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Chapter 4: Consumer Credit - Coggle Diagram
Chapter 4: Consumer Credit
INTRODUCTION
Definition
The use of credit for personal needs, except a home mortgage by individuals and families
Ways to finance purchases
Draw on their savings
Use present earnings
Borrow against unexpected future income
Advantages of credit
Current use of goods and services
Permits purchase even when funds are low
A cushion for financial emergencies
Advance notice of sales
Easier to return merchandise
Convenient when shopping
One montly payments
Safer than cash
Needed for hotel, car reservations and shopping online
Can take advantage of float time / grace period
May get rebates, airline miles, or other bonuses
Indicates financial stability
Disadvantages of credit
Temptation to overspend
Failure to repay loan may lead to loss of income
It does not increase total purchasing power
Credit costs money
CREDIT
Travel and Entertainment Cards
not really credit card
monthly balance is due in full
Home Equity Loans
definition: borrowing money against the value of your house
let you borrow money using that owned portion as collateral
pay down payment and monthly installment
get lump sum of cash and repay fixed monthly payments (like mortgage or personal loan)
Credit Cards
Co-branding: linking credit card with a business offering rebates on products and services
smart cards have an imbedded computer cips
Debit cards: similar impact as writing a check
Protecting yourself against debit / credit card fraud
sign new cards when arrive
treat it like money, keep secure
shred anything with your account number
do not give your number over the phone
get card and receipt after every transaction
notify card issuer if you do not get billing statement, or if your card is lost or stolen
check credit report
Purchases Online
use secure browser
keep records of online transactions
review monthly statements
read policies of the website (concerns refund, site security and privacy)
keep personal information private
shop at trusted business
never share your password
do not download anonymous files
some use for cash advances (expensive)
Types of Credit
Closed-End Credit
One time loans for specific purpose, in specific time and equal amounts
example: mortgage, automobile, and installment loans for furniture
Open-End Credit
Use as needed until reaching line of credit max (pay interrest if late payments)
credit cards, departments store cards, bank credit cards, incidential credit
3, MEASURING CREDIT CAPACITY
General Rules of
Credit Capacity
Debt payment-to-income ratio
= monthly payments / net monthly income
(not more than 20% of net income)
Debt to equity ratio
= total liabilities / net worth
(exclude home value and should be <1)
Co-signing a loan
Creditor
asked to guarantee the debt
(consider you can afford)
if borrow does not pay, you need
to pay full amount and also all fees
if payment id missed, creditor
can collect debt from you
Do co-sign
If cannot affort to pay, your credit
rating could be damanged
Liability from the debt can prevent
to get other credit that you want
Put collateral, can lose if
the loan go defaults
Check state's law to
know cosigner's rights
Request copy of
overdue payments
Build & Maintain
Credit Rating
limit borrowing
live up to the
terms of contracts
check to see
credit report
Credit Bureaus
Collect information from banks, finance companies, credit card companies, merchants, other creditors
Fair Credit Reporting Act
regulates the use of credit reports
credit card companies must correct inaccurate information
only authorized persons can have access to your report
adverse data can be reported for seven years, bankruptcy for ten years
Credit Reporting Agencies Act 2010 (CRAA 2010)
regulates the credit reporting industry on promoting fairness, accuracy and privacy to credit information
Denied
Ask lender why rejected
Check credit report (CTOS etc)
Dispute any errors
Improve credit by paying on time
Rights under CRAA 2010
to view your credit report
to correct wrong info
to be notified when you data is used
to data privacy with consent
APPLY FOR CREDIT
Creditors Look 5Cs
Character
(do you pay bills on time)
Capacity
(can you repay the loan)
Capital
(what are your
assets net worth)
Collateral
(what property do you
have to pledge)
Conditions
(what economic conditions could
affect your ability to repay the loan)
AVOID AND CORRECT CREDIT MISTAKES
Correct Mistakes
get your credit report from CTOS, Experian, Credit Bureau Malaysia
check for errors
submit a dispute to the credit agency
wait for investigation
confirm correction
pay bills and loans on time
Avoid Mistakes
pay bills and loans on time
do not max out your credit cards
limit loan applications
review your credit card report regularly
keep old credit accounts active
Identity is Stolen
contact the fraud department of each three major credit bureaus
contact creditors to check for account tampered with or opened fraudently
file a police report and keep a copy
COMPLAINING ABOUT CONSUMER CREDIT
Law that Protect you in Consumer Credit Complaints (Malaysia)
Credit Reporting Agencies Act 2010 (CRAA 2010)
Consumer Protection Act 1999
Financial Services Act 2013 (FSA)
Islamic Financial Services Act 2013 (IFSA)
Central Credit Reference Information System (CCRIS)
[managed by Bank Negara Malaysia (BNM)]
Collects information from banks and financial institutions in Malaysia
Summarizes your credit history, including loans, credit cards and payments behavior
Shows
total loans and outstanding balances
monthly repayment records (up to 12 months)
any missed or late payments
legal actions related to unpaid debts
Functions
helps banks assess your creditworthiness
provides lenders a snapshot of your financial commitments
promotes responsible lending and helps prevent over-borrowing
enables you to check you own credit standing through platforms like eCCRIS
Contributes Data to CCRIS
Banks
Development financial institutions
Insurance companies
Credit leasing companies
Check CCRIS
eCCRIS online (eccris.bnm.gov.my
at BNM branches or kioks
Credit Tip-Off Service (CTOS)
Private credit reporting agency in Malaysia under CRAA 2010
It collects & complies credit information to help lenders assess your creditworthiness
CONSUMER CREDIT COUNSELING SERVICES
If you cannot pay your bills, postpone further credit purchases, talk with your creditors or seek help from a non-profit credit counseling services
In Malaysia we have
Agensi Kaunseling dan Pengurusan Kredit (AKPK)
MANAGING DEBTS
The Fair Debt Collection Practices Act
(regulates debt collection agencies)
within 5 days, debt collector must send written notice of amount owed, creditors name and your right to dispute
you can dispute the debt or pay it
within 30 days, request verification send but if not, insist communication the debt cease
if verification sent, may pay or give notice that you will not pay
Reason for Debt
emotional problems such as the need for instant gratification
the use of money to punish or get even
the expectation of instant couples who overuse the installment plan
keeping up with the Joneses
overindulgence of children
misunderstanding or lack of communication
amount of finance charges makes it difficult to pay
Warning Signs of Debt Problems
paying only the minimum balance each month
increases the total balance due each month
missing payments or pay late
intentionally using overdraft protection
using savings to pay routine bills
The Serious Consequences of Debt`
heavy drinking
neglect of children
marital difficulties
drug abuse
bankurpty
THE COST OF CREDIT
Finance charge
(the total amount you pay using credit card
Annual percentage rate (APR)
(the percentage cost of credit on a yearly basis, true rate of interest for credit)
Base Lending Rate (BLR)
(the cost to borrow money was determined by Overnight Policy Rate (OPR) set by central bank)
Base Rate (BR)
(determined by individual banks' benchmark and Statutory Reserve Requirement (SRR))
Standardized Base Rate (SBR)
(standardazation as the common reference rate for all banks and already linked solely to the OPR)
SBR effects
easier to understand that repayment installments only charge when there is a change in the OPR, unless there is an increase in consumer credit risk
no longer a need to compare differences in computation of BRs across banks
SBR affect loan interest rate
Existing borrowers: not affect lending rate
New borrowers: lending rate for retail borrowers are unaffected
Borrowers' lending rate & loan repayments affected by other factors (borrowers' credit risk profile)
Effective Lending Rate (ELR)
the all-in rate that affects repayment amount
(adding reference rate like SBR and spread that the bank uses)
Comparison before applying loans
compare the effective lending rates (ELR)
bank usually have produk disclosure sheet (PDS) can be found online
understand that their monthly repayment amount will increase or decrease when there is a change in the OPR
Tackling the Trade-Offs
Term versus interest costs
(longer loans-lower payments, but more total interest)
Lender risk versus interest rate
(ways to reduce: accept a variable interest rate, provide collaretal, make large downpayment, have shorter loan term)
Calculate the Cost of Credit
Interest = Principal x Rate of Interest x Time
I = (P x r x T)
Add-On Interet
calculated on the full amount of the original principal
(total interest plus principal is divided by the number of payments to be made arrive the payment amount)
Cost of Open-End Credit
Adjusted Balance Method
(payments substract before calculate finance charges)
Previous Balance Method
(payments not substract when calculate finance charges)
Average Daily Balance Method
(creditors add balances for each day and divide this total by number of days in billing period then multiply average balance monthly interest rate)
Two-cycle Average Daily Balance Method
(uses the average daily balance for two consecutive billing cycles)
Cost of Credit and Expected Inflation
(Each percentage point increase, approximately 1% decrease in the quantity of goods and services with a dollar)
Avoid the Minimum Monthly Payment Trap
(minimum monthly - smallest amount you can pay and remain good standing)
The Rules of 78's
(favors lenders and also known the sum of digits)
SOURCES OF CONSUMER CREDIT
Type of Loan
Expensive loans
finance and check cashing companies, retailers, bank credit cards and cash advances
Medium-priced loans
commercial banks, savings and loan associations and credit unions
Inexpensive loans
parents or family members