CHAPTER:6

INTRODUCTION TO CONSUMER CREDIT

INTRODUCTION TO CONSUMER CREDIT

CREDIT: Its an arrangement to receive cash,
goods or services now and pay for them in future.
CONSUMER CREDIT: Use of credit for personal
needs(except home) by an individual and families.

Every consumer having three alternatives in current

purchases Use the savings
Utilize current earnings
Borrow against the future income.
- Trade off related with each alternative and having
negative impact on financial condition and can lead
to financial crisis.
- Consumer credit depends upon the peoples ability
and willingness to pay.

Increasing level of credit in EconomyBasically the young generation has added to the growth of
consumer credit. Without consideration of debit limit they
uses the credit over electronic appliances, clothing,
furniture, automobiles.

Uses and misuses of creditUsing credit may make a consumer more efficient or give
enjoyable life. There can be some valid reasons to use
credits like basic need or education purposes.

Using credit increases the amt of money a person can

spend on purchases today against the trade off of
decreasing future income.
Things to be considered before purchase on creditHaving down payment
Using savings
Fit into the Budget
Unavoidable Need
Opportunity cost of avoiding purchase.

Advantages Of Credit:
Enables a person to enjoy goods and services.
Credit

card provides shopping convenience and

efficiency of paying several purchases in one monthly
payment.
Credit is more than substitute for cash.
Safer to use credit card when u shop or travel.
By using credit card holder will be given grace period till
the due date of billing.
Many shopping malls also issue their credit card so
daily purchase becomes easy.

Disadvantages Of Credit
Temptation to overspend, especially during period of

inflation but the over spending can lead to serious

problem.
Failure to repay a loan may result in loss of income and
good reputation.
Long term financial problem damage personal relations
Decrease the future income
Delay in payment would increase amt with interest.

How to Protect Yourself From Identity Theft:

Provide private identity numbers only when

necessary.
Remove your name from junk mail,
telemarketing lists.
Protect yourself by shredding old credit slips,
account statements, and credit offers you
receive in the mail.

TYPES OF CREDIT
CLOSE ENDED CREDIT: One time loan that the
borrower pays back in a specified period of time and in
payment of equal amounts. Eg. home loan, automobile
loan
Three typesInstallment sales credit:
Installment cash credit:
Single lump sum credit:

OPEN ENDED CREDIT: A line of credit in which loans

are made on a continuous basis and the borrower is
billed periodically for at least partial payment. Eg. credit
card use in different stores
Credit cards: Many banks offering credit cards with

grace period available to customers.

Cash advances on credit card: This charges higher

interest rates
Cobranding: Eg star bazaar hsbc Cobranding
Debit cards: ATM cards used for withdrawal and for

purchases

Protection Against Debit/Credit Card Fraud

MeasuresSign immediate
store them at secure place
Dont give no on phone lines
Dont write no's anywhere
Remember to get card receipts after transaction
If billing incorrect than inquire
If dont receive billing statement notify complain

immediately

As internet is widely used for investing, banking, shopping

the incidence of cyber theft has been increase, SoUse secured browser software that encrypts the
purchase information
Keep records of your online transaction
Review monthly bank and credit card statement
Read policies of web sites you visit.
Keep personal information private
Never share password
Shop at businesses you know and trust.

Dont download files sent by strangers.

Travel and entertainment card

T&E cards are not really credit card because Monthly

balance due in full
Home equity loan

This base only difference between the current market

value and amount still you owe

Measuring your credit capacity

Depending on the budget take decision about loan and
Credits

CAN YOU AFFORD A LOANBy proper assessment of budget plan decide of credits.
If the installment is less than saving then a person can
afford it.

GENRAL RULE OF CREDIT CAPACITY-

Debt payment to income ratio =

Monthly debt payment
monthly income
Debt should not be more than 15% of income.
*Not including house payment which is a long-term liability

Debt to equity ratio=

liability
net worth

So based on financial obligation and income take decision.

Cosigning A loan: Co signing means taking an extra

responsibility of debt of another person.
You are being asked to guarantee the debt, so consider if
you can afford it if the borrower defaults.

Co signer often pay- if person taken credit and fails to

repay then co signer comes under the liability of repaying debt.
Before cosign take into considerationYou can afford to repay the loan
Even if you dont ask to pay loan but this would be
considered as liability
If borrower defaults you may lose the property.

BUILDING AND MAINTAINING CREDIT

RATING
Whenever a person takes a loan its major consideration
for creditors also. Quality of credit rating depends on the
person.
CREDIT BUREAUS: CIBIL(Credit Information bureaus
(India) limited) Its first credit information bureau of India
and software developed by the transunion, largest
Consumer credit bureau of the world and CIBILs
technical partner. Working since 2001.

Who provides data to credit bureaus- all the bank and

financial institutes as per the RBI notification provides
data to CIBIL.
Credit file is maintained for every person and CIR( credit
information report) is created.
Rating is given for credit.
To obtain credit report some fees need to be paid and for
specific purpose only a person can get his credit
information.

APPLYING FOR CREDIT

ECOA(Equal credit opportunity act)
Creditor cant discriminate on basis of race, age, gender,
marital status and other factors for credit dealing.

Fair Credit Reporting Act

Five Cs
Character: borrowers attitude towards credit obligation
Capacity: financial ability of a borrower to meet financial

obligation
Capital: the net worth of assets of the borrower
Collateral: a valuable asset that is pledged to ensure loan
payment
Conditions: general economic condition that affect the ability
to repay the loan.
Age: ECOA very specific about the age.
Housing loans: taken into consideration if any for
granting other credit. Based on these factors credit is
given to applicant.

AVOIDING AND CORRECTING CREDIT

MISTAKE
Sometimes a person find the transaction in credit card

bills that he had not done. So better to have regular

payment of the bills and if any snag occurs then complain
to creditors.

BILLING ERROR: charge for something that is not

authorize to you and many times the bill amt has been
wrongly debited or you have been debited for the
transaction that you had cancelled.

In case of billing error- Notify the creditor by call and

then in writing. Write all the information needed. Till the
time pay rest of the amount i.e. undisputed amt.
if the mistake is from creditor side then no financial
charges or interest will be levied. If no mistake is from
creditor then creditor will send the explanation and also
debit the charges.

DEFECTIVE GOODS OR SERVICES: any defective

item u have got then ask merchant to replace or if not
solved then complain to forum and get the thing replaced.

IDENTITY CRISIS: recently many cases have been

occurred. The information has been used and transaction
take place but the person not even have knowledge of this
theft and get to know when statement receive. check from
data has been used- whether from personal computer,
office system, any bank account if chq has been issued
then stop payment if card stolen get it blocked.
eg.icici bank

COMPLAINING ABOUT CONSUMER

CREDIT
COMPLAINS ABOUT BANKS: RBI
PROTECTION UNDER CONSUMER CREDIT

LAWS
Truth in lending act
Equal credit opportunity act
Fair credit billing act
Fair credit reporting act

Truth In Lending Rights

The Truth In Lending Act requires creditors to
provide you with accurate and complete credit
costs and terms.
Provides specific cost disclosure requirements

for the APR and total finance charges.

Regulates disclosure of other terms and
conditions.
Regulates advertising of credit terms.