LAW

CREDIT

Credit: buying goods or services or borrowing money in exchange for a promise to pay in the future

1. Creditors: people who lend money

2. Debtors: people who owe the money

3. Finance charge: money paid for using the credit

a. Interest rate: percentage charged per month for credit

i. Some states set limits on maximum interest rates

(not IL)

1. usury: charging above legal limit

2. most credit card companies are in states without usury laws because the laws of their home state apply to all consumers, regardless of where consumer lives

b. credit property insurance: insures bought item against theft

c. credit life/disability insurance: insures payment if purchaser dies

d. service charge: covers seller’s misc. costs

e. penalty charge: covers costs to seller in case of late payments

4. Two types of credit

a. Unsecured credit: credit based on promise to

repay with no other backup

i. ex: Credit Card

1. most credit cards have limits» your limit increases the

better your credit is

2. don’t have to pay off full amount each month, but they do have minimums you must pay – finance charge

a. different companies charge different interest rates

i. Annual percentage rate (APR): the percentage cost of credit on a yearly basis

ii. Some companies charge finance charge regardless of time of payment

iii. Others only charge on amount left over

iv. Some companies charge annual fee (yearly fee just to have it – member)

3. minimum is calculated one of three ways:

a. adjusted balance system (pro-consumer)

i. bank adds new charges to previous balance, subtracts payments, then multiplies the

sum by monthly interest charge.

Consider…

• Bob has a balance of $600,

–spends $400 on 16th day,

–pays $300 on 26th day;

–APR = %18; 1.5% monthly

Sooooooo…

• Adjusted balance:

$600 + $400 - $300 = $700

$700 x .015 = $10.50

b. previous balance system (pro-bank)

i. bank multiplies balance from the previous month and new charges by the monthly interest payment, ignoring payments.

Sooooooo…

• Previous balance:

$600 + $400= $1000

$1000 x .015 = $15.00

c. average daily balance method (balanced)

i. bank tracks balance day by day including purchases and payments as they occur. Then multiply average of the daily totals by monthly interest rate.

Soooooo…

• ADB:

([$600 x 15 days] + [$1000 x 10 days] + [$700 x 5 days]) = $22,000

$22,500/30 days = $750 (ADB)

$750 x .015 = $11.25

3. debit card: card that deducts money directly from bank account (more like a check)

4. ATM (EFT) card: card that allows holder to draw money directly from account

ii. Secured credit: credit based on promise and backup property

1. collateral: property of value put forward in exchange for credit

(ex: give ID to borrow a pencil)

5. default: not paying back loans

a. creditors have several options for collection payment

i. often hire outside collection agencies to get the money

ii. Practice: calls and letters

1. restriction: can’t be harassing

2. if harassing, contact consumer protection agency and demand all contacts stop

iii. Practice: repossession: taking back of collateral

1. only applies to secured credit

2. restriction: can not u se violence to repossess

iv. Practice: court action

1. usually last resort because it costs the creditor more

2. default judgment: a judgment in favor of creditor because

defendant didn’t show up (regardless who is right)

v. Practice: garnishment: court order forcing debtor’s employer to withhold part of debtor’s wages and pay it directly to creditor

1. only after a court action in favor of creditor

2. restriction: Wage Garnishment Act: act limiting garnished amount to 25% of pay after taxes

a. also federal employees, people on welfare or unemployment can not have wages garnished

b. also employers can not fire based on garnishment

vi. Practice: attachment: court order forcing a bank to pay creditor from debtor’s bank account

1. also allows court to seize debtor’s property and sell

it to pay off debt

b. Bankruptcy: procedure in which debtor places all assets under control of federal court

i. Two types

1. Chapter 13: debtor can pay off some or all of debt over

extended period of time under court supervision

2. Chapter 7: court seizes all assets and sells them to pay off debt

a. Usually assets do not cover all debt

ii. Record of bankruptcy stays on credit report for 10 years (everything else is 7)

1. credit report: report of a person’s entire credit history

a. used by companies to determine if future credit

will be given

iii. Debt from taxes, child support, & student loans can not be wiped out