FIN533 Chapter 4: Consumer Credit (Part 1)

Consumer Credit

• Consumer credit is the use of credit for personal needs, except a home mortgage, by individuals and families.
• Three ways consumers can finance purchases:
  • Draw on their savings
  • Use present earnings
  • Borrow against expected future income
• Trade-offs with each alternative:
  • Draw on savings: loses the interest that could be earned
  • Use present earnings: reduces current spending power
  • Borrow against expected future income: pays interest and may affect future spending power

Use and Misuses of Credit

• Questions to ask before using credit for a major purchase:
  • Do I have the cash for the down payment?
  • Do I want to use my savings for this purchase?
  • Does this purchase fit my budget?
  • Could I use the credit I'll need in some better way?
  • Can I postpone this purchase?

Central Credit Reference Information System (CCRIS)

• The CCRIS contains credit information on about 9 million borrowers in Malaysia.
• The database system automatically processes the credit data received from financial institutions and synthesizes the information into credit reports.

Credit Tip-Off Service (CTOS)

• CTOS stands for Credit Tip-Off Service, the company itself is categorized as a Credit Agency.
• CTOS is an electronic 'archive' of information collated from gazettes, newspapers, court notices, and searches at relevant statutory bodies.
• CTOS reports provide information on bankruptcy, summons of any individual in Malaysia.

Credit Cards

• One-third of households are convenience users, paying balances in full each month.
• Two-thirds are borrowers, carrying a balance over, paying finance charges.
• Some use cards for cash advances, which can be expensive.
• Co-branding: linking a credit card with a business offering rebates on products and services.
• Smart cards have an imbedded computer chip.
• Debit cards: similar impact as writing a check, electronically subtracts from your account the moment you make a purchase.

Stored-Value (or Gift) Cards

• Are prepaid cards.
• Resemble a debit card and use magnetic stripe technology to store and track funds.
• Used in lieu of paper gift certificates.
• Used for business purposes (payroll, travel expenses, government benefit payments).

Travel and Entertainment Cards

• These cards are not really credit cards.
• Monthly balance is due in full.
• Diners Club or Carte Blanche cards have an annual fee that allows you to replace lost passports, buy airline tickets, find doctors, and access airport lounges around the world.

Applying for Credit

• The 5 Cs of credit:
  • Character: Do you pay bills on time?
  • Capacity: Can you repay the loan?
  • Capital: What are your assets and net worth?
  • Collateral: What property do you have to pledge that the lender can repossess if you default on the loan?
  • Conditions: What economic conditions could affect your ability to repay the loan?

Avoiding and Correcting Credit Mistakes

• Fair Credit Billing Act:
  • Notify creditor of error in writing within 60 days.
  • Include your explanation of the error and your account number to the billing inquiries address.
  • They must respond within 30 days.
  • Credit card company has two billing periods but no longer than 90 days to correct your account or tell you why they think the bill is correct.
  • Your credit rating is not affected while item is in dispute.
• If your identity is stolen, you can:
  • Notify the creditor of the error in writing.
  • Place a fraud alert on your credit report.

Test your understanding of consumer credit, including its advantages and disadvantages, types of credit, credit capacity, credit rating, and laws that protect consumers. Learn how to avoid and correct credit mistakes and understand what creditors look for when applying for credit.