CH-6 Introduction to Consumer Credit – Personal Finance : Chapter Notes

6 INTRODUCTION TO CONSUMER CREDIT CHAPTER OVERVIEW This chapter defines consumer credit and analyzes its advantages and disadvantages. The importance of consumer credit in our economy is explained and uses and misuses of credit are discussed. Financial and personal opportunity costs of using credit are emphasized. Next, two types of consumer credit—closed- end credit and open-end credit—are differentiated. Then, general rules of measuring credit capacity such as debt payments-to-income ratio and debt-to-equity ratio are explained. This is followed by coverage of building and maintaining a credit rating. Next, the information that creditors look for in granting or refusing credit is identified, and the Equal Credit Opportunity Act is explained. Then, the steps in avoiding and correcting credit mistakes are outlined, and the provisions of the Fair Credit Billing Act are described. Finally, strategies for complaining about consumer credit are introduced and the major consumer credit laws are summarized. LEARNING OBJECTIVES CHAPTER SUMMARY After studying this chapter, students will be able to: My Life LO 6-1 Define consumer credit and analyze its advantages and disadvantages. Consumer credit is the use of credit by individuals and families for personal needs. Among the advantages of using credit are purchasing goods when they are needed and paying for them gradually, meeting financial emergencies, achieving convenience in shopping, and establishing a credit rating. But credit costs money, encourages overspending, and ties up future income. My Life LO 6-2 Differentiate among various kinds of credit. Closed-end and open-end credit are two types of consumer credit. With closed-end credit, the borrower pays back a onetime loan in a specified period of time and with a specified number of payments. With open-end credit, the borrower is permitted to take loans on a continuous basis and is billed for partial payments periodically. My Life LO 6-3 Assess your credit capacity and build your credit rating. Two general rules of thumb for measuring credit capacity are the debt payments-to-income ratio and the debt-to-equity ratio. In reviewing your credit-worthiness, a creditor seeks information from one of the three national credit bureaus or a regional credit bureau. My Life LO 6-4 Describe the information creditors look for when you apply for credit. Creditors determine credit-worthiness on the basis of the five C’s: character, capacity, capital, collateral, and conditions. 6-1 LEARNING OBJECTIVES CHAPTER SUMMARY My Life LO 6-5 Identify the steps you can take to avoid and correct credit mistakes. If a billing error occurs on your account, notify the creditor in writing within 60 days. If the dispute is not settled in your favor, you can place your version of it in your credit file. You may also withhold payment on any defective goods or services you have purchased with a credit card as long as you have attempted to resolve the problem with the merchant. My Life LO 6-6 Describe the laws that protect you if you complain about consumer credit. If you have a complaint about credit, first try to deal directly with the creditor. If that fails, you can turn to the appropriate consumer credit law. These laws include the Truth in Lending Act, the Consumer Leasing Act, the Equal Credit Opportunity Act, the Fair Credit Billing Act, and the Fair Credit Reporting Act. 6-2 INTRODUCTORY ACTIVITIES • Point out “What will this mean for me?” (p. 187). • Point out the learning objectives (p. 187) in an effort to highlight the key points in the chapter. • Ask students to comment on My Life: Cash, Credit or Debit, (p. 187). • Ask students if they have borrowed money to finance a purchase. What did they consider in making the decision to borrow money? • Point out financial and personal opportunity costs in using credit. • Ask students if they have credit and debit cards. How did they obtain their first credit card? • Ask students if anyone has asked a friend or relative to cosign a loan. • Ask students if they know what information creditors use in determining whether a loan will be approved. • Ask students what they might do if they purchase defective goods or services with a credit card. WHAT'S NEW TO THIS EDITION New Content: Changes in perception about credit. New content: Advantages of credit New content: Advantages of credit New content: Disadvantage of credit Updated Exhibit 6-2: Volume of Consumer Credit Updated Exhibit 6-3 Credit card holders and credit cards held Updated Did You Know feature Provides information why many people use credit to live beyond their means, and why past generations used it sparingly. Describes how most major cards provide benefits, such as, accidental death insurance, collision damage waiver, roadside services, gift cards, etc., at no extra cost. Includes information that some credit cards extend the manufacturer's warranty by up to one year when their credit card is used. Points out that if you choose to make a minimum payment, it may take decades to pay off the credit card balance and hefty interest. Shows that the volume of consumer credit has reached new highs in 2012. Provides updated statistics about credit card holders and credit cards held in 2012. Provides updated statistics about 191 million debit card holders and how they use their cards. 6-3 New coverage: Use of smart phones Revised content: What's "Phishing"? Updated Exhibit 6-4: Calculating debt- payments-to-income ratio New content: VantageScore 3.0 New Did You Know feature Updated Did You Know feature Updated Exhibit 6-12: Consumer credit laws New Dashboard feature Describes that some phones are now equipped to make purchases. Retailers such as Starbucks have apps that are scannable bar codes to quickly pay using a mobile phone. Includes expanded information on "phishing" in the Financial Planning for Life's Situations box. Gives updated information on how to calculate debt payments-to-income ratio with new figures. Provides information on new VantageScore 3.0. Introduced in 2013, it features a score range of 300-850 and does not count debt collection accounts that have been paid off. Informs how to obtain free credit report updates from Credit Sesame and free daily monitoring of Trans Union report from Credit Karma. Points out Consumer Sentinel Network identity theft complaints by victims' age in 2012. Provides updated information about federal government agencies that enforce consumer credit laws. Explains the importance of debt payments-to-income ratio in determining the credit worthiness. CHAPTER 6 OUTLINE I. What Is Consumer Credit? A. The Importance of Consumer Credit in Our Economy B. Uses and Misuses of Credit C. Advantages of Credit D. Disadvantages of Credit E. Summary: Advantages and Disadvantages of Credit 6-4 II. Types of Credit A. Closed-End Credit B. Open-End Credit 1. Credit Cards 2. Smart Cards 3. Debit Cards 4. Stored Value (or Gift) Cards 5 Travel and Entertainment (T & E) Cards 6. Smart Phones 7. Home-Equity Loans 8. Protecting Yourself Against Debit/Credit Card Fraud III. Measuring Your Credit Capacity A. Can You Afford a Loan? B. General Rules of Credit Capacity 1. Debt Payments-to-Income Ratio 2. Debt-to-Equity Ratio C. Cosigning a Loan 1. Cosigners Often Pay 2. If You Do Cosign D. Building and Maintaining Your Credit Rating E. Credit Bureaus F. Who Provides Data to Credit Bureaus? G. What’s In Your Credit Files? H. Fair Credit Reporting I. Who May Obtain a Credit Report? J. Time Limits on Adverse Data K. Incorrect Information in Your Credit File L. What Are the Legal Remedies? IV. Applying for Credit A. A Scenario from the Past B. What Creditors Look For: The Five Cs of Credit Management 1. FICO and Vantage score 2. Age 3. Public Assistance 4. Housing Loans C. What If Your Application Is Denied? V. Avoiding and Correcting Credit Mistakes A. In Case of a Billing Error B. Your Credit Rating During the Dispute 6-5 C. Defective Goods or Services D. Identity Crisis: What to Do if Your Identity is Stolen VI. Complaining About Consumer Credit A. Complaints About Banks B. Protection Under Consumer Credit Laws 1. Truth in Lending and Consumer Leasing Acts 2. Equal Credit Opportunity Act 3. Fair Credit Billing Act 4. Fair Credit Reporting Act 5. Consumer Credit Reporting Reform Act 6. Credit Card Accountability, Responsibility and Disclosure Act of 2009 C. Your Rights Under Consumer Credit Laws CHAPTER 6 LECTURE OUTLINE Instructional Suggestions • Credit is an arrangement to receive cash, goods, or services now and pay for them in the future. I. WHAT IS CONSUMER CREDIT (p. 188) • Consumer credit is the use of credit for personal needs of individuals and families. The Importance of Consumer Credit in Our Economy (p. 189) • All economists recognize consumer credit as a major force in the American economy. • The movement of the baby boom generation into the age group that tends to use credit most heavily has added to the growth of consumer credit. Uses and Misuses of Credit (p. 189) • There are many valid reasons for using credit:  a medical emergency  an immediate need for a car • Discussion Question: What types of activities and purchases would be restricted without consumer credit? • Use PPT slides 6-2 and 6-3. • Discussion Question: What are alternatives in financing current purchases? • Class Exercise: Ask students what would happen to our economy if every one had to pay cash for each major purchase. • Use PPT slide 6-5. • Assignment: Have students survey three or four individuals to determine their uses of credit. • Class Exercise: Ask students 6-6 CHAPTER 6 LECTURE OUTLINE Instructional Suggestions  buying now to protect against rising prices • Consider the trade-offs:  Do I have cash to make the purchase?  Do I want to use my savings for the purchase?  Does the purchase fit my budget?  Could I postpone my purchase?  What are the opportunity costs of postponing the purchase?  What are the dollar costs and the psychological costs of using credit? • Effective use of credit can help us satisfy our wants and needs. Misused, credit can result in default, bankruptcy, and loss of reputation. what were their financial and psychological costs of borrowing. Advantages of Credit (p. 190) • Buy and enjoy now and pay from future income • Purchase goods even when funds are low • Advance notices of sales • Order by phone or to buy on approval • Easier to return merchandise • Shopping convenience • No need to carry large amounts of cash • Simplified bookkeeping of expenses • Use of credit cards as identification when cashing checks • Rebate offers on purchases • Cash bonus based on total purchases during the year • Credit indicates stability and responsibility • Use PPT slides 6-6 and 6-7. Disadvantages of Credit (p. 191) • Credit costs money • Credit may cause overspending • Credit may result in loss of merchandise or income • Credit ties up future income • Financial and Personal Opportunity Costs • An intelligent decision to use credit demands careful evaluation of your current debt, future income, the added cost, and the consequences of overspending. Summary: Advantages and Disadvantages of Credit (p. 192) • Use PPT slide 6-8. • Transparency Master 6-1: Lists 13 helpful hints about credit. • Class Exercise: Is it possible to live without using any form of consumer credit? Have students debate this issue. • Practice Quiz 6-1 (p. 192) 6-7 CHAPTER 6 LECTURE OUTLINE Instructional Suggestions II. TYPES OF CREDIT (p. 192) • There are two types of consumer credit—closed-end credit and open-end credit. Closed-end credit (p. 192) • Closed-end credit is used for a specific purpose and is for a specified amount. • Mortgage loans, automobile loans, and installment loans for purchasing furniture or appliances are examples of closed-end credit. • The three most common types of closed-end credit are:  installment sales credit  installment cash credit  single lump-sum credit Open-end Credit (p. 193) • Open-end credit is a form of credit that many retailers use. You have an option to pay the bill in full within 30 days without interest charges or of making stated monthly installments based on the account balance plus interest. • Revolving check credit is a prearranged loan for a specified amount that the consumer can use by writing a special check. • Credit Cards. A bank credit card differs from other credit cards in that it is issued by a bank or other financial institution. • Don’t confuse credit card with a debit card. The debit card debits your account at the moment you buy goods or services, while the credit card extends credit and delays your payment. • Protect yourself against debit/credit card fraud. • Travel and Entertainment (T & E) cards are not really credit cards, because the monthly balance is due in full. • A home equity loan is usually set up as a revolving line of credit, typically with a variable interest rate. • Use PPT slides 6-9 and 6-10 • Supplementary Resource: Consumer Credit Terminology is available from the Federal Reserve Bank of New York, Public Information Dept., 33 Liberty Street, NY, NY 10045. • Assignment: Ask students to obtain a credit application from a local department store. Let them complete the application and apply for credit. • Discussion Question: Let the students discuss the pros and cons of using credit and debit cards. • Use PPT slide 6-9. • Text Highlight: Point out Exhibit 6-2, Volume of Consumer credit (p. 193). • Use PPT slide 6-9 • Use PPT slides 6-10 and 6- 11. • Text Highlight: Point out the 18 guidelines presented in the “Financial Planning for Life’s Situations” box: Choosing a Credit Card (p. 195). • Text Highlight: Point out the “Did You Know” features on p. 196). • Current Example: Smart cards: new financial services are possible using chip technology. And pave your way for the global acceptance of smart cards. Visit www.visa.com/nt/main.html. • Text Highlight: Point out the “Did You Know” feature Opting Out (p. 199). • Text Highlight: Point out the “Financial Planning Calculations” boxed feature on how much money you can 6-8 CHAPTER 6 LECTURE OUTLINE Instructional Suggestions borrow with a home equity loan (p. 197). • Practice Quiz 6-2 (p. 200) 6-9 CHAPTER 6 LECTURE OUTLINE Instructional Suggestions III. MEASURING YOUR CREDIT CAPACITY (p.200) • The only way to determine how much credit you can assume is to first learn how to make an accurate and sensible personal or family budget. Can You Afford a Loan? (p. 200) • Before you take a loan, ask yourself whether you can meet all of your essential expenses and still afford the monthly loan payments. General Rules of Credit Capacity (p. 200) • Debt Payments-to-income ratio is calculated by dividing monthly debt payments (not including house payments) by net monthly income.  Experts suggest that you spend no more than 20 percent of your net (after-tax) income on credit payments. • Debt-to-Equity ratio is calculated by dividing total liabilities by net worth, but do not include the value of your home and the amount of its mortgage.  If your debt-to-equity ratio is about 1, you have probably reached the upper limit of debt obligations. Cosigning a Loan (p. 202) • As many as three out of four cosigners are asked to repay the loan. • If you cosign, consider the following before you cosign: 1. Be sure you can afford to pay the loan. 2. Your liability for this loan may keep you from getting other credit that you may want. 3. You could lose the property you have pledged. 4. Check your state law. 5. Request that a copy of overdue payment notices be sent to you. • Use PPT slides 6-15 through 6-23. • Discussion Question: What factors should be considered when a person is determining the amount of credit he or she should take on? • Use PPT slides 6-15 through 6-17. • Text Reference: Point out the traditional, general rules of credit capacity on p. 200. • Discussion Question: Ask students if they would cosign a loan for a friend or relative. • Assignment: Have students talk to several friends and relatives to determine if they ever cosigned a loan? If yes, what were the consequences of cosigning? • Use PPT slides 6-16 and 6-17. • Assignment: Ask students to fill out Personal Financial Planner Sheet #29: Consumer credit usage patterns. Building and Maintaining Your Credit Rating (p. 202) • If you want a good rating, you must use credit with discretion; limit your borrowing to your capacity to pay the loan, and live up to the terms of your contracts. Credit Bureaus (p. 203) • Across the United States, there are several thousand credit bureaus that collect credit information about consumers. These credit bureaus can produce a report about your past and present credit activity. • Who Provides Data to Credit Bureaus? (p. 203) • Use PPT slide 6-20. • Supplementary Resource: Contact a local credit bureau to obtain information on the services provided and the fees charged. • Assignment: Ask students to check the Yellow Pages of a telephone directory to locate credit bureaus in their own areas. 6-10 CHAPTER 6 LECTURE OUTLINE Instructional Suggestions What’s in Your Credit Files? (p. 203) • The credit bureau file contains your name, your address, your social security number, and your birth date. Fair Credit Reporting (p. 204) • The Fair Credit Reporting Act regulates the use of credit reports, requires the deletion of obsolete information, and gives the consumer access to his or her file and the right to have erroneous data corrected. Who May Obtain a Credit Report? (p. 204) • Your credit report may be issued only to properly identified persons for approved purposes. Your friends and neighbors may not obtain credit information about you. Time Limits on Adverse Data (p. 204) • Most of the information in your credit file may be reported for only seven years. Incorrect Information in Your Credit File (p. 204) • When you notify the credit bureau that you dispute the accuracy of information, it must reinvestigate and modify or remove inaccurate data. If dispute is not resolved, you may place a statement of 100 words or less in your file. • Assignment: Have students talk to others to determine how they first established credit. • Text Highlight: Point out the purpose of the Fair Credit Reporting Act (p. 204). • Use PPT slide 6-22 through 6-26. • Discussion Question: Is it fair to keep credit file information for seven years? • Text Highlight: Point out Exhibit 6-6: What If You’re Denied Credit? (p. 206) • Current Example: Private information theft has become a plague on modern society, but you can protect yourself with the right technology and process. What Are the Legal Remedies? (p. 204) • The provisions of the Fair Credit Reporting Act allow consumers to sue any consumer reporting agency or user of reported information. • Practice Quiz 6-3 (p. 205) 6-11 CHAPTER 6 LECTURE OUTLINE Instructional Suggestions IV. APPLYING FOR CREDIT (p. 206) • The Equal Credit Opportunity Act starts all credit applicants off on the same footing. What Creditors Look For: The 5 Cs of Credit Management (p. 208) • Most lenders build their credit policies around the five C’s of credit: character, capacity, capital, collateral, and conditions. • Typical questions in a credit application are shown in Exhibit 6-7, and Exhibit 6-8 shows how a credit application might be scored. What if Your Application is Denied? (p. 210) • Ask questions if your application is denied. The ECOA gives you the right to know the specific reasons for denial. • Use PPT slide 6-24. • Text Reference: Point out the five C’s of credit in the “Financial Planning for Life’s Situations.” feature. • Current Example: Internet retailers race a struggle when it comes to charge backs and fraud. • Use PPT slide 6-23. • Transparency Master 6-2 highlights and summarizes the actions that may be taken if you are denied credit. • Practice Quiz 6-4 (p. 211) 6-12 CHAPTER 6 LECTURE OUTLINE Instructional Suggestions V. AVOIDING AND CORRECTING CREDIT MISTAKES (p. 212) • The best way to maintain your credit standing is to repay your debts on time. • The Fair Credit Billing Act sets procedures for promptly correcting billing errors, for refusing to make credit card or revolving credit payments on defective goods, and for promptly crediting your payments. In Case of Billing Error (p. 212) • If you think your bill is wrong or you want more information about it, notify the creditor in writing within 60 days after the bill was mailed. Pay all the parts of the bill that are not in dispute. Your Credit Rating During the Dispute (p. 213) • A creditor may not threaten your credit rating while you are resolving a billing dispute, and until your complaint has been answered, the creditor may not take any action to collect the disputed amount. • Use PPT slides 6-25 through 6-28. • Transparency Master 6-3 outlines the process of resolving a billing dispute (Exhibit 6-9, p. 213). • Current Example: Tips for safe ATM usage and safety tips for Visa. Visit www.visa.com/ct/main.html. • Current Example: Credit card companies are looking for future big spenders—college students—with cool new designs, including transparent credit cards. Defective Goods or Services (p. 214) • The Fair Credit Billing Act provides that you may withhold payment on any damaged or shoddy goods or poor services that you have purchased with a credit card, as long as you have made a real attempt to solve the problem with the merchant. Identity Crisis: What to Do if Your Identity is Stolen (p. 214) • Contact the fraud departments of each of the three major credit bureaus. • Contact the creditors for any accounts that have been tampered with or opened fraudulently. • File a police report. • Use PPT slide 6-27. • Practice Quiz 6-5 (p. 216) 6-13 CHAPTER 6 LECTURE OUTLINE Instructional Suggestions VI. COMPLAINING ABOUT CONSUMER CREDIT (p. 216) • First try to resolve the problem directly with the creditor. Only if that fails should you bring more formal complaint procedures. Complaints about Banks (p. 216) Protection under Consumer Credit Laws (p. 216) • You may also take legal action against a creditor. If you decide to file a lawsuit, here are important consumer credit laws you should know:  Truth in Lending and Consumer Leasing Acts  Equal Credit Opportunity Act  Fair Credit Billing Act  Fair Credit Reporting Act  Consumer Credit Reporting Reform Act • The Federal Reserve System has set up a separate office in Washington—the Division of Consumer and Community Affairs—to handle consumer complaints. Your Rights Under Consumer Credit Laws (p. 218) • Complain to the creditor. • File a complaint with the government. • If all else fails, sue the creditor. • Use PPT slide 6-29 and 6-30. • Text Highlight: Point out the complaint form shown in Exhibit 6-10 (p. 217). • Text Highlight: Point out Exhibit 6-11 which summarizes Federal consumer credit laws. (pp. 219-220) • Discussion Question: What are some common problems that a customer may have with a financial institution? • Use PPT slides 6-30. • Supplementary Resource: Obtain a copy of Consumer Handbook to Credit Protection Laws, Board of Governors, Federal Reserve System, Washington, DC 20551. (www. Federalreserve.gov) • Practice Quiz 6-6 (p. 221) 6-14 CONCLUDING ACTIVITIES • Point out the summary of objectives (p. 222) and key terms in the text margin (p. 222). • Let students solve the Self-Test Problems. • Discuss selected end-of-chapter Financial Planning Problems, Financial Planning Activities, and Financial Planning Case. • Use the Chapter Quiz in the Instructor’s Manual. • Let students start a journal of personal finance information and readings related to consumer credit. • Students can use the daily newspaper, The Wall Street Journal, news magazines, and personal business periodicals such as Money, Kiplinger’s Personal Finance, and Consumer Reports. • Have students create a case problem for class use on a personal financial experience related to consumer credit. WORKSHEETS FROM PERSONAL FINANCIAL PLANNER FOR USE WITH CHAPTER 6 Sheet 29 Consumer Credit Usage Patterns (debt inventory) CHAPTER 6 QUIZ ANSWERS True-False Multiple Choice 1. T (p. 191) 6. D (p. 192) 2. F (p. 192) 7. B (p. 192) 3. F (p. 192) 8. B (p. 207) 4. T (p. 200) 9. A (p. 204) 5. T (p. 207) 10. A (p. 216) 6-15 Name ________________________________________ Date____________________________ CHAPTER 6 QUIZ TRUE-FALSE _____1. Credit encourages overspending and ties up future income. _____2. With open-end credit, the borrower pays back a onetime loan in a specified period of time and with a specified number of payments. _____3. With closed-end credit, the borrower is permitted to take loans on a continuous basis and is billed for partial payments periodically . _____4. Two general rules of thumb for measuring credit capacity are the debt payments-to-income ratio and debt-to-equity ratio. _____5. Creditors determine credit worthiness on the basis of character, capacity, capital, collateral, and conditions. MULTIPLE CHOICE _____6. An example of closed-end credit is a. incidental credit. b. revolving check credit. c. credit cards. d. installment sales credit. _____7. An example of open-end credit is a. installment sales credit. b. revolving check credit. c. mortgage loans. d. automobile loans. _____8. Which one of the following is not one of the five Cs of credit? a. Conditions b. Climate c. Character d. Capacity _____9. Most of the information in your credit file may be reported for only __________ years. a. 7 b. 15 c. 20 d. 23 _____10. Which federal law provides specific cost disclosure requirements for the annual percentage rate and the finance charge as a dollar amount? a. Truth in Lending Act b. Fair Credit Reporting Act c. Fair Credit Billing Act d. Equal Credit Opportunity Act 6-16 SUPPLEMENTARY LECTURE*: 6-1 Peek at Your Credit Report Main points: • In the United States, there is at least one credit bureau file, and probably three, for every credit-using individual in the country. • Over 2½ billion items of information are added to these files every month. • Over 3 million credit reports are issued every day. • If you need a big loan, start early by getting your credit report. • Most people don’t realize they have adverse information in their credit file until they are denied credit. • The examples of what type of information is contained in a credit file. • Credit delinquencies remain in credit files for seven years, even if you are not applying for a loan. • It’s a good idea to review your credit report every year, even if you are not applying for a loan. • Offer a reasonable explanation to a creditor if you have adverse information in your credit file. Discussion Questions: • Why should you periodically check your credit file? • What should you do if you are denied credit? • How can you mend your inaccurate files? • What is a “reasonable time” to investigate and correct file mistakes? * Source: Federal Reserve Bank of Philadelphia, June 2013. 6-17 SUPPLEMENTARY LECTURE: 6-2 How To Improve Your Credit Report* It is important to know what you can do to correct or change information that is reported about your past credit history. It also is important to know what cannot be done. The first two parts of this section tell you what courses of action are available to you when you spot errors or omissions in your credit report. The third part of this section explains how time and three special circumstances affect your credit report, and when you can ask that negative information be removed. How To Correct Errors Your credit file may contain errors that can affect your chances of obtaining credit. Under the Fair Credit Reporting Act, you are entitled to have incomplete or inaccurate information corrected without charge. If you dispute information in your report, you must contact the credit bureau and explain the dispute. The credit bureau must reinvestigate it within a “reasonable period of time,” unless it believes the dispute is “frivolous or irrelevant.” To check on the accuracy of a disputed item, the credit bureau will ask the creditor in question what its records show. If the disputed item is on the public record, the credit bureau will check there instead. If a disputed item cannot be verified, the credit bureau must delete it. If an item contains erroneous information, the credit bureau must correct the error. If the item is incomplete, the credit bureau must complete it. For example, if your file showed accounts that belong to another person, the credit bureau would have to delete them. If it showed that you were late in making payments but failed to show that you are no longer delinquent, the credit bureau would have to add information to show that your payments are now current. Also, at your request, the credit bureau must send a notice of correction to any creditor who has checked your file in the past six months. If the reinvestigation does not resolve your dispute, the Fair Credit Reporting Act permits you to file a statement of up to 100 words with the credit bureau explaining your side of the story. A sample of such an explanation is shown on the bottom of the sample credit report. Employees of the credit bureau often are available to help you word your statement. The credit bureau must include this explanation in your report each time it sends it out. How To Include Omissions Your credit file may not contain information on all of the accounts you have with creditors. Although most national department store and all-purpose bank credit card accounts will be included in your file, not all creditors supply information to credit bureaus. For example, some travel-and-entertainment and gasoline card companies, local retailers, and credit unions do not report to credit bureaus. If you have been told that you were denied credit because of an “insufficient credit file” or “no credit file” and you have accounts with creditors that do not appear in your credit file, you can ask the credit bureau to add this information to future reports. Although they are not required to do so, for a fee some credit bureaus will add other verifiable accounts to your credit file. * Source: Federal Trade Commission, 6th and Pennsylvania Ave., N. W. Washington, D.C 20580. 6-18 SUPPLEMENTARY LECTURE: 6-3 (especially just before the holiday shopping season) Take Charge of Your Credit The holiday shopping season is in full swing. Whether you’re shopping online, by phone or at the mall, chances are you’ll use a credit card for some of your purchases. The Federal Trade Commission offers these tips to keep in mind when you shop. 1. Keep track of your spending. $ Incidental and impulse purchases add up. Remember credit cards are just like loans —you have to pay what you owe. Owing more than you can repay can damage your credit rating. That can make it hard to finance a car, rent an apartment, get insurance —even get a job. $ Pay your bill on time, and in full, if possible. If you don’t, you’ll have to pay finance charges on the unpaid balance—and it takes forever to get caught up if you just pay the minimum. 2. Keep an eye on your card and account number. $ Never lend your credit card to anyone because you’re responsible for paying the bill. Any problems with the bill can damage your credit rating. $ Don’t sign a blank charge slip. Draw a line through blank spaces on charge slips above the total so the amount cannot be changed. $ Never put your account number on the outside of an envelope or a postcard. $ Be cautious about disclosing your account number over the phone unless you know you are dealing with a reputable company. $ Carry only the cards you anticipate using to help prevent loss or theft. $ If your credit and ATM cards are lost or stolen, report it to the card issuers as quickly as possible. Many companies have toll-free numbers and 24-hour service to deal with such emergencies. Follow up with a letter, including your account number, when you noticed the card was missing, and the date you first reported the loss. 3. Keep good records $ Save your receipts. Compare them with your monthly bill. Promptly report problems to the company that issued the card. Usually, your statement will provide instructions for disputing a charge. $ If you order by mail, phone or online, keep copies or printouts with details about the transaction, including any warranties, or return and refund policies if you’re not satisfied. You should have the company’s name, address, phone number, the date of your order; a copy of the order form you sent to the company or a list of the items ordered and their stock codes, the order confirmation codes and the ad or catalog from which you ordered. The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace.  Source: http://www.ftc.gov/bcp/conline/pubs/alerts/chargealrt.htm 6-19 SUPPLEMENTARY LECTURE: 6-4 Credit Card Blocking Have you ever been told you were over your credit limit, even though you knew you weren’t? If this happened shortly after you stayed in a hotel or rented a car, the problem could have been credit card “blocking.” What’s Blocking? When you use a credit or charge card to check into a hotel or rent a car, the clerk usually contacts the company that issued your card to give an estimated total. If the transaction is approved, your available credit is reduced by this amount. That’s a “block.” Here’s how it works: Suppose you use a credit card when you check into a $100-a-night hotel for five nights. At least $500 would be blocked. In addition, hotels and rental car companies sometimes include anticipated charges for “incidentals” like food, beverages, or gasoline. These amounts can vary widely among merchants. If you pay your bill with the same card you used when you checked in, the final charge probably will replace the block in a day or two. However, if you pay your bill with a different card, or with cash or a check, the company that issued the card you used at check-in might hold the block for up to 15 days after you’ve checked out. That’s because they weren’t notified of the final charge and didn’t know you had paid another way. Why Blocking Can Be a Problem Blocking is used to make sure you don’t exceed your credit line before checking out of a hotel or returning a rental car, leaving the merchant unpaid. If you’re nowhere near your credit limit, chances are blocking won’t be a problem. But if you’re reaching the limit, be careful. Not only can it be embarrassing to have your card declined, it also can be inconvenient, especially if you have an emergency purchase and no available credit. How to Avoid Blocking To avoid the aggravation that blocking can cause, follow these tips: • Consider paying hotel, motel, or rental car bills with the same credit card you used at the beginning of the transaction. • When you check into a hotel or rent a car, ask clerks how much will be blocked, and how the amount is determined. • If you pay with a different credit card or with cash or a check, ask the clerk to remove the block. In addition, when you choose a credit card, ask issuers how long they block credit lines for transactions involving hotels, motels, and rental cars. You may want to go with an issuer that uses short blocks.  Source: Federal Trade Commission for the Consumer. 1-877-FTC-HELP. www.ftc.gov 6-20 SUPPLEMENTARY LECTURE: 6-5 A Consumer’s Guide to E-Payments The Internet has taken its place beside the telephone and television as an important part of people’s lives. Consumers use the Internet to shop, bank and invest online. Most consumers use credit or debit cards to pay for online purchases, but other payment methods, like “e-wallets,” are becoming more common. The Federal Trade Commission (FTC) wants you to know about these new payment technologies and how to make your transactions as safe and secure as possible. Keep these tips in mind as other forms of electronic commerce, like mobile and wireless transactions, become more available. And How Would You Like To Pay? Most online shoppers use credit cards to pay for their online purchases. But debit cards—which authorize merchants to debit your bank account electronically–are increasing in use. Your debit card may be an automated teller machine (ATM) card that can be used for retail purchases. To complete a debit card transaction, you may have to use a personal identification number (PIN), some form of a signature or other identification, or a combination of these identifiers. Some cards have both credit and debit features: You select the payment option at the point-of-sale. But remember, although a debit card may look like a credit card, the money for debit purchases is transferred almost immediately from your bank account to the merchant’s account. In addition, your liability limits for a lost or stolen debit card and unauthorized use are different from your liability if your credit card is lost, stolen or used without your authorization. New electronic payment systems—sometimes referred to as “electronic money” or “e-money”—are also occurring. Their goal is to make purchasing simpler. For example, “stored-value” cards let you transfer cash value to a card. They’re commonly used on public transportation, at colleges and universities and at gas stations. Many retailers also sell stored value cards in place of gift certificates. Some stored-value cards work offline, say, to buy a candy bar at a vending machine; others work online, for example, to buy an item from a website; some have both offline and online features. Some cards can be “reloaded” with additional value, at a cash machine; other cards are “disposable”—you can throw them away after you use them. Some stored-value cards contain computer chips that make them “smart” cards: These cards can act like a credit card as well as a debit card, and also can contain stored value. Some new Internet-based payment systems allow value to be transmitted through computers, sometimes called “e-wallets.” You can use “e-wallets” to make “micropayments”—very small online or offline payments for things like a magazine or fast food. When you buy something using your e-wallet, the balance on your online account decreases by that amount. “E-wallets” may work by using some form of stored value or by automatically accessing an account you’ve set up through a computer system connected to your credit or debit card account. “Paying” lt Safe The FTC encourages you to make sure your transactions are secure and your personal information is protected. Although you can’t control fraud or deception on the Internet, you can take steps to recognize it, avoid it and report it. Here’s how. • Use a secure browser—software that encrypts or scrambles the purchase information you send over the Internet—to guard the security of your online transactions. Be sure your browser has the most up-to-date encryption capabilities by using the latest version available from the manufacturer. You also can download some browsers for free over the Internet. When submitting your purchase information, look for the “lock” icon on the browser’s status bar to be sure your information is secure during transmission.  Source: Federal Trade Commission for the Consumer. 1-877-FTC-HELP. www.ftc.gov 6-21 • Before you provide any personal financial information to a website, check the site’s privacy policy. In particular, determine how the information will be used or shared with others and what security features are in place so the information cannot be obtained fraudulently. If you’re not comfortable with the policy, consider doing business elsewhere. • Read and understand the privacy, refund and shipping policies of the websites you visit, before you make your purchase. Look closely at the disclosures about a website’s security, its refund and shipping policies and its privacy policy on collecting and using your personal information. Some websites’ disclosures are easier to find than others—look at the bottom of the home page, on order forms or in the “About” or “FAQs” section of a site. • Keep your personal information private. Don’t disclose your personal information—your address, telephone number, Social Security number, bank account number or e-mail address—unless you know who’s collecting the information, why they’re collecting it and how they’ll use it. • Give payment information only to businesses you know and trust, and only when and where it is appropriate—like an order form. Never give your password to anyone online, even your Internet service provider. Do not download files sent to you by strangers or click on hyperlinks from people you don’t know. Opening a file could expose your system to a computer virus or a program that could hijack your modem. • Keep records of your online transactions and read your e-mail. Merchants may send you important information about your purchases. • Review your monthly credit card and bank statements for any errors or unauthorized purchases promptly and thoroughly. Notify your credit or debit card issuer immediately if your credit or debit card or checkbook is lost or stolen, or if you suspect someone is using your accounts without your permission. Report Problems Immediately The Fair Credit Billing Act (FCBA) and Electronic Fund Transfer Act (EFTA) establish procedures for resolving errors on credit and bank account statements, respectively, including: • credit charges or electronic fund transfers that you—or anyone you’ve authorized to use your account—have not made; • credit charges or electronic fund transfers that are incorrectly identified or show the wrong amount or date; • computation or similar errors; • a failure to properly reflect payments or credits, or electronic fund transfers; • not mailing or delivering credit billing statements to your current address, as long as that address was received by the creditor in writing at least 20 days before the billing period ended; and • credit charges or electronic fund transfers for which you request an explanation or documentation, because of a possible error. For credit: The FCBA generally applies to “open end” credit accounts—that is, credit cards and revolving charge accounts, like department store accounts. It does not apply to loans or credit sales that are paid according to a fixed schedule until the entire amount is paid back, like an automobile loan. Under the FCBA, your liability for lost or stolen credit cards is limited to $50. Notify your card issuer promptly upon discovering the loss. Many companies have toll-free numbers and 24-hour service to deal with such emergencies. Follow up with a letter. Write to the creditor at the address given for ‘billing inquiries,’ not the address for sending your payments, and include your name, address, account number 6-22 and a description of the billing error. Send your letter so that it reaches the creditor within 60 days after the first bill containing the error was mailed to you. And if you send your letter by certified mail, return receipt requested, you’ll have proof that the creditor received it. Include copies (not originals) of sales slips or other documents that support your position. Keep a copy of your dispute letter. The creditor must acknowledge your dispute in writing within 30 days after it is received, unless the problem is resolved within that period. The creditor must conduct an investigation and either correct the mistake or explain why the bill is believed to be correct, within two billing cycles (but not more than 90 days), unless the creditor provides a permanent credit instead. You may withhold payment of the amount in dispute and any related finance charges and the creditor may not take any action to collect that amount during the dispute. For debit: The EFTA applies to electronic fund transfers—transactions involving automated teller machines (ATMs), debit cards and other point-of-sale debit transactions, and other electronic banking transactions that can result in the withdrawal of cash from your bank account. Under the EFTA, if there is a mistake or unauthorized withdrawal from your bank account through the use of a debit card, or other electronic fund transfers, you must notify your financial institution of the problem or error not later than 60 days after the statement containing the problem or error was sent. Although most financial institutions have a toll-free number to report the problem, you should follow up in writing. For retail purchases, your financial institution has up to 10 business days to investigate after receiving your notice of the error. The financial institution must tell you the results of its investigation within three business days of completing its investigation. The error must be corrected within one business day after determining the error has occurred. If the institution needs more time, it may take up to 90 days to complete the investigation—but only if it returns the money in dispute to your account within 10 business days after receiving notice of the error, while it reviews your concerns. If someone uses your debit card, or makes other electronic fund transfers, without your permission, you can lose from $50 to $500 or more, depending on when you report the loss or theft. If you report the loss within two business days after you discover the problem, you will not be responsible for more than $50 for unauthorized use. However, if you do not report the loss within two business days after you realize the card is missing, but you do report its loss within 60 days after your statement is mailed to you, you could lose as much as $500 because of an unauthorized withdrawal. And, if you do not report an unauthorized transfer or withdrawal within 60 days after your statement is mailed to you, you risk unlimited loss. That means you could lose all the money in your account and the unused portion of your maximum line of credit established for overdrafts. Some financial institutions may voluntarily cap your liability at $50 for certain types of transactions, regardless of when you report the loss or theft; because this is voluntary, their policies could change at any time. Ask your financial institution about its liability limits. For stored-value: The FCBA and the EFTA may not cover stored-value cards or transactions involving them, so you may not be covered for loss or misuse of the card. However, stored-value cards still might be useful for micropayments and other small purchases online because they can be convenient and—in some cases—offer anonymity. Before you buy a stored-value card or other form of e-money, ask the issuer for written information about the product’s features. Find out the card’s dollar limit, whether it is reloadable or disposable, if there’s an expiration date, and any fees to use, reload or redeem (return it for a refund) the product. At the same time, ask about your rights and responsibilities. For example, does the issuer offer any protection in the case of a lost, stolen, misused, or malfunctioning card, and who do you call if you have a question or problem with the card? For More Information Your financial institution, local consumer protection agency and law enforcement agencies like the Federal Trade Commission or your state Attorney General are among the many organizations working to help consumers understand electronic commerce and new online payment options. 6-23 The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint or to get free information on consumer issues, visit www.ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters Internet, telemarketing, identity theft and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad. 6-24 SUPPLEMENTARY LECTURE: 6-6 GAO Highlights Credit Reporting Literacy* Highlights of GAO-05-223, a report to congressional committees Consumers Understood the Basics but Could Benefit from Targeted Educational Efforts Why GAO Did This Study What GAO Found This report responds to a mandate in the Fair and Accurate Credit Transactions Act (FACT Act) of 2003 requiring GAO to assess consumers’ understanding of credit reporting. The FACT Act, among other things, extended provisions governing the credit reporting systems and addressed ongoing concerns about inaccuracies in credit reports. For example, the act expanded access to credit information by entitling consumers to one free credit report each year. It also established the Financial Literacy and Education Commission (FLEC) to improve consumers’ understanding of credit issues. This report examines consumers’ understanding and use of credit reports and scores and the dispute process and looks at factors that may influence their understanding of credit reporting. What GAO Recommends GAO recommends that (1) the Secretary of Treasury, as Chairman of FLEC, working with its members, take steps to improve consumers’ understanding of their rights and remedies under the FACT Act, targeting the population groups that would most benefit; and (2) the Chairman of the Federal Trade Commission, take steps to improve consumers’ understanding of how credit reports and scores are used, their right to dispute inaccurate information, and how consumers’ credit behavior could affect their credit history. Both agencies generally agreed with the findings. Based on survey responses for a national sample of 1,578 consumers, GAO found that consumers understood the basics of credit reporting and the dispute process. For example, many consumers understood what a credit report contained and the sources of this information, and about 60 percent had seen their credit reports. However, many consumers did not know more detailed information, such as how long items remained on their credit reports or the impact their credit history could have on insurance rates and potential employment. Further, most consumers knew what a credit score was, and approximately one-third had obtained their credit scores, but many did not know that some behaviors—such as using all their available credit—could negatively affect their scores. Similarly, GAO found that most consumers knew they had the right to dispute information on their credit reports, and a small percentage (18 percent) had disputed inaccuracies. But most consumers did not fully understand their rights in the dispute process—for example, that there is no cost to dispute inaccurate information or that they could contact the Federal Trade Commission, the federal agency primarily responsible for enforcing consumers’ rights with respect to credit reporting agencies (CRAs), if they could not resolve a dispute with the CRAs. GAO also found that several factors were associated with consumers’ knowledge. For instance, having less education, lower incomes, and less experience obtaining credit were associated with lower survey scores, while having certain types of credit experiences—such as an automobile loan or a mortgage—were associated with higher scores. Other factors, such as gender and living in a state where credit reports were free prior to the FACT Act, did not have a significant effect on consumers’ knowledge. Educational efforts could potentially increase consumers’ understanding of the credit reporting process. These efforts should target those areas in which consumers’ knowledge was weakest and those subpopulations that did not score as well on GAO’s survey. * * Source: United States Government Accountability Office, March 2005. 6-25 SUPPLEMENTARY ACTIVITY: 6-1 How Divorce Affects Consumer Credit* When you obtained credit, you signed a contract agreeing to pay your bills. A divorce decree doesn’t change that contract. To credit grantors, an account held jointly by a divorced couple simply means that the chances of collecting are potentially doubled. D-I-V-O-R-C-E can spell post-marriage headaches for the unwary. Of all the ills that divorce is designed to cure, credit problems can be the most nagging. Why? Joint accounts mean joint liability. When you obtained credit, you signed a contract agreeing to pay your bills. A divorce decree doesn’t change that contract. To credit grantors, an account held jointly by a divorced couple—now two individuals with distinct assets—simply means that the chances of collecting are potentially doubled. Following are several ways you can prevent credit obligations from making divorce more difficult than it is and ways you can reestablish your own distinct credit lines after divorce occurs. TALK IT OUT • Communicate with your soon-to-be ex-spouse. Even in good times, many couples find it difficult to discuss money issues. When divorcing, it’s more important than ever to put bitterness aside and make as clean a financial cut as possible. • Communicate with your creditors. Decide on which debt belongs to whom, then ask each creditor to transfer the debt to the name of the person who will be responsible. • Creditors don’t have to agree, and they may defer a decision until you prove you can handle the payments alone. But this is an excellent way to protect yourself from new liability and reestablish credit as an individual. • During divorce negotiations, keep your joint bills current, even if it means paying for your spouse. If you don’t, your creditors could become more reluctant to release one party from joint liability. • Remember, joint bills are joint responsibilities. You obtained credit based on both of your incomes. It’s only fair that the credit grantor collect what’s due. MAKE IT LEGAL • If your ex-spouse assumes the major joint debts, this should be recognized as part of the support agreement. • If you can’t convince your creditors to remove you from liability and your ex later goes bankrupt, you will be able to sue for that money should creditors pursue you. The reason: support agreements aren’t dischargeable in bankruptcy. • If your spouse runs up large amounts of debt, you should cancel as many of the accounts as possible. Inform all creditors, in writing, that you are not responsible for these debts. * Source: United States Government Accountability Office, March 2005. * Reports on Credit is published by Experian Consumer Education Department (formerly TRW, Inc.) to help consumers better understand important credit and other financial issues. You may reproduce and distribute this report. For more information, call 972-390-3525 or visit the Web site at www.experian.com. 6-26 • This may not prevent them from trying to collect, but it does show that you attempted to act responsibly. • Upon your divorce settlement, close your joint accounts and establish or reestablish credit in your own name. KEEP BOTH EYES OPEN • Even if your marriage is proven and secure, it can pay to take note and stay alert to your credit situation. • If divorce looms, watch out for those bankcards, the mortgage, and that home equity loan. For a separated couple, each of these can become a recurring pain that’s resistant to all but the most courageous financial antidotes. 6-27 SUPPLEMENTARY ACTIVITY: 6-2 CONSUMER ALERT Federal Trade Commission • Bureau of Consumer Protection • Office of Consumer and Business Education CREDIT REPAIR: HELP YOURSELF FIRST “Credit Problems? NO problem ...” “We can erase your bad credit—100% guaranteed.” “We can remove bankruptcies, judgments, liens, and bad loans from your credit file, FOREVER!” “Create a new credit identity—legally.” Do yourself a favor and save some money, too. Don’t believe these statements. Newspapers, radio, TV, and the Internet are filled with ads that offer—for a fee—to erase accurate negative information in your credit file so you can get a credit card, auto loan, home mortgage, or even a job. The scam artists who run these ads can’t deliver. Only time, a deliberate effort, and a personal debt repayment plan will improve your credit. The companies that advertise credit repair services appeal to consumers with poor credit histories. Not only can’t they provide you with a clean credit record, they may be encouraging you to violate federal law. If they ask you to make false statements on a loan or credit application, misrepresent your Social Security number, or advise you to get an Employer Identification Number from the Internal Revenue Service under false pretenses, you will be committing fraud. The truth is you can help yourself to re-build a better credit record. Start by contacting your creditors when you realize that you are unable to make payments. If you need help working out a payment plan and a budget, contact your local credit counseling service. There are non-profit groups in every state that offer credit guidance to consumers. These services are available at little or no cost. Also, check with your employer, credit union, or housing authority for no-cost credit counseling programs . In addition, you have specific rights under the Fair Credit Reporting Act: • You are entitled to a free copy of your credit report if you’ve been denied credit, insurance or employment and request the report within 60 days of notice, or if you can prove that (1) you’re unemployed and plan to look for a job within 60 days, (2) you’re on welfare, or (3) your report is inaccurate because of fraud. • If your application for credit, insurance, or employment is denied because of inaccurate or incomplete credit information, the company to which you applied must give you the name and address of the reporting credit bureau. • There is no charge to dispute mistakes or outdated information on your credit record. Ask the credit bureau for a dispute form and submit it with any supporting documentation. 6-28 Other facts you should know: • Bankruptcy information can be reported for 10 years. • Information about a lawsuit or judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer. • Information reported because of an application for a job with a salary of more than $75,000 has no time limit. • Information reported because of an application for more than $150,000 worth of credit or life insurance has no time limit. If you’ve had a problem with a credit repair company, contact your local consumer affairs office or state attorney general (AG). Many AG offices have toll-free consumer hotlines. Check your local directory assistance. You also may contact the Consumer Response Center, Federal Trade Commission, Washington, DC 20580; 202-326-2222; TDD, 202-326-2502, or visit the FTC at www.ftc.gov. 6-29 SUPPLEMENTARY ACTIVITY: 6-3 Instructions for Completing the ID Theft Affidavit To make certain that you do not become responsible for the debts incurred by the identity thief, you must provide proof that you didn’t create the debt to each of the companies where accounts were opened or used in your name. A working group composed of credit grantors, consumer advocates and the Federal Trade Commission (FTC) developed this ID Theft Affidavit to help you report information to many companies using just one standard form. Use of this affidavit is optional. While many companies accept this affidavit, others require that you submit more or different forms. Before you send the affidavit, contact each company to find out if they accept it. You can use this affidavit where a new account was opened in your name. The information will enable the companies to investigate the fraud and decide the outcome of your claim. (If someone made unauthorized charges to an existing account, call the company to find out what to do.) This affidavit has two parts: • ID Theft Affidavit is where you report general information about yourself and the theft. • Fraudulent Account Statement is where you describe the fraudulent account(s) opened in your name. Use a separate Fraudulent Account Statement for each company you need to write to. When you send the affidavit to the companies, attach copies (NOT originals) of any supporting documents (e.g., driver’s license, police report) you have. Before submitting your affidavit, review the disputed account(s) with family members or friends who may have information about the account(s) or access to them. Complete this affidavit as soon as possible. Many creditors ask that you send it within two weeks of receiving it. Delaying could slow the investigation. Be as accurate and complete as possible. You may choose not to provide some of the information requested. However, incorrect or incomplete information will slow the process of investigating your claim and absolving the debt. Please print clearly. When you have finished completing the affidavit, mail a copy to each creditor, bank or company that provided the thief with the unauthorized credit, goods or services you describe. Attach to each affidavit a copy of the Fraudulent Account Statement with information only on accounts opened at the institution receiving the packet, as well as any other supporting documentation you are able to provide. 6-30 Send the appropriate documents to each company by certified mail, return receipt requested, so you can prove that it was received. The companies will review your claim and send you a written response telling you the outcome of their investigation. Keep a copy of everything you submit for your records. If you cannot complete the affidavit, a legal guardian or someone with power of attorney may complete it for you. Except as noted, the information you provide will be used only by the company to process your affidavit, investigate the events you report and help stop further fraud. If this affidavit is requested in a lawsuit, the company might have to provide it to the requesting party. Completing this affidavit does not guarantee that the identity thief will be prosecuted or that the debt will be cleared. If you haven’t already done so, report the fraud to the following organizations: 1. Each of the three national consumer reporting agencies. Ask each agency to place a “fraud alert” on your credit report, and send you a copy of your credit file. When you have completed your affidavit packet, you may want to send them a copy to help them investigate the disputed accounts.  Equifax Credit Information Services, Inc. (800) 525-6285 (Hearing impaired call 1-800-255-0056 and ask the operator to call the Auto Disclosure Line at 1-800-685-1111 to obtain a copy of your report.) P.0. Box 740241, Atlanta, GA 30374-0241 www.equifax.com  Experian Information Solutions, Inc. (888) 397-3742/TDD (800) 972 0322 P.O. Box 9530, Allen, TX 75013 www.experian.com  TransUnion (800) 680-7289/TDD (877) 553-7803 Fraud Victim Assistance Division P.O. Box 6790, Fullerton, CA 92634-6790 www.tuc.com 2. The fraud department at each creditor, bank, or utility/service that provided the identity thief with unauthorized credit, goods or services. This would be a good time to find out if the company accepts this affidavit, and whether they require notarization or a copy of the police report. 3. Your local police department. Ask the officer to take a report and give you the report number or a copy of the report. When you have completed the affidavit packet, you may want to give your police department a copy to help them add to their report and verify the crime. 4. The FTC, which maintains the Identity Theft Data Clearinghouse—the federal government’s centralized identity theft complaint database—and provides information to identity theft victims. You can call toll-free 1 -877-ID-THEFT (1-877-438-4338), visit www.consumer.gov/idtheft, or send mail to: 6-31 Identity Theft Data Clearinghouse Federal Trade Commission 600 Pennsylvania Avenue, NW Washington, D.C. 20580 The FTC collects complaints from identity theft victims and shares their information with law enforcement nationwide. This information also may be shared with other government agencies, consumer reporting agencies, and companies where the fraud was perpetrated to help resolve identity theft related problems. 6-32 Name ________________________________ Phone number ___________________ Page 1 ID Theft Affidavit (1) My full legal name is ________________________________________________________ (First) (Middle) (Last) (Jr., Sr. III) (2) (If different from above) When the events described in this affidavit took place, I was known as _________________________________________________________________________ (First) (Middle) (Last) (Jr., Sr. III) (3) My date of birth is ____________________ (day/month/year) (4) My social security number is ________________________________ (5) My driver’s license or identification card state and number are _______________________ (6) My current address is _______________________________________________________ City _______________________________ State ___________ Zip Code _____________ (7) I have lived at this address since ___________________________ (month/year) (8) (If different from above) When the events described in this affidavit took place, my address was_________________________________________________________________________ City _______________________________ State ___________ Zip Code _____________ (9) I lived at the address in #8 from ____________ until ____________ (month/year) (month/year) (10) My daytime telephone number is ( ) _________________________ My evening telephone number is ( _ ) _________________________ 6-33 Name _________________________________ Phone number __________________ Page 2 Check all that apply for items 11 – 17: (11) I did not authorize anyone to use my name or personal information to seek the money, credit, loans, goods or services described in this report. (12) I did not receive any benefit, money, goods or services as a result of the events described in this report. (13) My identification documents (for example, credit cards; birth certificate; driver’s license; social security card; etc.) were stolen lost on or about ______________ (day/month/year) (14) To the best of my knowledge and belief, the following person(s) used my information (for example, my name, address, date of birth, existing account numbers, social security number, mother’s maiden name, etc.) or identification documents to get money, credit, loans, goods or services without my knowledge or authorization: Name (if known) Name (if known) Address (if known) Address (if known) Phone number(s) (if known) Phone number(s) (if known) additional information (if known) additional information (if known) (15) I do NOT know who used my information or identification documents to get money, credit, loans, goods or services without my knowledge or authorization. (16) Additional comments: (For example, description of the fraud, which documents or information were used or how the identity thief gained access to your information.) _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ (Attach additional pages as necessary.) 6-34 Name _________________________________ Phone number __________________ Page 3 (17) (check one) I am am not willing to assist in the prosecution of the person(s) who committed this fraud. (18) (check one) I am am not authorizing the release of this information to law enforcement for the purpose of assisting them in the investigation and prosecution of the person(s) who committed this fraud. (19) (check all that apply) I have have not reported the events described in this affidavit to the police or other law enforcement agency. The police did did not write a report. In the event you have contacted the police or other law enforcement agency, please complete the following: (Agency #1) (Officer/Agency personnel taking report) (Date of report) (Report Number, if any) (Phone number) (e-mail address, if any) (Agency #2) (Officer/Agency personnel taking report) (Date of report) (Report Number, if any) (Phone number) (e-mail address, if any) Please indicate the supporting documentation you are able to provide to the companies you plan to notify. Attach copies (NOT originals) to the affidavit before sending it to the companies. (20) A copy of a valid government-issued photo-identification card (for example, your driver’s license, state-issued ID card or your passport). If you are under 16 and don’t have a photo-ID, you may submit a copy of your birth certificate or a copy of your official school records showing your enrollment and place of residence. (21) Proof of residency during the time the disputed bill occurred, the loan was made or the other event took place (for example, a rental/lease agreement in your name, a copy of a utility bill or a copy of an insurance bill). 6-35 Name _________________________________ Phone number __________________ Page 4 (22) A copy of the report you filed with the police or sheriff’s department. If you are unable to obtain a report or report number from the police, please indicate that in Item 19. Some companies only need the report number, not a copy of the report. You may want to check with each company. I declare under penalty of perjury that the information I have provided in this affidavit is true and correct to the best of my knowledge. _____________________________________ ________________________________ (signature) (date signed) Knowingly submitting false information on this form could subject you to criminal prosecution for perjury. _____________________________________ (Notary) [Check with each company. Creditors sometimes require notarization. If they do not, please have one witness (non-relative) sign below that you completed and signed this affidavit.] Witness: _____________________________________ ________________________________ (signature) (printed name) _____________________________________ ________________________________ (date) (telephone number) 6-36 Name _________________________________ Phone number __________________ Page 5 Fraudulent Account Statement I declare (check all that apply): As a result of the event(s) described in the ID Theft Affidavit, the following account(s) was/were opened at your company in my name without my knowledge, permission or authorization using my personal information or identifying documents: During the time of the accounts described above, I had the following account open with your company: Billing name _______________________________________________________________ Billing address _____________________________________________________________ Account number ___________________________________________________________ Completing this Statement • Make as many copies of this page as you need. Complete a separate page for each company you’re notifying and only send it to that company. Include a copy of your signed affidavit. • List only the account(s) you’re disputing with the company receiving this form. See the example below. • If a collection agency sent you a statement, letter or notice about the fraudulent account, attach a copy of that document (NOT the original). 6-37 ANSWERS TO PRACTICE QUIZZES, FINANCIAL PLANNING PROBLEMS, FINANCIAL PLANNING ACTIVITIES, AND FINANCIAL PLANNING CASE. PRACTICE QUIZZES Practice Quiz 6-1 (p. 192) 1. What is Consumer Credit? Consumer credit refers to the use of credit for personal needs (except a home mortgage) by individuals and families. (p. 188) 2. Why is consumer credit important to our economy? All economists now recognize consumer credit as a major force in the American economy. Any forecast or evaluation of the economy includes consumer spending trends and consumer credit as a sustaining force. To paraphrase an old political expression, as the consumer goes, so goes the U.S. economy. (p. 189) 3. What are the uses and misuses of credit? Financing a Corvette on credit when a Ford Escort is all your budget allows. Using credit cards to buy frivolous goods and services. Purchasing nonessential products on an impulse. Valid reasons for using credit are: a medical emergency; need for a car; and buying an item now for less money than it will cost later. (p. 189) 4. What are the advantages and disadvantages of credit? Advantages of using credit are: purchasing goods and services when they are needed and paying for them gradually, meeting financial emergencies, achieving convenience in shopping, establishing a credit rating, making forced savings, and employing credit as leverage. Disadvantages are: credit costs money, encourages impulse buying and overspending, and ties up future income. Furthermore, credit misuse can create serious long-term financial difficulties. (pp. 190-191) Practice Quiz 6-2 (p. 200) 1. What are the two main types of consumer credit? Closed-end and open-end are two types of consumer credit. With closed-end (or installment-credit, the borrower pays back a one-time loan in a specific number of payments in a specific period of time. With open-end credit, or revolving credit, the borrower is permitted to take loans on a continuous basis and is billed for partial payments periodically. 6-38 The three most common types of closed-end credit are installment sales credit, installment cash credit, and single lump-sum credit. Examples of open-end credit include convenience credit, incidental credit, revolving credit, and credit cards. Only individual or family circumstances will dictate if one type of credit is better than another. (pp. 192-193) 2. What is a debit card? A debit card debits your account at the moment you buy goods or services. Debit cards withdraw money from your account as soon as you make a purchase. Debit cards are used most commonly at automated teller machines and at point-of-sale terminals in stores. (p. 196) 3. What is a home-equity loan? A home-equity loan is based on the difference between the current market value of your home and the amount you still owe on your mortgage. A home-equity loan is usually set up as a revolving line of credit, typically with a variable interest rate. (p. 197) Practice Quiz 6-3 (p. 205) 1. What are the general rules of measuring credit capacity? Two general rules for measuring credit capacity are: debt payments-to-income ratio, and debt-to- equity ratio. None of these methods is perfect for everyone; the limits given are only guidelines. Only you, based on the money you earn, your current obligations, and your financial plans for the future, can determine the exact amount of credit you need and can afford. You must be your own credit manager. (pp. 200-201) 2. What can happen if you cosign a loan? You may end up paying the loan yourself. Despite the risks, there may be times when you decide to cosign a loan for a friend or a relative. Before you cosign, make sure you know what cosigning involves. For example, be sure you can afford to pay the loan. If the borrower defaults, you could damage your credit rating, and you could lose the property you pledge. (p. 202) 3. What can you do to build and maintain your credit rating? A good credit rating is a valuable asset that should be nurtured and protected. If you want a good rating, you must use credit with discretion; limit your borrowing to your capacity to repay, and live up to the terms of your contracts. The quality of your credit rating is entirely up to you. (p. 202) 4. What is the Fair Credit Reporting Act? The Fair Credit Reporting Act gives you the right to know what your credit file contains. Erroneous information must be corrected to your satisfaction; if not, you may enter your version. (p. 204) 5. How do you correct erroneous information in your credit file? When you notify the credit bureau that you dispute the accuracy of information, it must reinvestigate and modify or remove inaccurate data. If reinvestigation does not resolve the dispute to your satisfaction; you may place a statement of 100 words or less in your file, explaining why you think the record is inaccurate. (p. 204) 6-39 6. What are your legal remedies if a credit reporting agency engages in unfair reporting practices? Under the Fair Credit Reporting Act, you can sue the agency. If the agency or the user is found guilty, you may be awarded actual damages, court costs, and attorney’s fees. In case of willful noncompliance, punitive damages maybe allowed by the court. ( p. 204) Practice Quiz 6-4 (p. 211) 1. What is the Equal Credit Opportunity Act? The Equal Credit Opportunity Act, (ECOA) states that race, color, age, sex, marital status, and certain other factors may not be used to discriminate against you in any part of a credit dealing. It starts all credit applicants off on the same footing. (p. 207) 2. What are five C’s of credit? Creditors evaluate the five C’s (character, capacity, capital, collateral, and conditions) in granting or denying credit. For example, is the borrower prompt in paying bills? Has the borrower declared personal bankruptcy or been forced by courts to pay bills? What is the borrower’s occupation, income, and how long has he/she been working? What is the borrower’s net worth? Is the loan to be secured by collateral? What general economic conditions can affect a borrower’s ability to repay a loan and other obligations? Creditors use different combinations of the above facts to reach their decisions. (p. 208) 3. What can you do if your credit application is denied? The ECOA gives you the right to know the specific reasons for denial. If it is based on a credit report, you are entitled to know the specific information in the credit report that led to denial. Then, visit or telephone the local credit bureau to find out what information is reported. You may ask the bureau to investigate any inaccurate or incomplete information and correct its records. (p. 210) Practice Quiz 6-5 (p. 216) 1. What is the Fair Credit Billing Act (FCBA)? The FCBA sets procedures for promptly correcting billing mistakes, for refusing to make credit-card or revolving credit payments on defective goods, and for promptly crediting your payments. (p. 212) 2. What must you do to protect your rights if there is a billing error? First, notify the creditor in writing within 60 days after the bill was mailed. State the suspected amount of the error on the item you want explained. Then pay all the parts of the bill that are not in dispute. (p. 212) 3. What happens to your credit rating during the billing dispute? A creditor may not threaten your credit rating while you are resolving a billing dispute. And until your complaint has been answered, the creditor may not take any action to collect the disputed amount. (p. 213) 4. What can you do if your identity is stolen? Contact the fraud departments of each of the three major credit bureaus; contact your creditors; and file a police report. (pp. 214-215) 6-40 Practice Quiz 6-6 (p. 221) 1. What federal laws protect you if you have a complaint regarding consumer credit? Exhibit 6-11 summarizes Federal Consumer Credit laws: the Truth in Lending Act, the Fair Credit Reporting Act, the Fair Credit Billing Act, the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act, and the Consumer Credit Reporting Reform Act. (pp. 219-220) 2. What are your rights under the consumer credit laws? a. Complain to the creditor. Let the creditor know you are aware of the law. (p. 218) b. File a complaint with the government. You can report any violations to the appropriate enforcement agency. (See Exhibit 6-10; p 217) c. If all else fails, sue the creditor. You have the right to bring a case in a federal district court. A private attorney can advise you on how to proceed. (p. 221) . FINANCIAL PLANNING PROBLEMS (p. 223) 1. Calculating the Amount for a Home Equity Loan. A few years ago, Michael Tucker purchased a home for $100,000. Today, the home is worth $150,000. His remaining mortgage balance is $50,000. Assuming Michael can borrow up to 80 percent of the market value of his home, what is the maximum amount he can borrow? Present market value of Michael’s home = $150,000. Michael can borrow up to 80 percent of the market value, or $120,000. Michael still owes $50,000 mortgage on his home. Therefore, he can borrow a maximum of $70,000 ($120,000 - $50,000). 2. Determining the Debt Payments-to-Income Ratio. Louise McIntyre’s monthly gross income is $2,000. Her employer withholds $400 in federal, state, and local income taxes and $160 in Social Security taxes per month. Louise contributes $80 per month for her IRA. Her monthly credit payments for Visa, MasterCard, and Discover card are $35, $30, and $20, respectively. Her monthly payment on an automobile loan is $285. What is Louise’s debt payments-to-income ratio? Is Louise living within her means? Louise’s Gross Income = $2,000 6-41 Less: Income taxes = -400 Less: Social Security Tax = -160 Less: IRA contribution = -80 Net take-home pay = $1,360 Her monthly payments on VISA, MasterCard, Discover Card, and a car loan add up to $370 per month. Louise’s debt payments to income ratio is 370 to 1,360, or 27.2 percent. This ratio exceeds the recommended 20 percent figure. Therefore, Louise is overextended. Her maximum monthly loan and credit card payments should not be over $272 (20 percent of $1,360). 3. Calculating the Debt-to-Equity Ratio. Robert Thumme owns a $140,000 townhouse and still has an unpaid mortgage of $110,000. In addition to his mortgage, he has the following liabilities: Visa $565 MasterCard 480 Discover card 395 Education loan 920 Personal bank loan 800 Auto loan 4,250 Total $7,410 Robert’s net worth (not including his home) is about $21,000. This equity is in mutual funds, an automobile, a coin collection, furniture, and other personal property. What is Robert’s debt-to-equity ratio? Has he reached the upper limit of debt obligations? Explain. Robert’s total debt (not including mortgage) is $7,410. His net worth (not including his home) is $21,000. Therefore, his debt-to-equity ratio is $7,410 divided by $21,000, or 0.35. Since this ratio is less than 1, Robert has not reached the upper limit of debt obligations. 4. Calculating Net Worth and Determining a Safe Credit Limit. 6-42 (a) Calculate your net worth based on your present assets and liabilities. Refer students to Exhibit 3-3: Creating a Personal Balance Sheet. (b) Refer to your net worth statement and determine your safe credit limit. Use debt payments-to- income and debt-to-equity formulas. Refer students to the section on General Rules of Credit Capacity in the text. 5. Calculating the Debt Payments-to-Income Ratio. Kim Lee is trying to decide whether she can afford a loan she needs in order to go to chiropractic school. Right now Kim is living at home and works in a shoe store, earning a gross income of $820 per month. Her employer deducts $145 for taxes from her monthly pay. Kim also pays $95 on several credit card debts each month. The loan she needs for chiropractic school will cost an additional $120 per month. Help Kim make her decision by calculating her debt payments-to-income ratio with and without the college loan. (Remember the 20 percent rule.) Kim’s debt payments-to-income ratio with the college loan is 31.85 percent; without the college loan it is 14.07 percent. According to the 20 percent rule, she cannot afford the college loan. However, after Kim pays off her credit card debts, her debt payments-to-income ratio with the college loan will be 17.5 percent. Therefore, once she pays off her credit cards, she will be able to afford the loan. [ANSWER: $820 — $145 = $675; $95 + $120 = $215; $215 ÷ $675 = 31.39%; $120 ÷ $675 = 17.8%] 6. Calculating Debt Payment–to–Income Ratio. Suppose that your monthly net income is $2,400. Your monthly debt payments include your student loan payment and a gas credit card. They total $360. What is your debt payments–to–income ratio? Monthly net income = $2,400 Total monthly debt payments = $360 Debt-payments-to-income ratio = $360 ÷ $2,400 = 0.15 or 15% 6-43 7. Calculating Debt Payments–to–Income Ratio. What is your debt payments–to–income ratio if your debt payments total $684 and your net income is $2,000 per month? Total monthly debt payments = $684 Monthly net income = $2,000 Debt payments-to-income ratio = $684 ÷ $2,000 = 0.342 or 34.2% 8. Calculating a Safe Credit Limit. Drew’s monthly net income is $1,600. What is the maximum he should use on debt payments? Drew’s monthly net income = $1,600 Maximum should be 20% of net income, or $320 ($1,600 x .20) 9. Credit Reduces Future Income. The disposable income from your part-time job in 2010 and 2011 is $12,000. In 2010, you borrowed $500 at 18 percent interest. You repay your loan with interest in 2011. How much would you have available for spending in 2011? Amount borrowed in 2010 = $500 Interest rate = 18% Interest for one year = $500 x .18 x 1 = $90 Loan repaid with interest in 2011 = $500 + $90 = $590 Spending amount available in 2011 = $12,000 - $590 = $11,410 10. Analyzing Feasibility of a Loan. Fred Reinero has had a student loan, two auto loans, and three credit cards. He has always made timely payments on all obligations. He has a savings account of $2,400 and an annual income of $25,000. His current payments for rent, insurance, and utilities are about $1,100 per month. Fred has accumulated $12,800 in an individual retirement account. Fred’s loan application asks for $10,000 to start up a small restaurant with some friends. Fred will not be an active manager; his partner will run the restaurant. Will he get the loan? Explain your answer. 6-44 Even though Fred has always made timely payments on all obligations, he is not likely to get a $10,000 loan to start up a small restaurant with some friends. The lender knows that Fred will not be an active manager, and his partner may not have any experience in running a restaurant. Moreover, restaurants have one of the highest failure rates in the business world. His current yearly income of $25,000 minus expenses for rent, insurance and utilities will leave just enough money to live. His savings of $2,400 are not sufficient to pay off a loan, and he can not access a $12,800 IRA account until he is 59 ½ years old. 11. Analyzing a Spending Plan. Carl’s house payment is $1,050 per month and his car payment is $385 per month. If Carl’s take-home pay is $2,800 per month, what percentage does Carl spend on his home and car? House Payment = $1,050/month Car Payment = $ 385/month Total Payment = $1,435/month Take-home Pay = $2,800/month Percentage spent on house and car = $1,435 ÷ $2,800 = .5125 or 51.25%. 6-45 FINANCIAL PLANNING ACTIVITIES (p. 224) 1. Determining Whether or Not to use Credit. Survey friends and relatives to determine the process they used in deciding whether or not to use credit to purchase an automobile or a major appliance. What risks and opportunity costs did they consider? This activity can be beneficial to both students and those to whom they talk. The responses will vary, but the process will generally be the same. Using credit increases the amount of money that a consumer can spend to purchase goods and services now. But it decreases the amount of money that will be available to spend in the future. Although credit permits more immediate satisfaction of needs and desires, it does not increase total purchasing power. For most consumers, there are three alternatives in financing a current purchase: they can draw upon their savings, use their present earnings, or borrow against their expected future income. 2. Analyzing Opportunity Costs Using Credit. Think about the last three major purchases you have made. a. Did you pay cash? Why? b. If you paid cash, what opportunity costs were associated with the purchase? c. Did you use credit? If so, why? d. What were the financial and psychological opportunity costs of using credit? a. Paid cash. Cash was available, and it is cheaper to pay cash than to pay finance charges on a purchase. b. Opportunity costs of using cash: The money spent now can’t be used for an another purchase. Also, if the money was in a bank earning interest, the amount of interest is forgone. c. Used credit. Current savings were insufficient to make a purchase with cash, but credit was available at an attractive interest rate from the merchant or a local bank. d. Financial and psychological opportunity costs of using credit: Refer students to text pages 164- 165 where financial and personal opportunity costs are discussed. Let them decide which opportunity costs are more important for them than others. 6-46 3. Comparing Reasons for Using Credit. Prepare a list of similarities and differences in the reasons that the following individuals might have for using credit: a. A teenager b. A young adult c. A growing family of four d. A retired couple a. A teenager may wish to use credit to buy a used car to go to work, to purchase a VCR, a musical instrument, or simply to take a small loan to establish credit. b. A young adult may need credit to purchase an automobile, a major appliance, or a loan for a condominium. c. A growing family of four may need credit for the purchase of a home, furniture, major appliances, or to finance a family vacation. d. A retired couple, hopefully, would have saved enough money so that they won’t need to borrow. But even the retired couple may need to borrow for any unforeseen medical or other emergencies. 4. Using the Internet to Obtain Information about Credit Cards. Choose one of the following organizations and visit its home page on the Internet. Then prepare a report that summarizes the information the organization provides. How can this information help you in choosing your credit card? a. BankCard Holders of America—provides consumer information about your credit card rights. b. Credit Card Network—provides information on credit card rates. c. Federal Trade Commission—provides information on how to regain financial health, uses and misuses of credit cards, and many other related topics. Although student answers will vary depending on which Internet site they visit, you may want to use this opportunity to discuss the issue of how we can get in trouble by misusing credit cards and how we can protect ourselves against credit card fraud. 5. Using your Home Equity to Obtain a Loan. Visit your local financial institutions, such as commercial banks, federal savings banks, and credit unions, to obtain information about getting a home equity loan. Compare their requirements for the loan. Responses will vary, but let students find out what percent of a home’s appraised value can be borrowed and at what interest rate. Once a revolving line of credit is arranged, how often and for how long borrowings are permitted Emphasize that a home equity loan should be used only for items such as education, home improvements, or medical bills. If you miss a payment, you can lose your home. Let students compare annual loan maintenance fees and other costs of setting up an equity credit line. 6. Determining Whether to Cosign a Loan. Talk to a person who has cosigned a loan. What experiences did this person have as a cosigner? Answers will vary, but some studies of certain types of lenders show that as many as three of four cosigners are asked to repay the loan. 6-47 7. Determining Net Worth and Credit Capacity. What changes might take place in your personal net worth during different stages of your life? How might these changes affect your credit limits? Generally, net worth increases with age. And, as net worth increases so does your credit limit. Remember, a creditor may not turn you down or decrease your credit because of your age, may not ignore your retirement income in rating your application, may not close your credit account or require you to reapply because you reach a certain age or retire. Furthermore, a creditor may not deny you credit or close your account because credit life insurance or other credit-related insurance is not available to persons of your age. 8. Assessing How Lenders Determine Creditworthiness. Survey credit representatives such as bankers, managers of credit departments in retail stores, managers of finance companies, credit union officers, managers of credit bureaus, and savings and loan officers. Ask what procedures they follow in granting or refusing a loan. When any one of the above lenders extends credit to its customers, it recognizes that some customers will be unable or unwilling to repay the debt. Therefore, lenders must establish policies for determining who will receive credit. Most lenders build their credit policies around the five C’s of credit: character, capacity, capital, collateral, and conditions. Most of the above creditors use different kinds of rating systems. Some rely strictly on their own instinct and experience. Others use a credit-scoring or statistical system to predict whether you are a good credit risk. 9. Analyzing Credit-Related Problems. Bring to class examples of credit-related problems of individuals or families. Suggest ways in which these problems might be solved. Examples of credit-related problems will vary. First, try to solve the problem directly with the creditor. Only if that fails should you bring more formal complaint procedures. 10. Evaluating Creditors and Seeking Help With Credit-Related Problems. Compile a list of places that can be called to report credit practices, to get advice, help with credit problems, and to check out a creditor’s reputation before signing a contract. If you have a complaint about a bank or if you think any part of your business with a bank has been handled in an unfair or deceptive way, you may get advice and help from the Federal Reserve, or from the Reserve Bank for your district. FINANCIAL PLANNING CASE (p. 225) Don’t Let Crooks Steal Your Identity: How to Protect Yourself and Your credit Rating (p. 225) 1. What are several methods that crooks use to steal your identity? Crooks can pilfer your credit card number and charge merchandise to your account, or they can use your name, birth date and Social Security number to take over your credit card and bank accounts. They may also set up new accounts in your name. 2. How do you discover that someone has stolen your identity? You discover that someone has stolen your identity when your checks start bouncing or a collection agency begins calling you. There will be numerous, current sources listed at the National Fraud Information Center website . 6-48 3. What steps can you take to thwart identity thieves? To protect yourself, you may want to sign up for a credit-monitoring service. Also, you can protect your identity by giving it a lower profile. 4. What actions might you take to ensure that your credit cards and other financial information is secure? To prevent an identity theft from picking up your trash to capture your personal information; tear and shred your charge receipts, copies of credit applications, insurance forms, bank checks and statements, expired charge cards, and credit offers you get in the mail. 6-49 CONTINUING CASE (p. 226) Getting Started 1.Given her current situation, list some suggestions on how Shelby can reduce her credit card debt. Shelby should make an attempt to limit the use of credit cards; cut down on non-essential purchases; reduce her current expenses; and pay off her credit card balances as quickly as possible. She should review her budget and set her spending priorities. 2. What is the best way for Shelby and Mark to become more aware of the effect of credit card debt on their current and long-term financial situation. To develop better credit sense and to avoid long-term financial difficulties, Shelby and Mark should understand that the use of credit decreases the amount of money that will be available in the future. Before charging on their credit cards, the couple should consider whether the purchase is really necessary? can it be postponed?; will it fit their budget? And what are the added financing costs. 3. Explain how the Personal Financial Planner sheet 29 (Consumer Credit Usage Patterns) might be useful for Shelby and Mark.. Students answers will vary. Encourage students to consider Lawrences' short-term and long-term financial planning activities. DAILY SPENDING DIARY (p. 227) Analysis Questions 1. What do your spending habits indicate about your use of credit? The student responses will vary. 2. How might your Daily Spending Diary provide information for wise use of credit? Student answers will vary. 6-50 TM 6-1 HELPFUL TIPS ABOUT CREDIT 1. Budget credit spending wisely. 2. Shop around for credit rates. 3. Use credit only when it's to your advantage. 4. Pay your bills on time. 5. Understand credit contract before you sign. 6. Notify creditors if you can't make payment. 7. Watch your credit card. 8. Tear up the carbons. 9. Don't give credit card numbers over the phone, unless you initiate the call. 10. Keep your receipts and compare them to your monthly statement. 11. Carefully read your monthly bill. 12. Keep a list of your credit card numbers. 13. Report your stolen cards at once. 6-51 TM 6-2 What If You Are Denied Credit? (Exhibit 6-6) 6-52 TM 6-3 Steps in the Process of Resolving a Billing Dispute (Exhibit 6-9) 6-54 Name ______________________________________ Cha pt er 6: I nt r oduct ion t o Consum er Cr edit 2. Bans discrimination in the extension of credit on the basis of race, color, age, sex, marital status, and other factors (abbreviation). 3. A reporting agency that assembles credit and other information about consumers. 4. A valuable asset that is pledged to ensure loan payments. 7. The use of credit for personal needs (except a home mortgage). 9. A prearranged loan from a bank for a specified amount; also called a bank line of credit. 10. The borrower's financial ability to meet credit obligations. 12. An arrangement to receive cash, goods, or services now and pay for them in the future. 13. The borrower's assets, or net worth. 14. A line of credit in which loans are made on a continuous basis and the borrower is billed periodically for at least partial payment. 15. A periodic charge for the use of credit. 1. Sets procedures for promptly correcting billing mistakes, refusing to make credit card payments on defective goods, and promptly crediting payments (abbreviation). 3. One-time loans that the borrower pays back in a specified period of time and in payments of equal amounts. 4. The borrower's attitude toward his or her credit obligations. 5. A loan based on the current market value of a home less the amount still owed on the mortgage. 6. The dollar amount, which may or may not be borrowed, that a lender makes available to a borrower. 8. Electronically subtracts the amount of a purchase from the buyer's account at the moment the purchase is made. 11. The general economic conditions that can affect a borrower's ability to repay a loan. Across Down H O M E E Q U I T Y L O A N C O N S U M E R C R E D I T R E V O L V I N G C H E C K C R E D I T C L O S E D E N D C R E D I T O P E N E N D C R E D I T L I N E O F C R E D I T C R E D I T B U R E A U C O N D I T I O N S C O L L A T E R A L D E B I T C A R D C H A R A C T E R I N T E R E S T C A P A C I T Y C A P I T A L C R E D I T F C B A E C O A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Instructor Manual for Personal Finance Jack R. Kapoor, Les R. Dlabay , Robert J. Hughes, Melissa M. Hart 9780077861643, 9781260013993