Liability Planning- Consumer Credit

Jill is little bit nervous about getting a credit card as she is still in college. She knows that many of Her friends has misused credit card. However she decides to carefully examine the advantage and disadvantage of having a credit card. Following steps should be adopted for carefully planning your credit

Steps for planning you credit/liability

Define consumer credit and analyze its advantage and

disadvantage.
Differentiate among various type of credit
Assess your credit capacity and build your credit ratings

Describe the information creditors look for when you apply for

credit
Identify the steps you can take to avoid and correct credit

mistakes
Describe the laws that protect you if you have a complaint about

consumer credit

Objective1: Define consumer credit

Credit is an arrangement to receive cash , goods and services now and pay for them in future. Consumer credit refers to the use of credit for personal needs (except a home mortgage) by individuals and families, in contrast to credit used for business purposes. Examples: In January you pay the bill for the electricity that you have used in the month of December. You write a cheque of Rs 4000, a minimum payement on a Rs 8000 departmental store bill. With a bank loan, you purchase a new car

Most consumers make current purchases from three alternatives: They can draw from savings Use their present earnings Borrow against their expected future income

Object 1: Advantage and disadvantage of credit

ADVANTAGE
1. Enable the consumer to enjoy good and services now 2. Purchase goods even when cash is low 3. Provide shopping convenience 4. Dont need to carry cash 5. It provide record of expense 6. Provide time to make payement

DISADVANTAGE
1. Builds the habbit of overspending 2. Failure to pay lead to loss of income and reputation 3. It can lead to long term financial problem 4. Does not increase total purchasing power 5. Credit cost money

Example:Jill has decided to go ahead and get a credit card. She is aware of the problems with using credit cards and plans on being very careful how she uses her new credit card. She also plans on keeping careful track of what she puts on her credit card each month. She also plans on being a convenience credit card user and pay off her balance in full each month.

Objective 2: Type of Credit

Two type of consumer credit exist:
1.

Close ended credit

Installment sale credit Installment cash credit Single lump sum credit
2.

Open Ended credit

Revolving credit Incidental credit

Credit cards
Co branded credit cards Debit cards

Co-branded Credit Card

with a business trade name.

A co-branded credit card is one that links a credit card

It offers 'points' or premiums toward the purchase of a

product or service.
There are many different kinds of co-branded cards

available today which include ones with 'points' towards the purchase of a car and cash back programs.

Example of Installment Sales credit Jack is using a closed ended loan to purchase a used car. He is using this loan for a specific purpose and has specific repayment terms. In this case the bank will probably retain title to the car until he has finished paying off the loan. Example of Installment cash credit Donna gets $ 5000 loan in cash from bank. She is using a closed ended loan to take her vacation. She will repay this loan in monthly installment of $ 430. In this case there is nothing to use to secure the loan and there is no down payment for this loan. However, it still has specific repayment terms.

Example of single lump sum credit

Vickie is essentially purchasing one piece of furniture, it cost $ 1050 and the furniture company is allowing him to borrow money and repay it in a single lump sum $1100 at the end of 90 days. This is a closed ended loan but only has one Payment

Example of Revolving credit and incidental credit

A credit card is an example of open ended credit. The line

of credit on a credit card is the maximum amount that can be borrowed at one time. James uses his credit card for the convenience of not having to carry around a lot of cash and the efficiency of only having to pay one bill each month.
Ricky is having an elderly cat. He need to take his cat to

Vet nary once in a week. As a courtesy doctor bills him once in a month rather than making him pay at every visit.

Credit Card Fraud

Davis has gone to his local dealer to purchase Hyundai Eon. David decided to get a loan from dealer to finance his purchase,. After applying for the loan, the dealer denies his loan saying that he has too much of outstanding debts. Davis is little confused as he knows he has no significant debt. It is likely that Blair has been the victim of credit fraud of some type.

Protecting yourself against debit/credit fraud

Sign your new card as soon as it arrive Treat your card like money. Store them in secure

place Dont give your credit card number on phone or online unless you initiate the call. Remember to get your card and receipt after the transaction If your billing is wrong intimate this to card issuer If dont receive the bill notify them immediately Report for stolen or lost card immediately

How to avoid credit card frauds

Use a secure browser, software Keep records of your online transaction Review your monthly bank and credit card

statements Read the policies of web sites you visit Keep your personal information private Never give your password online

Objective 3: Measuring your Credit Capacity

Can you afford a loan?

General rules of credit capacity: Debt payement- to- income ratio

= Monthly Debt Payement / Net Monthly (not including house payement) income 20% estimate is maximum, however 15% is much better.
Debt-to-equity ratio = Total liabilities / Net Worth

If Debt equity ratio is 1 it means debt is just equal your net worth

Because Davis has been denied a loan, under consumer credit protections acts he has the right to know the specific reason for the denial. If the denial is because of a credit report, he can apply to get a free copy of his credit report within 60 days of the denial. As of 2005, all consumers can get a free copy of their credit report

Building and maintaining your credit rating

Credit Bureau or Credit reporting agencies Who provide data to credit bureau? What is in your credit files?

Fair credit reporting Act

Who can obtain a credit report? Incorrect information in your credit file.

What are legal remedies?

Obj 4: Applying for credit

Example Mary and John have a joint income that is more than enough for them to make payement on their dream house. Yet they are turned down for a mortgage loan. The lender says Mary might become pregnant and leave her job. In fact, however it is illegal for a creditor to ask or assume anything. It is illegal to discourage Jones from applying for a loan. So, when you are ready to apply for loan, you should know what creditors think is important in deciding whether you are creditworthy. You should also know what they cannot legally consider in their decision.

Objective 4: Information creditor look for when you apply for loan?
Character: his/her attitude towards credit

obligations

Capacity: his/her financial ability to meet credit

obligations, it is measured with income statement.

Capital: his/her asset or net worth Collateral: A valuable asset pledged to secure a

loan

Conditions: the general economic condition that

affect the ability of person to pay loan

Objective 5: Steps to Avoid and correct credit mistakes

Has a department store ever billed you for goods

that you returned to the store or never received.? Has a credit company ever charged you for the same item twice or failed to properly credit on your account? Steps are: Pay your debts on time. Correct billing mistakes : notify the creditor in writing within 60 days of your bill being mailed to you, give your creditor your name , account number and bill. Creditor should report to your letter within 90 days and correct your account.

Objective 6: Complaining about consumer credit

First solve the problem directly with the creditor Complaint about banks

Protection under consumer credit laws, these are:

Make formal complaint with consumer forum Equal credit opportunity Act

Fair billing Act

Fair credit reporting Act Consumer credit Reporting reform Act, 1997