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Chapter 4 (Part 1): Consumer Credit - Coggle Diagram
Chapter 4 (Part 1): Consumer Credit
Differentiate Types of Credit
Closed-End Credit:
One-time loan for specific purpose
Fixed payments over specified period
E.g., Car loan, appliance loan, mortgage
Open-End Credit:
Revolving line of credit
E.g., Credit cards, store cards
Credit Cards:
Convenience Users
: Pay balance in full monthly
Borrowers
: Carry a balance, pay finance charges
-
Co-branding
: Cards linked to businesses for rebates
-
Smart Cards
: Embedded chip
Debit Cards
: Direct access to bank account (like a check)
Malaysia Context (2024/2025):
57% own at least one card
Household debt ~85% of GDP
High transaction volume per card (82.8)
Protection Against Fraud:
Sign cards, keep secure, shred documents
Review statements, report lost cards immediately
Online: Use secure browser, keep records, shop at trusted sites
Home Equity Loans (Malaysia Context):
Not widely offered as a separate product.
Alternative
: Mortgage Refinancing - Get a new, larger loan based on your home's equity (e.g., Maybank, CIMB).
1. Define Consumer Credit (Advantages/Disadvantages)
Definition
: An arrangement to receive cash, goods, or services now and pay for them later.
Consumer Credi
t: Credit for personal needs (excluding a home mortgage).
Ways to Finance Purchases
:
Draw on Savings
Use Present Earnings
Borrow against Future Income
Advantages:
Immediate use of goods/services
Cushion for emergencies
Convenience (online shopping, reservations)
Safer than cash
Grace period, rewards, rebates
Indicates financial stability
Disadvantages:
Temptation to overspend
Potential loss of income if not repaid
Does not increase total purchasing power
Credit costs money (interest, fees)
3. Assess Credit Capacity & Build Rating
Key Question
: Can I afford this loan? What will I give up to pay it?
Credit Capacity Rules
:
Debt Payments-to-Income Ratio
: Consumer credit payments ≤ 20% of net income.
Debt-to-Equity Ratio
: Total Liabilities / Net Worth (excluding home) < 1.
Co-Signing a Loan:
You guarantee the debt.
You may have to pay the full amount + fees if the borrower defaults.
Creditor can collect from you first.
Consider
: Can you afford it? It affects your credit rating and ability to get other loans.
Building/Maintaining Credit Rating:
Borrow only what you can repay.
Live up to contract terms.
Check your credit report regularly.
Credit Bureaus
: Agencies that collect credit information from banks, creditors, and merchants.
4. Information Creditors Look For (The 5 Cs)
Character
: Do you pay bills on time? (Credit History)
Capacity
: Can you repay the loan? (Income vs. Debts)
Capital
: What are your assets and net worth? (Financial Stability)
Collateral:
What asset can you pledge against the loan? (Security)
Conditions
: What economic conditions could affect repayment? (Interest rates, job market)
5. Avoid & Correct Credit Mistakes
To Avoid Mistakes:
Pay bills on time.
Don't max out credit cards.
Limit loan applications.
Review credit report regularly.
Keep old accounts active (if managed well).
To Correct Mistakes:
Get report from CTOS, Experian, or Credit Bureau Malaysia.
Check for errors (amounts, identity, outdated info).
Submit a dispute with documents.
Agency must respond within 21 days.
Confirm the correction is made.
Identity Theft:
Contact credit bureaus to place a fraud alert.
Contact creditors about fraudulent accounts.
File a police report.
7. Credit Systems in Malaysia (Key Terms)
CCRIS (Central Credit Reference Information System):
Managed by
Bank Negara Malaysia (BNM)
.
Shows: Loan amounts, repayment history (12 months), legal actions.
Function
: Helps banks assess creditworthiness.
Check via
: eCCRIS portal or BNM branches.
CTOS (Credit Tip-Off Service):
A private credit reporting agency (regulated by CRAA 2010).
Shows: Debts, late payments, legal cases, business info, credit score (300-850).
Used by: Banks, lenders, employers (with consent).
6. Laws Protecting Consumers (Malaysia)
Credit Reporting Agencies Act 2010 (CRAA 2010)
:
Regulates credit reporting.
Rights: Access report, correct data, data privacy, be notified.
Consumer Protection Act 1999:
Protects from unfair/misleading financial products.
Applies to loans, credit cards, hire-purchase.
Financial Services Act 2013 (FSA):
Regulates banks & financial institutions. Ensures fair treatment.
Islamic Financial Services Act 2013 (IFSA):
Regulates Islamic financial institutions.