm card
- contact privacy rights clearinghouse
- file complaint with federal trade commission
Important consumer credit laws
- truth in lending and consumer leasing acts
- Equal credit opportunity act
- fair credit billing act
- fair credit reporting act
- consumer credit reporting reform act
- credit card accountability, responsibility and disclosure act
Your rights under consumer credit laws
discrimination- what to do
If refused credit due to discrimination:
- let creditor know
- file a complaint with the government
- sue creditor in def district court
