CONSUMER CREDIT OBJECTIVES. Section 4.1: INTRODUCTION TO

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1 Chapter4 CONSUMER CREDIT 4.1: 4.2: Loans 4.3: Loan Calculations and Regression 4.4: Credit Cards 4.5: Credit Card Statement 4.6: Average Daily Balance Section 4.1: INTRODUCTION TO CONSUMER CREDIT OBJECTIVES Become familiar with the basic vocabulary of credit terms. Become familiar with types of lending institutions. Compute finance charges for installment purchases. Chapter 4 Consumer Credit 1

2 Key Terms credit debtor creditor asset earning power credit rating credit reporting agency FICO score installment plan down payment interest finance charge How can goods and services be purchased? Buy now, pay now Buy now, pay later What does this mean? 1. If you purchase something and do not pay for it immediately, you are using credit. 2. People who use credit are called debtors. 3. Organizations or people that extend credit to consumers are called creditors. Chapter 4 Consumer Credit 2

3 Examples of using credit: (1) Credit Cards (2) Loans (3) Electricity How are these examples of using credit? Advantages and disadvantages to using credit: Chapter 4 Consumer Credit 3

4 Creditors need to be sure that they will be paid back before they extend credit. You must apply for credit and your financial history will be looked at. Three basic items to a financial history: 1. Assets are everything you own your home, car, bank accounts, and other personal possessions. 2. Earning power is your ability to earn money now and in the future. 3. Credit rating is your credit report card. Every time you use credit, the creditor reports how well you me your financial obligations to a credit reporting agency. (a) Credit reporting agency complies records on all users of credit. These records are used by creditors before they issue credit to a consumer. Examples on how to establish a good credit history: Open savings and checking accounts Pay all bills on time Successfully handle all credit transactions Three major credit reporting agencies: Equifax, Experian, TransUnion Agencies are publicly-traded, for profit companies who are not owned by the government. However, government does have legislation, Fair Credit Reporting Act, regarding how they should operate. Chapter 4 Consumer Credit 4

5 (b) Consumers are given credit scores based on financial history. The most popular score is the FICO score, name for its creator, Fair, Isaac and Company. Scores range from 300 to 850 and summarize the probability that debtors will repay their debts. A higher score indicates a better credit rating. FICO score considers both positive and negative information and uses an equation that evaluates many types of information from your credit report: How a FICO Score breaks down: NBC Learn FICO score Video Does a credit score matter? Some stores offer creditworthy customers the convenience of paying for merchandise or services over a period of time called an installment plan. Customer pays part of the selling price at the time of purchase called the down payment. The scheduled payments, or installments, are usually made on a monthly basis. Installment buyers are charged a fee or a finance charge to use the plan. The finance charge is essentially the interest that will be added to the cost of the original purchase. Chapter 4 Consumer Credit 5

6 Example 1 Phoebe wants to purchase a guitar. The price of the guitar with tax is $2,240. If she can save $90 per month, how long will it take her to save up for the guitar? Example 2 Phoebe is considering an installment plan for the purchase. It will require a 15% down payment. How much will Phoebe need for the down payment? Example 3 Phoebe decides to use the installment plan and pays the down payment amount today. The remainder of the purchase, plus an additional finance charge, is paid back on a monthly basis for the next two years. The monthly payment is $ What is the finance charge? Chapter 4 Consumer Credit 6

7 Example 4 Monica buys living room furniture for $3,850 on an installment from Pottery Barn. She made a 20% down payment, and will make monthly payments of $90.75 for the next three years. What is the finance charge that Monica will pay? Example 5 Carpet King is trying to increase sales, and it has instituted a new promotion. All purchases can be paid on the installment plan with no interest, as long as the total is paid in full within six months. There is a $20 minimum monthly payment required. If the Jones family buys carpeting for $2,134 and makes only the minimum payment for five months, how much will they have to pay in the sixth month? Chapter 4 Consumer Credit 7

8 Example 6 Rachel has an excellent credit score of 790 and qualifies for a special promotion at Best Buy that includes a 20% discount on the purchase price and an installment plan. The original price of the ipad Pro is $649. Rachel will make a 10% down payment based on the discounted price. What is the down payment amount? Example 7 Rachel will make monthly payments in the amount of $26.32 for 18 months on the remaining purchase price. What is the finance charge? Chapter 4 Consumer Credit 8