Download Chapter 8 Section 2 and 3 Notes

CHAPTER 8.2
The Costs and Methods of Obtaining Credit
What is a loan?

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A loan is money that you borrow and must repay.
Loans cost money to the borrower in the form of
interest.
Will you be able to meet all your usual expenses plus
the monthly loan payments you will have to make?
 (take
home pay) - (total of basic monthly expenses) =
spending
 Consider giving something up so you can make the loan
payment
Debt Payments-to-Income Ratio (DPR)
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Percentage of debt you have in relation to your net
income.
Net Income is the income you receive
 Examples:
take home pay, allowance, gifts, and interest
 No more than 20% should be spend on debt

(Total monthly debt payments/monthly net income) =
DPR
EXAMPLES

Suppose that your monthly net income is $1,200.
Your monthly debt payments include your student
loan payment and a gas credit card, and they total
$180. What is your debt payments-to-income ratio?

Formula: Monthly Debt Payments/Monthly Net Income = DPR

180/1200 = .15 or 15%
EXAMPLES

What is your monthly DPR if your debt payments
total $342 and your net income is $1,000 per
month?
What does it cost to apply for credit?

Two key factors in shopping for credit:
 Finance
Charge
 Annual Percentage Rate (APR)
The Finance Charge and the Annual
Percentage Rate (APR)

Finance charge = total dollar amount your pay to use
credit.
 Calculated

using the APR
APR is the cost of credit on a yearly basis, expressed
as a percentage
 Example:
an APR of 18% means that you pay $18 per
year on each $100 you owe.
Tackling the Trade-Offs

Various features to choose when financing:
 Length
of the loan
 Variable interest rate or fixed interest rate
 Size of monthly payments
 Interest rate
TERM VERSUS INTEREST COSTS

Longer the term, smaller the payments
 Greater
amount you will pay in interest charges.
EXAMPLES: Calculating simple interest on a loan

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Janelle’s cousin agreed to lend her $1,000 to
purchase a used laptop computer. She has agreed
to charge only 5 percent simple interest, and Janelle
has agreed to repay the loan at the end of one
year. How much interest will she pay for the year?
Use the formula below to help compute Janelle’s
loan interest.
Formula: Principal x Interest Rate x Amount of Time = Simple Interest
Examples

You just bought a used car for $3,500 from your
aunt. She agreed to let you make payments for 3
years with simple interest at 6 percent. How much
interest will you pay?
LENDER RISK VERSUS INTEREST RATE
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Variable Interest Rate – based on changing rates in
the banking system.
A Secured Loan – lower interest rate, pledge
collateral
Up-Front Cash – large down payment in hopes of
better loan features
A Shorter Term – easier to repay your loan, lower
lender risk, higher monthly payments
Worksheet Chapter 8.2

The Cost of Credit

Complete with a partner

Show all work!

Turn in when finished-you will have time to work on
this tomorrow in-class!
The Five Cs of Credit
 Used
by lenders to determine who will receive credit.
 Character:
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
Will You Repay the Loan?
Personal/professional references, criminal history
Questions asked: Have you used credit before? How long have
you lived at your present address? How long have you held your
current job?
The Five Cs of Credit
 Capacity:
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
Your income in relation to your debts
Questions asked: What is your job, and how much is your salary?
Do you have other sources for income? What are your current
debts?
 Capital:
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
Can You Repay the Loan?
What Are Your Assets and Net Worth?
Items of value that you own including savings
Questions asked: What are your assets? What are your
liabilities?
The Five Cs of Credit
 Collateral:
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Creditors look at what kinds of property or savings you already
have, because these can be offered as collateral to secure the
loan.
Questions: What assets do you have to secure the loan?
Do you have any other assets?
 Conditions:

What If You Do Not Repay the Loan?
What If Your Job Is Insecure?
Unemployment, recession, general economic conditions
Credit Rating
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Combined information gathered from your
application and the credit bureau.
A credit rating is a measure of a person’s ability
and willingness to make credit payments on time.
Brainstorm: What are some factors that
influence your ability and
willingness to make these credit payments?
FICO and Vantagescore
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FICO
A
number between 350 and 850 that rates how risky a
borrower is.
 Higher the score, the less risk you are to creditors

Vantagescore
 Relatively
new scoring technique developed through three
credit reporting companies
 Ranges from 501 – 990
How Can I Improve My Credit
Score?
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Consistently review your credit report for accuracy
Long-term, responsible credit behavior
Pay bills on time
Lower balances
Use Credit wisely
What If Your Application Is Denied?
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They have to let you know why, Equal Credit
Opportunity Act (ECOA)
Can request a copy of your credit report, free
within 60 days
Why is your credit report important?
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Lenders rely heavily on credit reports when they
consider loan applications.
Lender will review your credit history.
 Credit
Bureaus
 Collect
information on how promptly people and
businesses pay their bills.
 Three major: Experian, Trans Union, and Equifax
 Get information from banks, stores, credit card
companies, other lenders, finance companies
Why is your credit report important?

Your credit report shows:
Name
 Address
 Social Security Number
 Birth date
 Employer, position, income
 Previous address
 Previous employer
 Spouse’s name, SSN, employer, income
 Homeowner or renter
 Checks returned for insufficient funds
 Detailed loan information and payment information

CHAPTER 8.3
Protecting Your Credit
What can you do to correct billing errors?
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In your lifetime you will probably receive a bill for something
you did not pay for, or you will make a payment and it will not
be credited to your account.
Steps to follow to correct errors:
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Notify your creditor in writing
Include information that will support your case
Pay the portion of your bill that is not in question
The creditor must notify you within 30 days.
If the creditor made a mistake, you do not have to pay finance
charges on the disputed amount.
Protecting Your Credit Rating
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Your credit rating cannot legally be damaged while
you are negotiating.
Your complaint must also be answered before a
creditor can collect the amount in question
How can someone steal your identity?

People who deceive others by assuming different identities, use
your name, SSN, credit card number, or other personal
information for their owner purposes are called impostors.

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When this occurs, the impostors are committing identity theft.
Identity theft is the fastest growing financial crime.
 The
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Federal Trade Commission recommends you:
Contact the credit bureaus
Contact the creditors
File a police report
What should you do if your credit has been stolen?

To protect your card, you should take the following actions:
 Be sure that your card is returned to you after you make a
purchase.
 Keep a record of your credit card numbers.

You should keep this record separate from your cards.
 The
maximum you have to pay if your card is used
illegally is $50.

If notified before the card is used, you will not have to pay
Keeping Track of Your Credit

You may not realize you have been a victim of identity
theft until you realize something is wrong
Steps to Protect Other Accounts:
 If your ATM or credit card has been lost, cancel the card.
 Create new PINs
 If your bank account has been accessed, close that
account.
 Government Agency Protection:

Contact the Federal Trade Commission (FTC) if you are still
experiencing problems.

Provides information on how to network with other victims.
Keeping Track of Your Credit
Credit Information on the Internet:
 Use
a secure browser (https not http when giving
personal information)
 Keep records of online transactions
 Review your monthly bank and credit card statements
 Read the privacy and security policies of Web sites you
visit
 Keep your personal information private
 Never give your password to anyone online
 Do not download files sent to you by strangers
Why would someone ask a friend or relative
or cosign a loan?
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Cosigning a loan means that you agree to be responsible for
the loan payments if the other person fails to make them.
The lender would not require a cosigner if the borrower were
considered a good risk.
If you cosign a loan and the borrower does not pay, you will
have to pay up to the full amount of the debt as well as any
late fees.

Can damage your credit score if the debt is not repaid
Why would someone ask a friend or relative
or cosign a loan?
If you decide to cosign a loan, consider the following:
Be sure you can afford to pay the loan.
 Consider that even if you are not asked to repay the debt,
your liability for this loan may keep you from getting other
credit.
 Before you pledge property to secure the loan, understand
that you could lose the property you pledge if the borrower
defaults.
 Check your state law. Some states have laws giving you
additional rights as a cosigner.
 Requires that a copy of overdue-payment notices be sent to
you so that you can take action to protect your credit history.

When should you complain about a lender?
Consumer Protection Laws
 There are six laws that protect consumer credit:
 Credit
Card Act
 Truth in Lending and Consumer Leasing Acts
 Equal Credit Opportunity Act (ECOA)
 Fair Credit Opportunity Act
 Fair Credit Reporting Act
 Consumer Credit Reporting Reform Act
Credit Card Act
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Passed in 2009
Prevents unfair increases in interest rates and changes in
terms.
Prohibits excessive and unnecessary fees.
Penalty fees must be reasonable and proportional to the
violation.
Requires fairness in timing of card payments.
Provides enhanced disclosures of card terms and
conditions.
Ensures adequate safeguards for young people.

Under the age of 21 you must have a cosigner
Truth in Lending and Consumer Leasing Acts
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If a creditor fails to disclose information or gives
inaccurate information, you can sue for any money
loss you suffer.
Permits class-action lawsuits.
Equal Credit Opportunity Act (ECOA)

If you can prove that you have been discriminated
against, you can sue for actual damages plus punitive
damages
A
payment used to punish the creditor who has violated
the law - $10,000
Fair Credit Opportunity Act

A creditor that fails to follow the rules that apply to
correcting any billing errors will automatically give
up the amount owed on the item in question.
Fair Credit Reporting Act
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You may sue any credit bureau or creditor that
violates the rules regarding access to your credit
records.
Or fails to correct errors in your credit file
Consumer Credit Reporting Reform Act
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Passed in 1997
Places the burden of proof for accurate credit
information on the credit bureau.
The creditor must prove that disputed information is
accurate.
If a creditor or the credit bureau verifies incorrect
data, you can sue for damages.