- To enhance one's lifestyle
- To make purchases more convenient
- To take advantage of sales
- To buy large ticket items
(car or furniture)
- To establish a credit history
- Future earnings committed
- Finance charges may be added
to purchase cost
- Too easily used
- Misuse results in poor credit
- Credit cards may be stolen
Types of Credit
Credit transactions are of
four types. A credit card purchase is the most frequently used credit.
When Jason Samuels goes shopping and purchases a new suit, he may use
a credit card to pay for it. A credit card is an example of "unsecured,
open-end" type of credit. In this agreement, the borrower has a line
of credit available for a specific limit backed only by his or her creditworthiness.
A borrower must make at least a minimum payment each month based on the
outstanding balance. The wise consumer will pay the entire balance each
Another often used form of
credit is a mortgage loan. When Rich and Shelly decide to buy a house,
they go to a bank or finance company to take out a mortgage. Mortgage
loans are known as "secured, closed-end" credit. The loan is
based on collateral and a specific number of payments are scheduled for
a specified period of time. A car loan is also this type of credit.
A third form of credit would
enable Rich and Shelly to obtain a loan without collateral to make improvements
on their home. This "unsecured, closed-end" credit is available
when the creditor is willing to make the loan based on the borrower's
creditworthiness. It is often referred to as a "signature loan."
Payments are for a specific amount for a specified period of time.
Finally, if Rich and Shelly
decide to get a loan using their home as collateral, this is type of credit
is known as an "open-end equity" or "secured, open-end"
loan. These loans are made against a borrower's property and the amount
of the loan is based on the equity in the home.
Comparison of Credit
A wise consumer shops for the
best credit terms, as though it were any other product or service. The
charges for credit cards are based on an annual percentage rate, known
as the APR. However, there are different methods to compute finance charges
which will vary based on how the balance is calculated.
The three alternative ways
of figuring the balance are the average daily balance, the adjusted
balance method, and the previous balance method. In determining
the average daily balance, lenders apply the APR over the 30
day billing period. For an adjusted balance, the figure is arrived
at by subtracting payments made from the total owed. Finally, in the previous
balance method, you are charged interest on the amount owed at the
beginning of the billing period.
There are variations on these
methods. Some lenders provide a "free" or "grace"
period between the end of a billing and the date you must pay to avoid
a finance charge. Annual fees, late fees, and when you overextend your
credit limit--over-the-line fees are also common. In addition, some credit
cards have variable rate provisions determined by purchase charges or
cash advance charges.
Examine the range of credit
terms and select those that best fit your credit needs and payment habits.
Consumer Credit Legislation
Although most lenders use fair
credit practices, there are some lenders who may attempt to take advantage
of an unknowing consumer. State and federal laws and regulations protect
consumers from an unscrupulous lender. Present legislation regulates disclosure
of credit information, credit discrimination or denial, credit disputes,
errors in credit billing and protection against collector harassment.
This section describes laws
that regulate credit disclosure information, protection against discrimination,
and credit denial. The National Foundation for Consumer Credit brochure, Are you in a Credit Emergency?, has legal information on credit
disputes, errors in credit billing, and protection against collector harassment.
Truth in Lending Act
The Truth in Lending Act requires creditors to provide consumers with accurate and complete credit
costs and terms. All terms must be disclosed in a clear and conspicuous
manner and in a form available to the purchaser. The creditor must clearly
display the finance charge and the annual percentage rate.
The issuer of a credit card
or charge account must display the cost of credit, how and when the interest
will be charged to the account, any annual fee or service charge, statement
of the consumer's billing rights, and other terms and conditions of the
The creditor must send statements
on all credit accounts which have a debit or credit balance at the end
of the billing cycle. Included on this statement must be the previous
balance, debits and credits in that month, periodic rate and corresponding
APR finance charge imposed that month, new balance, and explanation of
how the new balance was determined.
For a loan with a fixed term,
information must be displayed and explained accurately about total cost
including the down payment, total dollar amount of payments, payment schedule,
and any required collateral in case of default, as well as other terms
and conditions of the loan.
Equal Credit Opportunity
The Equal Credit Opportunity
Act prohibits a creditor from discriminating against a consumer on
the basis of age, sex or marital status, and/or reliance on income from
a public assistance program.
In addition, a credit application
cannot request information pertaining to a consumer's sex, race, color,
religion, or national origin. It cannot inquire about birth control practices
or intention to have children. In the case of unsecured, individual credit,
the creditor may not inquire information about a spouse or former spouse.
If a creditor denies an individual
credit, the applicant must be notified within a 30-day time period. Included
in the denial shall be a statement of the reason for the denial of credit,
an explanation of the Equal Credit Opportunity Act, and the name and address
of the agency which enforces the Act.
Fair Credit Reporting
When a creditor denies a consumer
credit, the creditor must provide the reason for credit denial. If a credit
bureau is used, the applicant must also be given the name, address, and
telephone number of the bureau which provided the individual's credit
If the applicant was denied
credit because of derogatory information on the credit file, the applicant
may obtain a copy of his file from the credit reporting agency used by
the creditor. If the applicant contacts the bureau within 30 days, there
is no cost for this service.
Upon contacting the credit
bureau, the consumer has the right to know the nature and substance of
all information contained on his credit report (except medical information).
The consumer also has the right to be informed about the sources of information,
as well as the names of employers, creditors, and others who have recently
received a credit report.
The consumer may make a written
request for an investigation of any inaccurate information. If the credit
bureau learns that the information is inaccurate or cannot be verified
within the 30 day period, the information must be corrected or deleted.
However, if the information is verified at a later date, it can be included
again on the credit report. The consumer may also write an explanatory
statement of no more than 100 words to be included in all future reports.
If any deletion or notation
is made regarding the information, the consumer may request that the new
information be sent to any employer who has received a credit report during
the past two years and in addition, anyone else who has requested credit
information in the previous six months.
Credit bureaus must automatically
delete information which is more than seven years old, with the exception
that bankruptcy declarations are deleted only after ten years and a judgment,
which can be reported for ten years, can remain on the record until satisfied.
Any organization with a legitimate
business reason for needing the information can request a consumer's credit
history from the bureau to which it subscribes.
Glossary of Credit
Annual Percentage Rate
(APR) - rate of interest figured on a yearly basis and expressed
in terms of a percentage.
amount of loan remaining to be paid; sometimes known as the "outstanding
Charge Account - arrangement permitting the customer to buy goods and services now and
pay for them later.
Collateral - something of worth which serves as security for a loan.
Credit - based
on trust that goods and services received now will be paid for in the
Credit Card - plastic card issued by a creditor, representing a type of charge account
which allows individuals to obtain cash, goods or services, according
to and within the dollar limits of an established credit arrangement.
Credit Union - a cooperative association which extends savings opportunities and credit
to members only.
Creditworthiness - ability to obtain and repay debts.
failure to meet a payment or fulfill an obligation.
Disclosure Statement - statement giving all the terms and conditions of the credit transaction.
Equity - the
money value of a property or of an interest in the property in excess
of claims or liens against it.
Finance Charge - amount charged for the use of credit services.
amount paid for the use of credit over a period of time, expressed as
Line of Credit -
dollar amount a lender makes available to a borrower.
pledge of property that accompanies a loan of money that acts as security
for payment of the loan and its interest.
charging more on a line of credit than you have been allowed.
Principal - original sum borrowed.
Revolving Account - line of credit that may be used repeatedly to a specified limit.
something of value pledged to assure loan repayment and subject to seizure
Source: The information
in the document was from the National Foundation for Consumer Credits
Publication "User Credit."
* Courtesy of The National
Foundation for Consumer Credit