Consumer Credit-Week One

Course Modules

Expectations

Evaluation Process
Test 1-30%
Test 2-35%
Test 3-35%
Institute of Canadian Bankers
This course is eligible for advance standing with
the ICB, in the Associate , Institute of Canadian
Bankers Program
If you choose to enroll in the program with the
ICB, you can submit your transcript for this
course, which will be eligible for advance
standing in their Consumer Credit course
http://Institute of Canadian Bankers
Go to AICB program,your route through the
program
 Book Order
Book order form
See ICB Book Order Form
The book should be ordered a soon as
possible as readings will be assigned in
week
 Consumer Credit
We will cover three main modules in this
course
1. Consumer Lending
2. Mortgage Lending
3. Financial Statement Analysis for
Consumer Lending
 Consumer Lending

Credit creates an economic means of

completing transactions to maintain business
growth in the community
Provides funds to develop new enterprises and
increases the productivity of individuals and
industries
Creates opportunities for people to employ their
accumulated assets to develop other concepts
Essential part of business promotion.
 Consumer Lending
Credit classification
– Public Credit, Government
– Private Credit
– Consumer Credit
 Consumer Lending
Reasons Consumers Use Credit
– Convenience
– Payment deferral
– To bridge shortfalls in income
– Debt consolidation
 Consumer Lending
Convenience
– Advantages
Interest free if full balance paid monthly
Revolving accounts with flexible payments

– Disadvantages
Easy to allow further debt to accumulate
Interest rates can be high on unpaid balances
Encourages impulsive purchases
 Consumer Lending
Payment Deferral
–Advantages
Savings on sale price might justify interest costs
Use credit to save

– Disadvantages
Direct interest cost
Monthly payment impact on household cash flow
 Consumer Lending
To Bridge Shortfalls in Income
Advantages
– Finance inputs awaiting receipt of funds
– Finance overhead awaiting sales revenue
– Finance inventory awaiting sales

Disadvantages
Interest expense incurred though revenue delayed
 Consumer Lending
Debt Consolidation
– Advantage
Combined payments can lower interest costs and
monthly payment

Disadvantage
– Poor financial management skills could result in
rebuilding debt
 Test Your Credit Skills
Go to link and try pop quiz
Know Yourself
 Consumer Lending
Types of Consumer Credit
– Credit cards
– Charge cards
– Store cards
– Consumer loans
 Credit Cards-Benefits
Help establish credit history and credit
rating
More convenient than cash
Free use of funds ( if paid balance paid in
full by due date)
Potential reward incentives
Convenient, internet, telephone purchases
 Credit Cards- Risks
Build up too much debt
Damage credit rating if payments are late
Cost more than other forms of credit
Often complicated terms and conditions
Determining the Costs of Credit
The balance owed
Interest rates
Balance calculation method
Cash advance costs
The grace period
The annual fee
Additional or penalty fees
 Interest Charges
If full payment by due date, no interest
will be charges ( except for cash
advances)
If not fully paid by due date interest
charges varies with type of transaction
1. New purchase
2. Previous purchase
3. Cash advances
4. Balance transfers
 Method
Two methods are used in calculating
interest
1. Average daily balance method
2. Daily balance method

Both methods generally result in same

interest charges
 Average Daily
Add the balance at the end of each day
Divide by total number of days in billing
period
Multiply average daily balance by daily
interest rate
Multiply result by number of days in billing
period
 Daily Balance
Interest is calculated at the end of each
day
Total of daily interest equals interest
charge for the month
 Example
Balance Jan 1 – nil
Purchase Jan 5 - $3000
Billing date Jan 1 -31
Payment date Feb 19
APR 18.5%
No payment made for Jan
No purchases for Feb
Determine balance owing on Feb statement
 Example
Ave Daily Daily

Jan 1-Jan4 $0 for 4 days $0(0.05068)=0.

No transactions $0 * 4 days=0

Jan 5-Jan 31 $3000 for 27 days $3,000 * (0.05068%)= 1.52

$3,000 purchase $1.52 *27 days= $41.05

Ave. Daily Calculation ($0 * 4 days ) +( $3,000* 27days) Not applicable

31 days billing period
= Average daily balance $2,612.90

Total interest charges Ave.daily balance * Daily interest*

number of days in billing period
=$2,612.90 * 0.05068% * 31 days=
$41.05 $41.05
 Interest Free Period
Does not apply to balance transfers or
cash advances
The interest free period has two parts
1. The time between purchase and
statement date
2. The time between statement date and
payment date ( Grace Period)
 Interest Free Period

Statement period : May 1- May 31

Opening balance owing 0
Purchase May 5
Payment date due : June 19
Interest Free Period May 5-May31=26 days
Grace Period May 31-June 19=19 days
Total Interest Free period 45 days
 The Grace Period
The length of time to make a payment
before interest is charged against the
out standing balance on a credit charge
Normally 20 to 25 days, excluding cash
advances
Doesn’t apply if you carry a balance
Not all credit cards offer a grace period
 Buying Money: The Cash
Advance
An extremely expensive way to borrow
Interest begins immediately and may be at
a higher rate than for purchases
No interest free period in cash advances
Some cards require payment of the
purchase balance before payment of the
cash advance balance
 Cost of Credit Cards
Go to in class exercise in learning module
 The Annual Fee
A fixed amount charge imposed on a
credit charge
Range from $12 to $150
70% of the 25 biggest card issuers don’t
charge an annual fee.
Merchant’s discount fee--charged to
merchants, typically 1.5% to 5.0% of the
purchase amount
 Choosing the right card
Know your needs and wants
Monthly spending patterns
Ability to pay off balance
Benefit from reward programs
Annual fees
 Your Credit Philosophy
Credit user
– Low APR
Convenience user
– Low annual fee
– Long, interest-free grace period
– Free benefits
Convenience and credit user
– Balance interest rate and annual fee for the
lowest total cost
Choosing the right card-In class
group exercise
Go to CHOOSING A CREDIT CARD pdf
document
Go to various Canadian Bank sites
Choose cards that the group has attractive
special features
Group share with class features and
benefits of card
Also go Credit Card- Interactive Tool
 Homework
Order text book