Consumer Credit: Uses and Advantages

Consumer Credit Basics

• Credit enables receiving cash, goods, or services immediately and paying for them later.
• Consumer credit involves using credit for personal requirements.
• Consumers can finance purchases by using savings, current earnings or borrowing against future income.
• Trade-offs must be considered when using credit.

Uses and Misuses of Credit

• Before using credit for major purchases it is wise to consider if you can pay cash or make a down payment.
• Before using credit for major purchases consider if you want to use savings, if it fits your goals and budget, and if there are better credit options.
• Deciding whether to postpone the purchase, consider opportunity costs.

Advantages of Credit

• Credit allows for immediate use of goods and services.
• Credit facilitates purchases when funds are low.
• Credit can be used for financial emergencies and is convenient for shopping.
• Credit is safer than cash.
• A 30-day "float" period can be advantageous.
• Credit use may include bonuses like rebates, airline miles, or emergency medical insurance.
• Demonstrates financial stability.

Disadvantages of Consumer Credit

• Purchases are more expensive due to interest.
• There may be a temptation to overspend.
• Credit ties up future income.
• Financial difficulties are possible.
• May cause damage to family relationships.
• Slows progress toward future financial goals.

Types of Consumer Credit

• Two basic types are consumer loans and revolving credit.

Consumer Loans

• A fixed sum paid back over time with scheduled payments

Revolving Credit

• Loans made on a continuous basis is billed periodically for payment.

Credit Limit

• The maximum dollar amount a lender provides.

Interest

• A periodic charge for using credit.

Personal Line of Credit

• Prearranged loan from a bank up to a specified amount.

Credit Card Usage

• About 89% of households in Canada have at least one credit card.
• 70% of credit card users are convenience users who pay their balance each month.
• 30% of credit card users are borrowers.
• Co-branding credit cards link with businesses and offer rebates.

Costs and Benefits of Credit Cards

• Costs: Late/overdue payments, exceeding credit limits, cash advances, foreign currency transactions, membership fees, exchange rate loading fees.
• Benefits: Short-term no-interest loans if paid in full monthly, rewards, rebates, points, insurance, protection against fraudulent use, and emergency availability

Credit Card Theft - Six Steps

• Suspend card activity via your banking app.
• Call the toll-free number on the card statement to reach the issuer.
• Immediately cancel the stolen card.
• Request a new account number and a new card.
• Check future statements for any unauthorized charges.
• Report any unrecognized charges discovered by calling the toll-free number again.

Protecting Against Debit/Credit and Identity Card Fraud

• Phone scams involve impersonating relatives needing money or CRA demanding payment.
• Phishing attempts to steal personal data by posing as a reliable source.
• Pharming redirects correct web searches to bogus websites via a computer virus.
• Shoulder surfing is when someone watches you enter your PIN on a pad.
• Dumpster diving involves extracting personal information from trash.
• Skimming is stealing card info on the magnetic strip to create fraudulent cards.

Fraud Protection Measures

• Sign new cards immediately after arrival.
• Treat cards like cash and keep them secure.
• Shred any documents with your account number.
• Only provide your card number over the phone if you initiated the call.
• Take your card and receipt after transactions; compare them to your billing statements upon arrival.
• Immediately report lost or stolen cards.
• Notify the issuer if your billing statement does not arrive.
• Review your credit report every few years.

Fraud Protection for Online Purchases

• Use a secure browser.
• Keep records of your online transactions.
• Review bank and credit card statements monthly.
• Read website policies.
• Keep personal information private.
• Do not save passwords on your computer.
• Share payment information only with businesses you know.
• Do not give your password to anyone online.
• Avoid downloading files or clicking hyperlinks from strangers.

Travel and Entertainment (T&E) Cards

• Charge cards require the balance to be paid in full each month.

Smartphones

• Mobile commerce has experienced growth due to interest by consumers, retailers and finance companies.

Personal Lines of Credit

• Revolving credit line.
• Interest rate is linked to the lender's prime rate.
• Withdraw up to a set limit.
• Repay stated minimum or more.
• Secured with assets.

Home Equity Line of Credit

• A loan based on the home's current market value, minus the outstanding mortgage amount.
• Up to 65% of the appraised home value can be borrowed.
• Interest is tax-deductible if used for investments.
• Usually set up as revolving credit.

Consumer Loans

• Mortgage Loans: The largest debt incurred by most Canadians.

  • Car Loans: Generally the second largest purchase.
    • Financing at the Banks is an option. - Financing at the Dealer is another option.

Lease-Versus-Buy Decision for a Car

• Closed-end lease: Option to buy the vehicle or return it to the leasing company at the end of the lease.
• Open-end lease: Requirement to pay the residual value of the vehicle and any specified charges at the end of the lease.
• Paying Cash: Avoids interest charges, though investment returns may exceed borrowing costs.

Can You Afford a Loan?

• Before taking a loan, determine if you can afford it.
• Make an accurate and sensible family or individual budget.

Debt-Payments-to-Income Ratio

• This ratio is monthly debt payments divided by net monthly income (excluding house payment).
• Experts suggest spending no more than 20% of net income on consumer credit payments.

Debt-to-Equity Ratio

• The ratio is total liabilities divided by net worth.
• Reaching a ratio of 1, where consumer debt equals net worth, indicates reaching debt obligation limits.

GDS and TDS Ratios

• GDS ratio: Monthly mortgage payment (principal, interest, heating, taxes) as a percentage of gross monthly income; spend no more than 32% on shelter costs.
• TDS ratio: Monthly mortgage payment plus other debt payments as a percentage of gross monthly income; combined shelter and non-shelter obligations should not exceed 40%.

Co-Signing a Loan

• Guaranteeing the debt of another.
• Co-signors become liable for the debt if the borrower defaults.
• Approximately 38% of co-signers end up paying some or all of the loan.
• Precautions to consider if you co-sign: Be sure you can afford to pay, understand that liability affects future credit.
• You could lose pledged property, understand provincial laws, and request copies of all overdue notices.

Building and Maintaining Your Credit Rating

• Creditors highly value your credit experiences.
• A good credit rating is valuable and can be achieved through discretion, limited borrowing, compliance with lending terms.

Credit Bureaus

• Credit bureaus collect consumer credit information.
• The two main credit bureaus in Canada are Equifax Canada and TransUnion Canada.
• Credit bureaus obtain data from banks, finance companies, merchants, credit card companies, and other creditors.

Contents of Credit Files

• Credit bureau files contain name, address, social insurance number, and birthdate.
• Files may have employer/position, former addresses and employers, spouse details, public records, and NSF cheques.

Credit Bureau Regulation in Canada

• Credit bureau regulation has legislation to protect consumer privacy and right to avoid false credit or personal information.

Time Limits on Adverse Data

• First bankruptcy remains for 7 years and second bankruptcy remains for 14 years.
• Errors should be corrected immediately.

Incorrect Information in Your Credit File

• Credit bureaus must ensure accurate creditor reporting through reasonable procedures.
• If you dispute information accuracy, the credit bureau must investigate and modify or remove inaccurate data.
• The law requires credit card companies to correct inaccurate or incomplete information.

Credit Scoring

• Credit scoring assesses the risk of prospective borrowers.
• Data in credit reports are summarized in a credit score.
• Creditworthiness can be predicted and a higher score is better.
• A strong score helps you get credit faster and at a more advantageous rate.

Five Categories Influencing Credit Score

• Payment history
• Length of credit history
• Amounts owed
• Types of credit used
• Number of recent credit applications
• Managing debt responsibly can improve your score.
• Obtain credit report, score, or analysis online at Equifax Canada or TransUnion.

Applying for Credit

• You should know what creditors value and legally cannot consider.
• Creditors cannot legally consider race, color, age, gender, marital status or sexual orientation in credit decisions.

Five Cs of Credit Management

• Character: Attitude towards credit.
• Capacity: Ability to meet obligations.
• Capital: Assets or net worth.
• Collateral: Assets pledged as loan security.
• Conditions: General economic factors affecting repayment ability.

Items on Sample Credit Application Questions

• Loan amount and proposed use
• Name and birthdate.
• Social insurance number and driver's license number
• Addresses; present and previous.
• Employers and their addresses; present and previous.
• Salary and documents e.g. T4s, pay stub, NOAs.
• Number of dependents
• Additional sources of income.
• Prior credit received.
• If so, when and where was it received?
• Institution, branch, and number: Chequing and Savings accounts
• Nearest relative living apart , address, and phone number.
• Status of marriage.
• Joint applicant's details, as well.

FICO Scores

• Range: 300-900, with higher scores being better.
• 35% based on payment history.
• 30% based on total amounts owed on outstanding credit.
• 15% based on the length of time that credit has been maintained.
• 20% based on other factors.
• FICO scores are available for a fee.

VantageScores

• A product offered by Equifax, TransUnion, and Experian, introduced in March 2006.
• Uses information from credit reports to calculate a three-digit score, like FICO.
• Several factors influence your Vantage Score e.g. recent credit, payment history, credit use, credit balances, depth of credit and available credit all expressed as a percentage.
• Scores vary from sub prime to super prime.

Improving Credit Score

• Review your credit report.
• Always pay bills on time.
• Stay within credit limits.
• Use credit wisely.
• Learn the legal steps to correct your credit.
• Be aware of credit scams.

Age and Credit Approval

• Creditors are prohibited from turning you down, or decreasing credit. Creditors are also prohibited from ignoring retirement income.
• Creditors can not close your account or requirement to reapply due to age or retirement.
• Denying credit or closure because credit life insurance is unavailable based on age is prohibited.
• Denial for receiving Old Age Security or public assistance is illegal.

Denied Applications

• Ask why the application was denied
• If the reason for denial comes from the credit report; determine the precise reason.
• Contact the credit bureau to find out what information was reported and investigate and remedy any errors.

Correcting Credit Mistakes - Billing Errors

• If there is a billing error, contact the creditor first.
• Contact major credit bureaus if your identity has been stolen.
• Contact creditors for accounts fraudulently opened or tampered with.
• File a police report.
• Close and cancel the bank accounts, and credit cards.

Three Steps For Resolving Mistakes

• Step 1: The Phone Call
  • Record the time, date, and names and titles of those spoken to.
  • Gather bills, warranties, and guarantees.
  • Call the business and state exactly what needs to be rectified.
  • Speak to an authority that is lower down in the hierarchy e.g the sales member.
  • Express concerns calmly and specifically.
  • Offer details and conclude with a completion to the promise to the business.
  • If the call does not amount to any change request someone with greater power in the company.
  • Progress up the power ladder, state concerns that are in your requirements and don't hang up until you are happy.
• Step 2: The Letter
  • State the problem you are having with the company's letter
  • Clarify things that you are unhappy with, for example make, model, price warranty, date of problem warranty etc.
  • State any harm caused.
  • Append photocopies with complaints attached
  • Describe the type of required solution
  • Specify a required date to perform by that is rational
  • Explain any actions taken if satisfaction is not fulfilled.
  • Attach agencies to be contacted.
  • Government agency (Consumers' Bureau, Industry Canada)
  • Non Government agency (Better Business Bureau)
• Step 3: Other Alternatives
  • If an optimal solution isn't produced with the letter perform other means towards independent agencies, along with other Consumers.

LO1:Consumer Credit Advantages and Disadvantages

• Consumer credit: Borrowing money for personal needs.
  • Advantages: Purchase flexibility, financial emergencies, convenience, establishing credit.
• Disadvantages: High cost, overspending, limits future income.

LO2: Types of Credit

-Closed end (installment) credit is repaying a one-time loan over a fixed period with scheduled installments.
 - Open end (revolving) credit is continuous borrowing with regular billings for partial payments.

LO3: Credit Capacity and Rating

 - Assessed through debt payment to income and debt to equity ratios. Creditors obtain credit information from credit bureaus.

LO4: Information Creditors Seek

• Information on character, capacity, capital, collateral, and conditions are all important for credibility

LO5: Correcting Credit Mistakes

• Notify creditor in writing within 60 days of a billing error.
• Add your version to your credit file if the dispute isn’t settled.
• Withhold payment for defective goods if you’re trying to resolve it with the merchant.