Lecture 12 - Borrowing Part 2 Flashcards
Debt - July 2016
Outstanding consumer credit lending - £186.6 billion
Total credit card debt - £65.5 billion
For a credit card with average interest rate, it would take 25 years and 6 months to repay if you made only the minimum repayment each month
During June 2016, 471 purchases were made in the UK every second using debit or credit card
Easy credit
Credit cards
Payday loans
Pay weekly/monthly catalogues
Country court judgments
Poor credit history accepted
High risk lending
High interest rates
Someone will always offer you loans above your risk rating
Credit cards
Minimum payment
Usually interest rate free period and then pay interest
Charge card
Feel like credit cards in use
Must repay after two months, no interest
Probably pay a fee for the card
American Express the most well known expample
Pre-pay cards
Not credit, just pre-load money in a card
How do credit cards make money
Interest charges Different charges for cash withdrawals Note which types of expenditure are paid off first Annual fee Additional fees Foreign currency transactions Insurance The seller pays a fee too
Additional fees
Avoidable if life is well-managed Cash-advance fee And or higher rate of interest Late fee Over the limit fee
How do you gain from a credit card
Convenience/liquidity Picking a card that is suitable for you Interest free period Low interest rate Low annual charge Useful benefits - cash-back
Store cards
Issued by financial services companies
Badged/branded as store specific
Possibly offers discount on purchases
Often higher rate of interest
Representative
Commonly offered rate
You might be offered higher or lower
Are credit cards a good idea
Perhaps
- convenient
- flexible
- well managed will build up a good credit history
Perhaps not
- expensive if poorly managed
- can be difficult to cancel “ standing orders” on credit cards
Do you have sufficient self-control
What determines the level of interest rates
B.O.E base rate
Risk and return
- the greater the estimated risk of loss the greater the interest charged
Security offered by lender
- secured loans typically have lower interest rates
Competition amongst lenders
- more competition = lower interest rates
Credit scoring
Most lenders will determine an individual’s credit score before deciding whether to lend funds
This will determine the availability of credit, size of the loans and the interest rate to be charged
Factors credit evaluation
1) character
2) capacity
3) capital
4) collateral
5) conditions
Factors often automatically preventing approval from low interest products
Character
Previous track record Payment history - timely Reliability/stability - health, stable personal circumstances Not over extending - borrowing more than you can afford No track record = no history - evidence of poor financial management
Capacity
How much can you afford to borrow
Current income
Current level of borrowing
Current level of expenditure
Capital
Size of financial holdings/investments
- more savings = more credit worthy
- ask for a credit card/loan when needed
- relevant for non-secured debt
Collateral
Assets offered as security to the loan
The more collateral, the more credit-worthy
Secured debt
Conditions
Economic conditions
- chance of losing job
Lenders view of the economic situation and their own total exposure
Credit scoring factors
US credit score
1) payment history (35%)
2) amount you already owe/already have available (30%)
3) length of credit history (15%)
4) type of credit (10%)
5) new credit (10%)
Easy credit
Poor credit record Need it today Easy to use in a efficient way Hire purchase- make regular payments but the item is only really yours after the last payment Alternative credit - mail-order catalogues, payday loans
Curbs on easy credit
Affordability checks
Limit of two
Interest rate capped at daily rate of 0.8%
Default charges capped at £15
Total cost including fees and interest capped at 100% of original loan
Citizens advice high cost short-term credit
45% reduction in clients accessing advice about PDL
53 firms received full authorisation to continue
25 remain active while waiting outcome of their review
48 withdrawn
