MODULE 4 CREDIT TRANSACTIONS obtain from the source.

OUTLINE(NATURE OF CREDIT, BASES AND SOURCES OF CREDIT, HOW TO ESTABLISH CREDIT

CLASSIFICATION OF CREDIT(INSTRUMENTS) ) -Bank accounts
CREDIT -A legal agreement to receive cash, goods, or services now -Employment history
and pay for them in the future. -Residence history
WHY USE CREDIT? -Utilities in borrower’s name
-Avoid paying cash for large outlays -Department store or gas credit card
-Meet financial emergency HOW TO MAINTAIN GOOD CREDIT RANKING
-Convenience -Establish a good credit history.
-Investment Purposes -Pay monthly balance on time.
SOURCES OF CREDIT -Use credit cards sparingly and stay within the limit.
INDIVIDUAL MONEY LENDERS -Do not move balance to other cards.
-Lend his surplus to those in need so that it will bring income to him TYPES OF CREDIT
RETAIL STORES Credit Cards
PAWNSHOPS Installment Loans- A loan in which the amount of payment and the
COMMERCIAL BANKS number of payments are predetermined, such as an automobile
-Engage in the grant of loans not only to businessmen, but also to loan.
individuals for personal purposes Fixed payment
SAVINGS BANK Set period of time
-Financial institution whose primary purpose is accepting savings Set or varying interest rates
deposits and paying interest on those deposits Examples: Car loans and mortgages
RURAL BANK Service Credit- A member's earned service, prior service, and
-Financial institutions that help rationalize the developing regions or purchased service.
country to finance their needs specially the projects regarding Revolving Credit- A type of credit that does NOT have a fixed
agricultural progress number of payments, such as a credit card.
DEVELOPMENT BANKS -No stated payoff time
-Financial institutions dedicated to fund new and upcoming -Limit to credit
businesses and economic development projects by providing equity -Minimum monthly payments
capital or loan. -Finance charges
INVESTMENT BANK Example: credit card
-Financial institutions that provide large amounts of long-term fixed Student Loans- Loans offered to students to assist in payment of the
capital, primarily established firms. It generally takes an equity stake costs of professional education. These loans usually charger lower
in the borrower firm to exercise some influence on its direction and interest than other loans, and are also usually issued by the
operations government.
Savings and Loan Associations Allows a person to finance their education and defer payments until
-Associations that accept savings at interest and lend money to after graduation.
savers chiefly for home mortgage loans and may other related IOU
services. Single Payment Credit
FINANCE COMPANIES CREDIT CARDS
-Installment Sales Finance Companies -Plastic cards with electronic information that can be used by the
-Consumer Finance Companies holder to make purchases or obtain cash advances using a line of
-Commercial Finance Companies credit made available by the card-issuing financial institution.
CREDIT UNIONS DEBIT CARDS
-Corporate organizations which lend savings of members to some of -Debit cards are plastic cards with electronic information, that look
the members of the group very similar to credit cards, that you can use to take money out
Insurance Companies against your checking account.
-Issues insurance contracts with those who wish to provide for such -When you swipe your debit card remember that the money is taken
contingencies like death or fire. They receive premiums and pay out immediately from your checking account.
money on the occurrence of the particular contingencies RISK OF CREDIT
OTHER SOURCES Interest,Overspending,Debt,Identity Theft
-Social Security System RESPOSIBILITIES OF CREDIT
-Government Service Insurance System -Know the real cost of debt.
-PAG – IBIG -Don’t use credit to live beyond your means.
-Other Government Agencies -It is all about the details…read the fine print!
5C’S OF CREDIT -Pay as much as you can, as early as you can.
CREDIT POLICIES WARNING SIGNS OF CREDIT ABUSE
-May vary from one business to another -Delinquent Payments
Credit Terms -Default Notices
-Terms and conditions which credit is granted. -Repossession
Credit Periods -Collection Agencies
-Amount of time within which the customer is expected to remit -Judgment Lien
payment in part or in full -Garnishment
Credit Limit FINANCIAL CONSEQUENCES OF DEBT
-A limit with respect to the amount or value that a customer can -Overspending
-Paying high interest rates
-Lowers credit score as collateral for the loan and can be repossessed by the lender
-Difficulty getting a loan should the buyer fail to make payments.
CREDIT CARDS AND OTHER TYPES OF OPEN ACCOUNT CREDIT Collateral is an item of value used to secure the principal portion of a
OPEN ACCOUNT CREDIT loan.
- It is a form of credit extended to a consumer in advance of any LOANS FOR OTHER DURABLE GOODS
transactions. -Consumer loans to finance other kinds of costly durable goods, such
CREDIT LIMIT as furniture, home appliances, TVs, home computers, recreational
-A specified amount beyond which a customer may not borrow or vehicles, and even small airplanes and mobile homes.
purchase on credit. EDUCATION LOANS
2 BROADLY DEFINED SOURCES -Loans to finance college education, graduate studies, and special
-Financial Institutions government-subsidized loan programs.
-Retail stores or merchants PERSONAL LOANS
BANK CREDIT CARDS -These loans are typically used for nondurable expenditures, such an
CREDIT STATEMENT expensive European vacation or to cover temporary cash shortfalls.
-A monthly statement summarizing the transactions, interest CONSOLIDATION LOANS
charges, fees, and payments in a consumer credit account. -This type of loan is used to straighten out an unhealthy credit
BANK CREDIT CARD situation
-A credit card issued by a bank or other financial institution that SINGLE-PAYMENT LOAN
allows the holder to charge purchases at any establishment that -A loan made for a specified period, at the end of which payment is
accepts it. due in full.
LINE OF CREDIT INSTALLMENT LOAN
-The maximum amount of credit a customer is allowed to have -A loan that is repaid in a series of fixed, scheduled payments rather
outstanding at any point in time. than in one lump sum.
CASH ADVANCE FIXED-RATE LOAN
-A loan that can be obtained by a bank credit cardholder at any -The interest rate charged and the monthly payment remain the
participating bank or financial institution. same over the life of the obligation.
BASE RATE VARIABLE-RATE LOAN
- The rate of interest a bank uses a base for loans to individuals and -This is made with an increasing frequency, especially on longer-
small to midsize businesses. term installment loan.
GRACE PERIOD
-A short period of time usually 20 to 30 days, during which you can
pay your credit card bill in full and not incur any interest charges.
BALANCE TRANSFER
A program that enables cardholders to readily transfer credit -
balances from one card to another.
Advantages of balance transfer
-The convenience of being able to consolidate credit card payments
The potential savings in interest that accompanies the transfer, since
such deals usually come with very low rates (introductory).
CHOOSING A CREDIT CARD (FACTORS)
-Spending Habits
-Types of Interest Rate
-Credit Limit
-Fees and Penalties
-Balance Computation Method – Average Daily Balance
-Incentives
BEHAVIORAL BIASES AND CREDIT CARD USE
-Be wary of the minimum payment that appears on your monthly
credit card statement. There is evidence that people focus unduly or
anchor on the stated minimum payment and as result, pay a lower
amount than they would otherwise. And the effect is obvious – they
end up paying more interest.
-Another tendency is to fall victim or “mental accounting,” which
refers to inappropriately viewing interdependent decisions as
independent.
CONSUMER LOANS
-Formal, negotiated contracts that specify both the terms for
borrowing and the repayment schedule.
-One-shot transactions made for specific purposes
-Used mainly to borrow money to pay for big-ticket items.
-Loans made for specific purposes using formally negotiated
contracts that specify the borrowing terms and repayment.
DIFFERENT TYPES OF LOANS
AUTO LOANS
-This loan is secured with the auto, meaning that the vehicle serves