Consumer Credit Overview

Consumer Credit

• Consumer credit is an arrangement to receive cash, goods, or services now, with payment in the future.
• It is used for personal needs, excluding mortgages.
• Advantages include: immediate access to goods and services, purchase even with low funds, a cushion for emergencies, advanced sales/return notices, and convenience.
• Disadvantages include: temptation to overspend, failure to repay can result in loss of assets and reputation, and the cost of credit.
• Key questions to ask regarding consumer credit: available cash, savings use, budget suitability, alternative uses for credit, and postponement options.
• Psychological and financial costs of using credit should be considered.
• Credit plays a significant role in the American economy.

Consumer Borrowing/Credit

• Reasons for consumer borrowing include education (student loans), consumption (credit cards/personal loans/home equity lines), vehicle purchases (auto loans), business financing (credit cards/home equity lines/business loans), home purchases (mortgages), home improvements (home equity loans), and investment (margin loans).
• Student loan debt has significantly increased.
• Half of credit card holders carry balances
• Borrowing has increased against retirement funds.
• High-cost borrowing methods are common.
• Debt payments-to-income ratio: monthly debt divided by monthly net income (should ideally be less than 20%).
• Debt-to-equity ratio: Total liabilities divided by net worth (should ideally be less than 1).

Cosigning a Loan

• A cosigner guarantees repayment if the borrower defaults.
• Careful consideration of ability to repay is needed.
• Full loan amount and potential late/collection fees are potential burden.
• Cosigner(s) may be wholly/partially responsible for repayment.
• Cosigning can affect credit rating and impact future credit access.
• Factors to consider include: Affordability, potential damages to credit score, and implications of loan default.

Loan Amortization

• Loan repayment in consistent installments.
• Principal, the initial amount borrowed, reduces gradually with each payment.
• Portion of payment allocated to interest expense, decreasing through each subsequent period.
• Greater portion of payment directed to principal reduction as balance reduces.

Credit History/Ratings

• A good credit rating is a valuable asset.
• Credit limits should be monitored and managed responsibly.
• Contract compliance is crucial.
• Credit reports may show if outstanding debts are problematic.
• The rating should be managed well.
• Banks are creating their own systems for credit rating clients.
• Factors which may be used include: income, loan balance, any delays in repaying loans, net worth, and liquidity.
• Maintaining a good rating is essential to gain access to better terms.

Credit Cards

• Credit cards are revolving credit.
• Borrowers can borrow against a credit line without a fixed amount.
• Monthly expenses are calculated on outstanding balances.
• Minimum monthly payments are usually only for interest expense.
• The practice of paying the minimum often leads to significantly higher loan totals including added interest compared to covering the full balance.

Improving credit score

• Get copies of your credit report to ensure accuracy.
• Maintain timely payments on all debts.
• Understanding credit score determination.
• Avoiding credit repair scams.

Interest Rate

• Interest rate is the cost of borrowing money.
• Not just repayment of the loan; interest must also be paid.
• The greater the interest rate, the higher the total borrowing cost.

Student Loans

• Increasing amount of money borrowed by students.
• Data shows a considerable percentage of people within the 18-34 age bracket hold student loans.
• More than half wish they could go through the loan process differently.

Calculating Debt Payments-To-Income Ratio

• Divide monthly debt payments by monthly net income to determine the ratio.
• House payments/mortgage should not be included when determining this.