L5 Personal Credit PDF

Lesson 5 PERSONAL/CONSUMER CREDIT INTRODUCTION The discussion will focus on the characteristics and different types of personal/consumer credit. It will also cover credit card dos and don’ts and the common credit card problems and possible solutions LEARNING OBJECTIVES...

Lesson 5 PERSONAL/CONSUMER CREDIT INTRODUCTION The discussion will focus on the characteristics and different types of personal/consumer credit. It will also cover credit card dos and don’ts and the common credit card problems and possible solutions LEARNING OBJECTIVES 1. Compare various types of personal credit, understand costs and how to utilize them to the best advantage 2. Develop strategies to avoid being burdened with debt 3. Calculate finance charges 4. Describe the features in a credit card statement LECTURE DISCUSSION PERSONAL CREDIT The realm of personal credit encompasses any and all forms of credit, which tend to enhance the living standards of individuals and families through the acquisition of consumption goods as well as added convenience for comfortable living. CHARACTERISTICS OF PERSONAL CREDIT  It is based largely on the character of the individual and also his capacity to pay.  Since repayment is from personal income, it is non-self-liquidating and constitutes a direct cut from the individual’s earnings.  The employment of the goods, services or funds borrowed is non-productive.  It is usually unsecured and may either be evidenced or not evidenced. SECURED VS. UNSECURED LOAN Pros and Cons of Secured Loans Pros  Higher loan amounts – Since secured loans require to pledge collateral, lenders are more confident that they can pay them back, giving them access to higher loan amounts.  Lower interest rates – For the same reason as the higher loan amounts, one can get access to lower interest rates because of collateral.  Longer installment terms – Secured loans allow one to pay back over longer periods of time. This means one can spread the loan amount across several months or even years, making it feel less of a burden paying for it monthly.  No need for an excellent credit score – Lenders will still check the credit score, but it’s not the end-all-be-all Cons  More interest with long-term payments – Extending repayment for months or years may seem like the easy thing to do, but the interest piles up every month.   Could affect credit score – The high loan amounts and long installment terms mean that this can be a serious commitment to make. Apply for secured loans only if one can handle the repayment  Lenders could seize collateral – Not only could the credit score dip due to failure to repay the loan, but the lender could also seize collateral to pay for the loan. Pros and Cons of Unsecured Loans Pros  Fast and simple application process – The entire application process including disbursement is generally faster and more straight-forward compared to secured loans.  Can be used for multiple purposes – While some secured loans offer flexibility, most can only be used for specific purposes such as purchasing a house or vehicle. Most unsecured loans, though, can be used for a wide variety of reasons such as investing in a business or paying for emergencies.  No need to worry about collateral – Since collateral is not pledged in order to get an unsecured loan, one won’t have to worry about anything getting seized by the lender Cons  Strict eligibility criteria – One can apply for unsecured loans with less hassle than a secured loan, but that doesn’t mean lenders would approve anyone who applies. They set eligibility requirements for age, employment status, and citizenship just to name a few.  Higher interest rates and lower loan amounts – Since collateral is not pledged to borrow funds, there’s higher risk for lenders – thus, higher interest rates and lower loan amounts! TYPES OF PERSONAL CREDIT Revolving Credit With revolving credit, a maximum borrowing limit is given and can make charges up to that limit. A minimum payment can be made each month, but otherwise the amount paid can be any portion of the outstanding charges, up to the full amount. If a partial payment is made, the remainder of your balance will be carried forward or revolve the debt. Most credit cards count as revolving credit. Charge Cards Once commonly issued by retailers for use exclusively in their establishment, charge cards are relatively rare these days. Charge cards are used in much the same way as credit cards, but they don't permit to carry a balance, all charges must be paid in full every month. Service Credit Contracts with service providers such as water and electric utilities, cable and internet providers; cellular phone companies; and gyms are all credit agreements: These companies provide their services with the understanding that they will be paid after the fact. Installment Credit Installment credit is a loan for a specific sum of money to be repaid, plus interest and fees, in a series of equal monthly payments (installments) over a set period of time. Car loans and mortgages are all examples of installment credit.  Payments are made in staggered amounts as specified periods  There is usually a small down payment and the subsequent payments are scheduled at evenly-spaced intervals  May be applicable to goods and series and also to money loans  The goods purchased are usually in substantial amounts   All installments are subject to the payment of interest. The interest is added to the installment price offered.  Usually covered by installment contracts, which often come in the form of collateral promissory notes in view of the fact that most installment buying (or selling) transactions are secured. The security or collateral is usually the object.  In the case of money loans, collateral may be required of the borrower to guarantee repayment of the loan. Some of the clauses contained in an installment contract are the following: Conditional sales agreement This is a contract entered into between the buyer and the seller whereby it is agreed that the buyer may take possession and use the same. However, title to the property remains with the seller. Such title will only be transferred to the buyer upon full settlement of his account. The property purchased is the object of the agreement. Default on the part of the buyer will lead to repossession of the property. Chattel mortgage It is usually executed when getting loans in money. It is executed conveying to the creditor the title to the property. Should the debtor default in payment, the mortgage is foreclosed and disposed of according to legal procedures. The amount realized from the sale will be used to satisfy the debt. Acceleration clause It results in acceleration or hastening of the term of payment. The clause may read as follows” “The monthly installments shall be paid every month. However, failure to pay for two consecutive months shall make the balance outstanding, due and demandable. Add-on or Open-end contract This contract leaves open the borrower to purchase a number of articles. However, he only has title to all his purchases upon full settlement of the last item purchased. Failure to pay on any one item will lead to the repossession of all the merchandise bought on credit. Balloon Contract The buyer may be scheduled to pay equal installments for a certain period. Then at the end of such period, a big amount will be paid. Wage assignment The contract may also be accompanied by a proviso that the paymaster of the firm where the buyer is working is authorized to collect from the buyer’s wages or salary payment for the scheduled installment. On the theory that one’s salary and wages cannot be appropriated unless given proper authority by the earner, this is included to avoid inconvenience of collection and also to assure collection. Hidden clause The effect of this clause will mean that the buyer is getting himself something, which he does not actually need. But in order to get the item he wishes to purchase, he involuntarily has to submit to the provisions contained therein. Ex. Even if he does not want to insure his car, he will be forced to do so if the purchase contract requires such insurance. As a matter of precaution, a buyer on an installment basis should read the contract carefully, especially the small prints. The seller on the other hand, should acquaint the buyer wit company policies clearly so that there will be no misunderstanding. ON-LINE CASH LOANS Online cash loan is a loan that can be applied online directly without visiting the lender's office physically. It can be considered as short-term loan as the loan tenure is usually up to 12 months Lending companies that legally operate online and cater to Filipinos are required to be registered under DTI. They usually have a physical office set up within the Philippines and can be easily tracked if untoward circumstances arise. To apply for online cash loans from a legitimate lender, borrowers will only need to provide supporting documents such as proof of identification, address, and income.  Communication and exchange of information between the borrower and lender will be done online throughout the loan application process.  The application is quick and hassle-free. Most personal loans online offer quick approval, some offer same-day approval while most is 24 business hours approval. The most common factor that causes a delay in loan approval is incomplete documents.  Most online loans are unsecured and will only require minimal documentary requirements.  The release of funds is also very convenient as it's directly transferred to bank account or debit card.  However, compared to the conventional personal loans offered by banks or private lenders, the loan amount, especially for first-time borrowers may not be as big. CREDIT CARD DO’S AND DON’TS One must realize that a credit card is a double-edged sword. Use it right, and you’ll enjoy its convenience and be able to track your expenses. Abuse it, and you’ll experience an overwhelming amount of stress brought about by massive debts. The first step to building good credit card habits is knowing that having a card doesn’t mean instant free cash. The money spent using this card is just a loan that needs to be paid back eventually. While this is basic information, a lot of people seem not to acknowledge it. Do’s  Before using the new card for the first time, take time to read carefully the issuing bank’s Terms and Conditions that contain the rules of using the credit card. Make sure to understand them to avoid problems later on.  Pay close attention to these details in the credit card’s terms and conditions: - The credit card fees and interest charges - Length of grace period - How finance charges are computed - How to qualify for credit card promos and rewards - Rules on the rewards program (e.g., types of transactions that qualify for rewards, amounts of rewards earned on purchases, and the minimum amount that can be redeemed)  Think Twice Before Spending with the Card The act of swiping the card and signing the receipt can, for some people, feel more bearable than having to part with their hard-earned cash. Thus, people find it easier to spend more on their credit cards than they would with cash. - Give yourself 48 hours to decide. When you’re about to use a credit card to purchase something, wait 48 hours. This will let you deliberate on whether you actually need it. - “Budget” your credit card. Every time you pay with a credit card, ask yourself: “Can I pay for this in cash?” If the answer is no, don’t proceed with the purchase, though the rule might be bent for paying on layaway.  Spend Only What Can Be Paid Off Monthly Using credit cards properly takes a lot of discipline and the right mindset. Credit cards are not unlimited sources of funds. One is essentially borrowing money from the bank – an amount not earned yet each time the card is used. One can be in trouble if he spends with the card more than he can afford to pay each month. Here are the practical ways to avoid credit card overspending: - Make a list of all expenses for each month.  - Set a strict budget based on the list of expenses and the maximum amount to be spent using the card. - Use the card for purchases and payments regularly made such as groceries, utility bills, and gas. One may earn rebates or rewards for such transactions, depending on the credit card type.  Check Card and Sales Slip After Every Purchase - Keep a careful watch over the credit card to avoid any error in the transaction. - If the cashier will swipe the card twice, ask for proof that the transaction (the first swipe) is canceled. Always check all the details on the sales slip before signing it. Make sure that the amount indicated on the slip matches the actual amount of purchases. Never sign a blank slip. - As soon as the cashier returns the card, check it to make sure it's yours and not tampered with.  Pay Credit Card Bills on Time - Missing or delaying payments is another no-no when it comes to using credit cards. On top of the finance charge, one can also be slapped with a late payment fee each time the balance is paid after the due date. - Aside from avoiding late fees, paying the monthly balances on or before the due date helps to improve the credit history and keep the monthly credit card payments low. - To avoid missing payments, set up credit card’s auto-payment feature. But if you want to pay manually every month, just set up a bill payment reminder. - In case of using multiple credit cards, consider consolidating the debts via a balance transfer. This works by transferring all other credit cards’ balances to one credit card. That way, only one due date needs to be remembered. However, make sure that the credit card receiving all the balances has a lower interest rate and processing fees, to save money.  Pay Monthly Bills in Full - Many Filipino credit card users fall into the debt trap because of one costly mistake: making only the minimum payment. If one does that, he will end up shelling out more money to pay the interest. - Credit cards are among the most expensive forms of debt, with monthly interest rates of up to 2%. Banks also charge at a compounding interest rate. This means that often carrying over balances, will lead to charged interest not just on the amount owed but also on the interest. - The only way to enjoy credit card rewards and avoid finance charges is to always pay the total amount due in full by the due date. Ignore the minimum amount due and pretend as if it does not exist.  Monitor Credit Card Transactions Responsible credit card users check the card activity at least once a week. It takes only a couple of minutes to monitor the transactions made using credit card. That way, it is ensured that spending is within the budget, does not exceed credit limit, avoid penalty fees, and have no unauthorized transactions charged to the card. - Set up an online banking account. This allows review of expenses using the bank’s website or mobile app. - Subscribe to email or mobile alerts that prompts each time the card is used. - Keep all the credit card receipts and a running total of expenses. By doing so, any sign of fraud may be spotted. Checking credit card balance will also inform about the changes in interest rate and other fees.  Read Credit Card Statements Thoroughly Each time the billing statement arrives, do not just look at the minimum amount due, outstanding balance, and the due date. The statement contains other details that one must keep an eye out for, such as each transaction detail. Review all credit card transactions listed on the billing statement and ensure the following: - The amounts for all purchases are correct. - The last payment, rebates, and other credits were applied properly. - There are no errors and unauthorized charges on the card.  If any unauthorized transaction on the credit card statement is spotted, report it immediately to the credit card provider.  Get Another Credit Card Only When Financially Healthy If used correctly, a credit card is the door to a life of efficient financial management. With that, one should apply for a credit card only when he’s financially healthy and ready. If he knows that he’s an impulsive buyer or a shopaholic, he must deal with those issues first before he gets a second card. Stick to the existing card and manage outstanding debts, if any. Otherwise, he’ll end up in financial ruins.  Make Sure That the Account is in Good Standing One good way of making sure that the account is in good standing is by paying the credit card bill diligently. This means that the due date should never be missed. When the account is in good standing, it will be reflected in the credit score.  Take Advantage of Rewards, Promos, and Discounts Every year, credit card companies offer a multitude of rewards. These may come in the form of cashback, airline miles, free gas, points (which can be redeemed for freebies and other perks), and discounts on delivery services (e.g. GrabFood and Foodpanda). Use these credit card rewards to save money. For example, if you’re using a card to shop for groceries and pay utility bills, take advantage of rebates from a cashback credit card, which allows you to refund 0.2% to 6% of your monthly purchases. However, always check the conditions, such as minimum spending requirements.  Protect The Card Against Theft and Fraud Credit cards have security features such as the EMV chip, hologram, security code, and signature panel. But it does not mean that it is 100% safe from people who are out to use credit cards for unauthorized transactions. It is the cardholder’s responsibility to keep the card safe and secure. Aside from physical theft, scammers can steal r information in other ways: - Identity theft. Scammers hack into a merchant’s database or pose as a bank representative to get the data they need.  - Skimming. Fraudsters illegally copy someone’s information from a credit card’s magnetic strip. They may use the stolen details for online transactions and produce fake credit cards. - Phishing. Fake emails or text messages from the bank asking the recipient for credit card details. Be careful when using credit card online. Before shopping online, check the URL address of the website. A secure site starts with “https” (and not “http”) and has the padlock icon. Avoid saving the credit card information on the website by unchecking the box that asks to save your details. Don’ts  Don’t Max Out the Credit Card Maxing out the credit card means that massive debt will be incurred. Always remember that the way of using the credit card will affect the credit score. A huge debt may impair other aspects of finances. As a rule, stay within 30% of the credit limit not just for maintaining the credit score but also for making sure that the debts are under control.  Don’t Use Credit Card as a Substitute for Cash Keep in mind that credit card is not a cash card. Don’t use it to buy daily necessities and cover home expenses. The debt incurred this month will take the payment from the next month’s income. This will put lead to a vicious cycle, and getting out of it often proves to be challenging.  Don't Use Card When Cannot Pay in Full Sometimes, certain emergencies and unexpected expenses keep one from paying the balance in full. During those times, the most logical thing to do is to pay at least the minimum amount due on time and avoid adding up to the balances. Until the credit card balance cannot be paid in full, put the card away and don’t use it. This way racking up credit card debt can be avoided  Don’t Use Too Many Credit Cards All At Once  Having too many credit cards means multiple credit limits at disposal. But this is a huge responsibility especially if all the credit cards are active at one single time. Multiple active accounts will only tempt to spend beyond means.  Don’t Take a Cash Advance When It’s Not Necessary Through a cash advance, money from the ATM using your credit card can be withdrawn. But one must remind himself that the withdrawn money is not his It’s actually part of the credit line, which means the bank is lending that amount A cash advance is supposed to be used for emergency purposes, so as much as possible, it must never be uses for other expenditures. Banks and credit card companies often remind credit card users that cash advances incur high-interest charges and upfront fees.  Don’t Be Attracted to High Credit Limit Offers Credit card companies won’t stop promoting attractive offers, such as high credit limits and exclusive perks. If a seemingly exclusive offer in the mail is received, ask yourself this: “Do I really need this right now?”  Don’t Use the Credit Card When Emotional Retail therapy is one way of making oneself feel better. And it’s become much easier with the help of credit cards. One must be reminded that shopping or spending is just a short-term cure for your emotional woes. On the other hand, don’t use the credit card when too happy or excited about a prospective big-ticket purchase. Give some time before spending; waiting things out within a day or so will help in determining if there is really a need to purchase  Don’t Spend Just for Rewards Rewards just look attractive on paper. The truth is, they’re never free! One has to spend money before he gets them. So, if the only motivation for using credit card is to get rewards, then you’re using it wrong. In the end, the amount of your debt will outweigh the value of your rewards.  Don’t Use the Credit Card If the POS Looks Suspicious Fraudsters and thieves can steal credit card data through skimming. If an ATM or a credit card POS looks suspicious, then don’t use the card with it.  In case a fraudulent transaction happens using your credit card, know that it is never your fault. However, the investigation process that comes after it may take a lot of your time. It may even stress you out.  Don’t Share Credit Card Information Keep the credit card details private even to close family and friends, especially the account number, card expiration date, and security code. Never share them with anyone asking for data online or over the phone. Also, don't reply to or click on a link in a suspicious email.  Don’t Forget to Settle Credit Card Debt Before Applying for Any Loan Unsettled credit card balances may affect the approval and interest rates of certain loans, as they have an impact on credit score. Loan companies need to make sure that the borrower can pay back, which is determined by the credit score. If applying for a home loan or car loan, deal with the credit card debts first for a chance to get a low-interest offer.  Don’t Accept a Credit Line That Will be Difficult to Manage In other words, don’t bite off more than you can chew. If you’re struggling with the existing bills right now, likely, you can never afford a high credit line. If you insist on getting it despite your situation, you’re just putting yourself in financial quicksand. And even if you’re offered a high credit line due to your responsible payment, ask yourself twice if you need it. Assessing your repayment capacity and present needs carefully will help you arrive at a sensible decision. Final Thoughts Owning a credit card empowers you as a consumer. It makes both in-person and online transactions not only convenient but also rewarding. However, a credit card doesn’t make you rich or financially powerful. Keep in mind that each swipe is just a loan that you’re supposed to pay back. These credit card dos and don’ts are essentially anchored to these two tenets: first, live below your means and second, spend wisely. COMMON CREDIT CARD PROBLEMS & SOLUTIONS Can’t Afford Payments Don’t stop making payments; this is the worst thing to do in this situation. Get in contact with the credit card issuer as soon as having trouble paying starts. Ask them to lower monthly payment or reduce credit card interest fees. If they can’t or won’t do this, cut back on monthly expenses. Live within the budget to be able to catch up. Credit Card Declined Having the card declined can be humiliating and frustrating, but it happens. There could be a number of reasons for this, and the issuer should be contacted first. A customer service rep should be able to look and see if the account is suspended or flagged. If it’s declined for an exhausted credit line or late payments, the bank would know. If the card issuer thinks the charges are fraudulent, they’ll refuse the purchase. To avoid this, get in touch with the card issuer before making a large purchase and warn them. Also get in touch with them if there’s a plan to travel internationally. High Annual Fee There are a lot of great credit card options out there. However, many of they come with too high of an annual fee. This is one of the most common credit card problems a person can face. If this cost gets too much to handle, the first thing to do is contact the lender. Ask them if they’ll waive the annual fee. This can go one of two ways. They’ll either do it for you or send you to retentions. If you end up in retentions, they might try to get you to stay with bonus miles or rewards. The second option is to switch the balance to a card with no annual fee. They usually won’t have as great of a rewards system, but it’ll cost less per year. Credit Card Refuses to Swipe The strip on the card wears out with repeated use. Also, if it is left around a magnet for a period, it’ll become demagnetized. This can happen from the card being in contact with a magnetic clasp on the wallet as well. Purses can also have these magnetic closures, and this can wipe the card. This means the information was erased and is no longer usable. Some cashiers will enter the card number manually, and this will work for a while. Call the credit card company and request a new one eventually. There is no other fix for this issue. Pay Day and Credit Card Due Date Are at Odds The credit card due date and pay day can be at opposite ends of the month. This will lead to juggling other bills to have money for the credit card payment. Call the card issuer and ask if they can move the due date. Before doing this, look at upcoming paydays. Find a balance because the card will be due on the same day every month. Letting Someone Use the Card, and They’re Not Paying the Balance Your credit card is in your name, and you run a risk each time you let someone use it. You will be stuck with the balance, not your friend or family member. If they do it without your permission, it’s illegal, and you can take them to court over it. If you gave them permission, there’s not a lot you can do but pay the balance. You’ve just learned the hard way why co-signing can be a bad idea or let anyone else use your card. It’s your credit you’re risking, and this is never a good idea. Have Late or Missing Payments This will cause the credit score to fall, and it will only get worse the longer without paying. To avoid this, set up email and text alerts. These will give a good reminder when payments are due.