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Consumer Credit CHAPTER 18 Consumer Credit 18-1 Credit Fundamentals 18-2 Cost of Credit 18-3 Credit Application and Documents 18-4 Protection of Credit Rights © Getty Images/PhotoDisc 448 445610_18_Ch18_p448-477.indd5610_18_Ch18_p448-477.indd 444848 112/21/072/21/07 22:18:37:18:37 PPMM Planning a Career in… CONSUMER CREDIT Credit is important in most economies. Many indi- Needed Skills viduals and businesses use credit for various pur- • Four-year college degree with an emphasis in chases. Consumer credit involves loans for housing, finance and economics motor vehicles, and college expenses. Business loans • On-the-job training and industry courses for loan are vital for companies to start operations, purchase officers and other credit workers inventory, and buy equipment. As a result, many workers employed by banks and credit card compa- • Computer skills, especially in spreadsheet and nies are involved in approving, processing, servicing, database application programs and collecting credit transactions. Workers in con- • Excellent communication skills for interaction sumer credit also find jobs in credit counseling, help- with customers ing people regain control of their finances and plan for their financial future. What’s it like to work in . Consumer Credit Employment Outlook “We’re not sure where our money • Most occupations in the credit industry will have goes each month. We just know average growth. we owe more than $8,000 in • Slower growth is expected for loan officers because credit card bills,” was the response technology is making loan processing simpler and of Joan and Hank Salvatore. faster. Joan and Hank have a • Demand for bill collectors and loan counselors is monthly income of $3,750, but expected to increase because people do not always their expenses are more than $4,400. That’s why they came to make wise credit and buying choices. © Getty Images/PhotoDisc the community credit counseling Related Job Titles service. Joan and Hank were assigned to Bev Gonzalez. Bev worked for a consumer loan company for more • Bill and Account Collector than 15 years. Today, instead of granting credit to peo- • Credit Authorizer ple, she helps them with credit problems. • Credit Clerk Bev recommends that the Salvatores set up a bud- • Loan Officer get to help them plan purchases and reduce spending. • Interviewer For example, Joan and Hank can eat at home more often and make occasional restaurant meals a treat. • Credit Analyst The extra money the Salvatores will have as a result of • Loan Counselor following a budget can be used to pay off their debt. • Information and Record Clerk In addition to offering a strategy for getting out of • Customer Service Representative debt, Bev will help Joan and Hank learn how to man- • Credit Counselor age their money in the future. No more arguing about money and no more calls about late bill payments. • Credit Administrator • Credit and Collections Manager What about you? What work activities in the con- sumer credit field appeal to you? What will you have • Commercial Credit Analyst to do to achieve success in this career field? 449 445610_18_Ch18_p448-477.indd5610_18_Ch18_p448-477.indd 444949 112/21/072/21/07 22:19:30:19:30 PPMM 18-1 Credit Fundamentals Goals Key Terms Focus on Real Life Identify the types of credit In most economies, consumers, businesses, and consumer credit. governments use credit. For example, a person buys finance charge gas with an oil company credit card. A student applies for and Describe the down payment receives a government loan to help with college expenses. A benefits of using business receives a $2 million loan to build a new store. Another installment loan credit. company borrows $150,000 to finance the purchase of additional promissory note inventory. The state of Louisiana may borrow $35 million through Explain some disad- a bond issue to build new college buildings. A county board might vantages of using collateral borrow $250,000 to make emergency road repairs. credit. cosigner What do these people, businesses, and governmental institu- tions have in common? They all have wants, but lack the money credit rating to satisfy those wants. If they borrow money to satisfy their wants, they will be using credit. main idea USING CREDIT periods, usually for 30 to 90 days, to meet Identify the types of Credit is the privilege of using someone short-term needs for cash. consumer credit. else’s money for a period of time. That Local, state, and federal govern- privilege is based on the belief that the ments often use credit to provide goods person receiving credit will honor a prom- and services that benefit the public. ise to repay the amount owed at a future Governments may use credit to buy items date. Two parties are involved in a credit such as cars, aircraft, and police uniforms. transaction. Anyone who buys on credit or They may also borrow funds to build receives a loan is a debtor. The one who sells highways, parks, and airports. on credit or makes a loan is the creditor. Most consumers use credit. You may Although the credit system uses forms use credit to buy expensive products that and legal documents, it also depends on will last a long time. You may also use trust between the debtor and creditor. credit for convenience in making smaller This trust means that the creditor believes purchases. that the debtor will honor the promise to If you borrow money to use for some pay. Without that trust, the credit system special purpose, you are using loan credit. could not operate. Loans are available from several kinds of financial institutions. Loan credit usually Types of Credit involves a written contract. The bor- Businesses use trade credit. Trade credit rower agrees to repay the loan in specified occurs when a company receives goods amounts, called installments, over a period from a supplier and pays for them later. of time. Businesses may secure long-term If you charge a purchase at the time loans for land, equipment, and buildings. you buy the good or service, you are They may also borrow money for shorter using sales credit. Most businesses offer 450 CHAPTER 18 CONSUMER CREDIT 445610_18_Ch18_p448-477.indd5610_18_Ch18_p448-477.indd 445050 112/21/072/21/07 22:20:13:20:13 PPMM sales credit. Sales credit involves the use of charge accounts and credit cards by consumers. FFYIYI Charge Accounts Trade credit terms are often stated “2/10, n/30.” This means that the business can take a 2 percent discount if the bill is paid within A charge account represents a contract 10 days from the billing date. The full or net amount must be paid between the firm offering the account within 30 days. and the customer. Three types of charge accounts are generally available: regular, budget, and revolving. • A payment is required once a month, Regular Accounts A regular charge but the total amount owed need not be account requires the buyer to make full paid at one time. payment within a stated period—usu- • A finance charge is added if the ally 25 to 30 days. The seller may set a total amount owed is not paid. limit on the total amount that may be A finance charge is the total dollar charged during that time. People use cost of credit, including interest and regular accounts for everyday needs all other charges. You must pay this and small purchases. Service providers, additional amount for the convenience such as doctors, dentists, lawyers, and of using credit. plumbers, commonly offer this type of credit. Budget Accounts Some stores and utility companies offer budget charge accounts. This credit agreement requires that a customer make payments of a fixed amount over several months. One budget plan that businesses offer is the 90-day, three-payment plan. Under this plan, you pay for your purchase over a 90-day period, usually in three equal monthly payments. With a utility company budget plan, the company makes an estimate for gas or electricity charges during a certain period, such as a year. You then agree to pay a certain amount each month to cover those charges. This plan avoids large payments during some times of the year. You pay the same amount each month. Revolving Accounts The most popu- lar form of sales credit is the revolving account. You may charge purchases at any time, but only part of the debt must be paid each month. Features of revolving credit include the following. • A maximum amount may be owed at © Getty Images/PhotoDisc What are some reasons that a business would borrow funds? one time, called a credit limit. 18-1 CREDIT FUNDAMENTALS 451 445610_18_Ch18_p448-477.indd5610_18_Ch18_p448-477.indd 445151 112/21/072/21/07 22:20:25:20:25 PPMM Revolving charge accounts are conve- best known. Sometimes an annual fee nient, but they can make overspending must be paid for the privilege of using easy. The finance charges on unpaid these cards. balances can be quite high, sometimes While banks and various merchants 1½ percent per month (18 percent per may issue credit cards, most credit card year) or higher. There is rarely a finance processing is done through Independent charge if balances are paid in full within a Sales Organizations (ISOs). When you use specified period, such as within 25 days. your bank credit card, electronic terminals typically send the transaction data to an Credit Cards ISO which then authorizes payment. At Charging purchases with credit cards is the end of the day, credit sales informa- common. Most credit cards issued today tion is submitted electronically and the are multipurpose cards. Consumers can banks then pay the business for the sales use them at thousands of stores, restau- amount minus a service fee.
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