PAMANTASAN NG LUNGSOD NG MAYNILA

(University of the City of Manila)

Gen. Luna cor. Muralla St., Intramuros, Manila, Philippines

PLM Business School

1st Semester
A.Y. 2024-2025

Module 2: Securing Basic Households Needs

Chapter 5: MANAGING CREDIT: CREDIT CARDS AND CONSUMER LOANS

Submitted by:

Luat, Kenshin Dale E.

Dela Cruz, Jannah Ray-Ann Jiezelle M.

Molo, Raquim Leigh B.

Quising, Aaron G.

Zamora, Cyril Milo F.

BSBA FM 1-2

Submitted to:
Professor Ragrciel G. Manalo
Personal Finance Adviser

FIN 4112-2 - PERSONAL FINANCE

October 2024
Abstract

This written report provides a comprehensive study aimed to equip students

with the knowledge and skills necessary to navigate the complex world of consumer

credit effectively. Using reputable resources from academic sites, financial

companies, websites, and primary data from interviews and surveys with credit card

users, the report emphasizes the importance of understanding one’s financial limits

and how to make informed decisions in order to avoid debt. The report outlines the

different types of consumer credit, including credit cards and also a detailed analysis

of their terms, costs, and implications for creditworthiness. Offering practical advice

on protecting personal information and preventing identity theft, The report also

delves into the legal framework governing consumer credit in the Philippines.The

report concludes that the critical role of good credit management in achieving

personal financial stability and long-term financial goals serves as a valuable

resource for individuals seeking to understand and responsibly utilize consumer

credit in their financial planning.

Keywords: Credit cards, consumer loans, secured credit, installment credit,

identity theft, credit

LEARNING OBJECTIVES

Afterward, students should be able to do the following:

● Identify the most common types of consumer loans and compare these

based on terms and costs.

● Assess your creditworthiness, know how to improve it and understand

your consumer credit rights

● Understand the various types of consumer credit and recognize the

hazards of credit card use, including the risk of identity theft.

● Establish a plan for managing your consumer.

TOPIC OUTLINE

I. Introduction

II. Methodology

III. Results and Discussions

A. What is Consumer Credit?

○ Uses and Misuses of Credit

○ Types of Consumer Credit - Dela Cruz, Janna Ray-Ann

Jiezelle M.

○ Advantages and Disadvantages of Consumer Credit - Dela

Cruz, Janna Ray-Ann Jiezelle M.

○ Consumer Credit Protection

B. Your consumer credit plan

o Creating a Consumer Credit Plan

o General Rules of Credit Capacity

- Factors Considered in Determining Creditworthiness

 - Factors Influencing Creditworthiness

- What can you do to improve your credit score?

- The Cost of Credit

- Improving Creditworthiness - Zamora, Cyril Milo F.

○ Creditworthiness – Zamora, Cyril Milo F.

○ Identity Theft

- How can thieves get your data?

C. Credit Cards

o Three types of payments in credit card – Dela Cruz, Janna

Ray-Ann Jiezelle M.

○ Types of Credit Cards - Dela Cruz, Janna Ray-Ann Jiezelle M.

○ Pros and Cons of using Credit Card – Dela Cruz, Janna Ray-

Ann Jiezelle M.

○ Types of Credit Card Fees - Dela Cruz, Janna Ray-Ann

Jiezelle M.

○ How to use your credit card responsibly? - Luat, Kenshin Dale

E.

D. Consumer Loans

○ Types of Consumer Loans

○ Advantages and Disadvantages of Consumer Loans - Luat,

Kenshin Dale E.

IV. Conclusion
 I. INTRODUCTION

In today’s economy effective credit management is a critical component of

personal financial health. Credit cards and consumer loans offer individuals the

ability to have borrowing power that are able to help them fund their essential

purchases, manage cash flow, and handle their unexpected expenses Their main

difference is that a consumer loan provides a set plan for an individual’s monthly

down payments which gives many a sense of security, while a credit card is a lot

more flexible since an individual has the power to borrow how much as they want to

and how much they want to pay back each month (Entercard, n.d.). However,

without proper understanding and responsible use, these tools can lead to debt,

increased interest costs, and long-term financial strain.

A study conducted by Pete Grieve in April 2024 revealed that a significant

portion of students are postponing major life milestones due to the burden of student

loan debt. The study found that 70% of students surveyed reported delaying at least

one major life event, such as buying a home, starting a family, or purchasing a car.

This highlights the substantial financial strain that student loan debt can place on

young adults and their ability to achieve key life goals.

The inherent risk of taking on credit intensifies its potential to cause stress,

beyond just being a financial entry in a budget. When questioning an individual's

ability to repay a debt, the total resources available to the individual become crucial.

This indicates that people from various financial backgrounds and social classes

may experience debt in significantly different ways (Hill, 2014).

 While credit cards and consumer loans can be a valuable financial tool for

everyone, mismanagement can lead to significant financial strain in their life,

especially for those who are already burdened by debt. The varying impacts of debt

across different economic classes underscores the importance of understanding

one’s limit financially and making informed decisions. As access to credit and loans

become increasingly common, fostering responsible credit management is truly

essential to maintaining personal financial stability while achieving long-term

financial goals in life.

II. METHODOLOGY

The data for this study were acquired from a combination of existing literature

from reputable academic sites such as Google Scholar and Research Gate, as well

as interviews and surveys conducted among different credit card users. Articles from

financial companies' websites are also mentioned. This study intends to produce a

comprehensive understanding of how multiple factors, such as financial literacy,

compulsive shopping, and identity theft, affect credit card usage and overall

consumer credit behavior. These questions were made with the aim of providing a

complete understanding of the use of credit cards and consumer loans.

1. What are the types of Consumer Credit?

2. What are the ways to avoid Identity Theft?

3. How important having a credit card is and how to use it responsibly?

4. What are the Advantages and Disadvantages of Consumer Loans?

III. RESULTS AND DISCUSSIONS

A. What is Consumer Credit?

According to Galloway & Mahr (2023), a major element of today’s financial

systems is consumer credit, which makes it easier for people to finance their own

needs. It includes a range of borrowing arrangements used for large expenditures or

to cover unforeseen expenses. This investigates the basic elements of consumer

credit, including its origins, varieties, and loan-related terminology. It's a kind of loan

arrangement that enables people to borrow money for personal requirements like

buying cars, paying for school, or handling unpredicted bills. The main goal of

consumer credit is to give customers access to money so they may make large

purchases that they would not be able to pay with their current cash reserves. This

financial instrument is essential for raising people's purchasing power and promoting

economic growth.

Uses and Misuses of Credit

The use of credit to buy goods and services can enhance consumer efficiency,

productivity, or contribute to a more fulfilling life. There are many legitimate reasons

for using credit, such as covering medical emergencies, purchasing an item before

its price increases, or borrowing for a college education. However, using credit for

daily expenses or financing a luxury car like a Porsche when a more affordable

Honda fits your budget is likely unwise.

Credit allows people to spend more money in the present, but the downside is

it reduces future spending power. Many individuals assume their income will grow,

enabling them to repay past credit purchases while continuing to make new ones,
but this requires careful consideration. These are questions you should askbefore

you decide how and when to make a purchase, for example, a car:

● Do I have the cash to purchase this?

● Could I use my savings for this purchase?

● Can the purchase fit my budget?

● Can I use the credit I need for this purchase in another better way?

● Could I postpone the purchase?

● What are the opportunity costs of not purchasing this?

When an individual chooses to use credit, they should ensure that the

advantages of buying now—such as greater efficiency, productivity, or a more

fulfilling life—outweigh the financial and emotional costs. When used properly, credit

allow individuals to experience more and enjoy more. However, if misused, it can

lead to default, bankruptcy, and damage to their creditworthiness.

Using credit wisely needs planning and foresight. Individuals should not only

assess the immediate benefits of a purchase, but also consider the long-term

financial implications. Creating a solid financial plan that includes setting limits on

how much credit to use, and understanding how repayment will affect future cash

flow is essential. Building an emergency fund and prioritizing savings can help

reduce the reliance on credit for unforeseen expenses.

Types of Consumer Credit

Secured Credit

A secured credit card is a type of credit card that is intended to help people

establish or repair their credit histories. With a secured card, as opposed to a regular
credit card, the user must deposit cash as security, usually equal to the credit limit

that has been approved. For instance, a customer will often receive a credit line for

the same amount if they deposit $500. In addition to reducing the risk for the lender,

this technique gives consumers the ability to carefully control their payments and

expenditures. Customers can successfully prove to prospective lenders that they are

creditworthy by using a secured credit card.

Moreover, people who utilize secured credit cards have the chance to improve

their credit histories over time. When consumers pay on time, credit bureaus receive

a record on these transactions, which can raise their credit scores. People with short

or bad credit histories might progressively get better credit because of this reporting

method. Furthermore, access to unsecured credit products in the future may be

made possible by using a secured card responsibly. In the end, a secured credit card

is an invaluable tool for customers who want to build or repair their credit (Staff,

2023).

Unsecured Credit

An unsecured credit card does not need you to make a collateral deposit.

Better benefits and rewards, cheaper fees, and lower interest rates are typically

associated with unsecured credit cards. In general, customers get better value with

unsecured credit cards. Although it may seem strange that someone would want a

credit card that demands an upfront cash deposit, it's easy to see why customers

with bad or no credit could be prepared to apply. If you can't find a lender to offer you

credit in the first place, you might not be able to build credit over time. It can be

tough to qualify for a typical, unsecured credit card when your credit score is low or

nonexistent (Staff, 2023).

Installment Credit

A sort of borrowing, also known as "closed-end credit" , has a specified

repayment time, a predetermined amount, and a specific purpose. This type of credit

helps borrowers create reasonable budgets by usually requiring set payments of

identical amounts over the course of the loan. Closed-end credit is often associated

with mortgages and vehicle loans, which are regulated by formal agreements that

specify terms of payback. Important information like the total number of payments,

the amount of each payment, and the total cost of the credit are all specified in this

contract. Crucially, when a borrower uses closed-end credit, the lender frequently

maintains some degree of ownership over the products they have financed until they

have paid off all of their debt (Enright, 2021).

Revolving Credit

Revolving credit, also referred to as open-end credit, lets borrowers access

money whenever they want to make purchases and is automatically billed on a

regular basis for at least a portion of the outstanding debt. Retailer credit cards,

major bank credit cards, and overdraft protection services are typical examples of

open-end credit. With this kind of credit, the total amount that can be used is

determined by the maximum borrowing limit, also known as the line of credit. It is

crucial to remember that the borrower will usually be subject to high interest rates

and other finance charges on the remaining debt if they do not pay off the entire

balance each month. Therefore, even if open-end credit gives customers freedom

and convenience, if it is not handled carefully, it can also result in large financial
expenses. To preserve financial stability and prevent taking on too much debt, it is

imperative to comprehend and handle open-end credit appropriately (Enright, 2021).

Advantages and Disadvantages

According to GoCardless (2022), borrowers should weigh the many benefits and

drawbacks of consumer credit before utilizing it. Being prepared for emergencies is

one of the main advantages of having consumer credit, since a revolving line of

credit can give you quick access to money for unforeseen costs like auto repairs or

broken appliances. Furthermore, credit makes it unnecessary for customers to carry

big amounts of cash while they purchase, increasing convenience. People can buy

things without having to save for years because of the flexibility of payment plans,

which enables them to take care of urgent costs like home repairs. Additionally, a lot

of stores and credit card issuers create rewards programs that provide customers

cash-back, discounts, and other incentives for using credit, which increases the

value for their money.

On the other hand, consumer financing also has a few major disadvantages.

The high interest rates attached to credit purchases are one major disadvantage;

whereas paying cash covers the sticker price in full, financing a purchase might

cause interest charges that ultimately drive up the total cost. . For instance, credit

card average annual percentage rates (APRs) might be more than 21%, which

results in significant extra costs. Additionally, since being able to borrow money may

encourage spending above one's means, consumers should exercise caution when it

comes to overextending their finances. This can quickly lead to unmanageable debt
levels, therefore it's critical that people use credit cards responsibly in order to keep

their finances stable.

Consumer Credit Protection

The Consumer Credit Protection Act (CCPA) was created in 1968 with the

intention of strengthening consumer rights in the credit industry. Key credit terms

must be disclosed, and it includes safeguards against dishonest practices such as

truth in lending, fair credit reporting, and limitations on wage garnishment. The CCPA

provides financial security for workers by limiting garnishments, and it also builds

consumer confidence in the credit system by encouraging transparency in lending

practices.

The CCPA presents difficulties for compliance and efficient implementation in

spite of its advantages. In order to ensure compliance with a variety of requirements,

organizations must manage its complexity. This is especially true when it comes to

providing clear financing disclosures, which frequently cause misunderstandings.

The requirement to keep accurate and up-to-date credit information is another

challenge faced by credit reporting agencies. Through a comprehensive analysis of

the CCPA and a focus on compliance, institutions can strengthen consumer rights

and promote responsible credit practices.

Lending Act (TILA) and the Consumer Leasing Act (CLA)

In the case that creditors withhold necessary information from consumers or

provide false information, consumers have the legal options to pursue remedies

under the Truth in Lending Act (TILA) and the Consumer Leasing Act (CLA). In the
event that a creditor fails to adhere to these regulations, customers may file a lawsuit

to recover any resulting financial damages. This legal framework also covers credit

card violations, giving customers the ability to hold noncompliant creditors liable.

Furthermore, by facilitating class action lawsuits, these acts allow groups of people

who have all been subjected to similar injustices to file a lawsuit together. This

clause encourages greater responsibility among creditors and increases the

likelihood that consumers will receive compensation, which eventually creates a

more equitable lending environment.

Fair Credit and Charge Card Disclosure Act

Originally proposed as a Truth in Lending Act amendment, the Fair Credit and

Charge Card Disclosure Act aims to improve consumer protection with regard to

credit card solicitations. This law requires that any credit card solicitation, whether

done online, over the phone, through print, or by mail, must prominently display the

important terms related to the account. Important details like annual fees, cash

advance fees, and financing charges are among the important disclosures that must

be provided in order for customers to make an informed decision about a credit card.

The act also mandates that any modifications to account terms be promptly

disclosed to customers in order to avoid unforeseen expenses. The act intends to

encourage transparency and assist consumers in making wise financial decisions

about the use of credit by enforcing these requirements.

Equal Credit Opportunity Act (ECOA)

In order to stop discrimination in lending practices on the basis of race, color,

religion, national origin, sex, marital status, or age, the Equal Credit Opportunity Act
(ECOA) was created. A consumer has the right to file a lawsuit if they think their

creditor has been unfairly treating them or discriminating against them. People who

have been the victims of discrimination may file a lawsuit under the ECOA for actual

damages as well as punitive damages, which act as a monetary fine to discourage

the creditor from committing the same offenses in the future. Since punitive damages

have a $10,000 maximum, creditors are strongly encouraged to follow fair lending

practices. This law creates a more equitable financial environment by promoting

equal access to credit for all people and holding creditors accountable.

Fair Credit Billing Act

Regarding billing errors on credit accounts, the Fair Credit Billing Act offers

consumers vital protections. A creditor loses the right to collect the amount owed on

the disputed item plus any related finance charges, if they fail to follow the

established procedures for fixing these errors. This protection is important because it

guarantees that creditors uphold strict standards in their billing procedures, even in

cases where the initial bill was ultimately accurate. Customers who suffer from these

violations may also file a lawsuit for double the amount of any finance charges they

incur in addition to actual damages. By putting these conditions in place, FCBA

promotes greater accountability in the credit industry by empowering customers and

encouraging creditors to resolve billing issues promptly and fairly.

Fair Credit Reporting Act

Important rules for how creditors and credit bureaus must handle and access

consumer credit information are established under the Fair Credit Reporting Act. A

consumer has the ability to file a lawsuit against the companies involved if they find
that their credit information were accessed illegally or that mistakes were not fixed. In

the event that such violations occur, consumers have the right to pursue actual

damages, which may include monetary losses brought on by false credit reporting.

Punitive damages may also be awarded by courts in cases where intentionality of

the breach is established, which acts as a disincentive to creditors and credit

bureaus engaging in careless or deliberate misbehavior. In order to guarantee that

customers have more control over their credit information and to advance fairness

and accuracy in the credit reporting system, these rights must be upheld.

Consumer Credit Reporting Reform Act

The Consumer Credit Reporting Reform Act of 1977 significantly transfers

from consumers to credit bureaus the burden of guaranteeing accurate credit

information. This indicates that in the situation that you dispute something on your

credit report, the onus now shifts to the credit bureau to verify the accuracy of the

data rather than to you to provide evidence of any errors. Customers may file a

lawsuit to recover damages if a creditor or credit bureau neglects to confirm the

accuracy of contested data and it turns out to be false later on. By making credit

reporting agencies answerable for the accuracy of the data they provide, this reform

gives consumers more power. The overall goal of the act is to increase consumer

trust in the financial system by promoting accuracy and fairness in credit reporting.

Electronic Fund Transfer Act

The Electronic Fund Transfer Act (EFTA) provides needed safeguards for

consumers using electronic financial transactions. In the event that a financial

institution violates any of the provisions outlined in this act, customers may take legal
action to recover actual damages that are caused by the violation. To further

encourage financial institutions to comply, the EFTA further provides that consumers

may receive punitive damages, with a maximum of $1,000 and a minimum of $100.

In addition, successful plaintiffs are entitled to reimbursement for their legal fees and

court expenses, which lessens the financial strain of filing a lawsuit. In addition, the

EFTA permits class-action lawsuits, which boosts the act's overall efficacy in

promoting fair practices in electronic fund transfers by allowing affected consumers

to collectively pursue justice against non-compliant institutions.

Credit Card Accountability Responsibility and Disclosure Act of 2009

This Act went into force in February of 2010. Numerous regulations governing

the credit card companies' ability to grant credit and manage accounts were altered.

From now on, credit card companies have to give 45 days' notice before raising

rates. Also, there is now a 21-day grace period between the date of receipt of the

statement and when the payment is due. Furthermore, the credit card companies

have to prioritize paying off debts with higher interest rates, like cash advances. If

only the minimum payment is made, they must also furnish a more comprehensive

statement that details the time and total interest amount required to pay off the

balance. The rules that credit card companies use to provide credit to individuals

under the age of 21 have also undergone adjustments. Young people need to be

able to provide evidence of their income or have an accepting signature from

someone accountable for the account.

B. Your consumer credit plan

Creating a Consumer Credit Plan

 Creating a consumer credit plan entails a number of crucial procedures that

assist in coordinating financial objectives with efficient credit management. This is a

methodical process for developing a thorough consumer credit plan.

Step 1: Understanding Your Current Financial Situation - Before creating

a credit plan, it is important to assess an individual’s financial situation. If they have

the capabilities to use a consumer credit. Credit reports are useful tools for

assessing someone's financial health. The financial data that credit bureaus gather

about you is used to create your report. To assess your creditworthiness, lenders

consult the reports—often in conjunction with additional information (Investopedia,

2023). Going back from past lessons, financial statements and income statements

are also used to determine if an individual is financially stable.

Step 2: Defining Credit Goals - After assessing the financial situation of an

individual, the next step is to define what their credit goals are. According to Faster

Capital, credit goals, Whether your objective is to pay off debt, increase your credit

score, or save for a major purchase, you need to have a plan that works for you and

your situation. This means that you need to have a clear and practical approach for

reaching your credit goals.

Step 3: Selecting the appropriate Credit Type - After coming up with credit

goals, the next will be selecting which type of credit an individual needs based on

their needs. According to Enwright (2021), When an individual purchases on open-

end or revolving credit, loans are made continuously, and they are billed on a regular

basis to cover at least a portion of the payments. Open-end credit includes things
like using a store-issued credit card, a bank card like a VISA or MasterCard, and

overdraft protection. Meanwhile, closed-end credits are used with specific purposes,

time and amount and are usually paid in equal amounts. Closed-end credit includes

loans for vehicles and mortgages. The terms of repayment, including the number of

payments, the amount of each payment, and the cost of the credit, are outlined in an

agreement, or contract. Closed-end credit usually involves the seller maintaining

some degree of control (title) over the items until all payments are made.

Step 4: Develop a Budget - After choosing the right type of credit based on

your current needs, the next step is to develop a budget that corresponds to the

credit obligation that you will have. To recall, according to Investopedia (2024), a

budget is an estimate of revenue and expenses for a given future period of time.

Individual budgets are typically reevaluated on a regular basis, and budgeting is

typically done continuously. By knowing what an individual’s budget is, they can

evaluate if they have the capacity or the capabilities to pay the credit that they will be

using.

Step 5: Implement Credit Management Strategies - After developing the

budget that will correspond to the credit obligations, the next step is to implement

credit management strategies to ensure that an individual is able to pay its credit

obligations and will not drown in debt. There are systems that an individual can use

to better manage their credit and avoid penalties. According to Investopedia (2023),

the amount of a borrower's overall credit limit that is being used at any particular time

is known as the credit usage ratio. A borrower's credit score is determined in part by

credit reporting companies using the credit utilization ratio. By maintaining this ratio
(preferably below 30%) the credit score of an individual will avoid being deducted.

There are also automated payments. According to Investopedia (2023), it is a

periodic bill payment that is set up to happen on a predefined date. Automated

payments help with the hassle of remembering due dates and also help with paying

on time. Moreover, this system helps avoid penalties made by not being able to pay

on time.

Step 6: Educate Yourself on Consumer Rights - Learn about the

regulations protecting consumers when it comes to credit. Knowing your rights can

help you deal with problems involving unfair procedures, errors in billing, or disputes

with creditors. Some of the laws here in the Philippines like the Credit Information

System Act (Republic Act No. 9510) which greatly helps in improving the overall

availability of credit especially to micro, small, and medium-scale enterprises;

providing mechanisms to make credit more cost-effective; and reducing the

excessive dependence on collateral to secure credit facilities, the Truth in Lending

Act (Republic Act No. 3765) which has a policy to safeguard its citizens against

awareness of the true cost of credit to the user by guaranteeing a complete

disclosure of said cost in order to avoid the usage of credit in an uneducated manner

that would be detrimental to the country's economy, the Credit Card Industry

Regulation Law (Republic Act No. 10870) that governs all credit card issuers,

acquirers, and all credit card transactions and aims to align to global best practices

and promote an efficient payment system. and the Bangko Sentral ng Pilipinas

(BSP) Regulations are to protect consumers and ensure the safety of their

information in terms of their credit.

General Rules of Credit Capacity

DEBT PAYMENTS-TO-INCOME RATIO

● The ratio is determined by dividing your monthly debt payments

(excluding mortgage payments) by your net monthly income. Experts

recommend that individuals allocate no more than 20% of their monthly

income (after taxes) to consumer debt payments. For instance,

someone earning P70,000 should spend P14000 on credit payments.

● The 20% threshold is the upper limit, but ideally, you should aim to

spend 15% or less to maintain financial stability. This figure accounts

for typical household expenses but may not cover emergencies. If you

are new to using credit, it is essential to keep debt obligations well

below 20% of your net income

DEBT-TO-EQUITY RATIO:

● The debt-to-equity ratio is calculated by dividing total liabilities by net

worth, excluding your home and mortgage. A debt-to-equity ratio

approaching 1:1—meaning your consumer debt equals your net

worth—is a sign that you may be over leveraged and have reached a

point of financial strain.

The guidelines above are not suitable and perfect for everyone. Only an

individual based on the money they earn, obligations, and financial plans for the

future, can determine the exact amount of credit you need and can afford. A person

must be his or her own credit manager.

Creditworthiness

According to Dhir (2023), it is a gauge of a person's likelihood of paying on

debt, or how deserving they are of obtaining new credit, based on the lender's

assessment. This measurement allows the lenders/creditors to know if an individual

is capable of paying said credit before approving a new credit. An individual’s

creditworthiness is also measured by their credit score.

Credit Score is a three digit number that can measure an individual’s credit

worthiness based on factors in their credit report. A credit score can range from 300

to 850 based on how responsible an individual is in being careful of paying on time,

making a positive payment history and avoiding penalties. This tool can help lenders

assess an individual’s ability to pay debt and the risk of lending to an individual

(Brankas Team, 2023).

Payment history also plays a vital role for lenders to determine an

individual's creditworthiness. This shows every payment that an individual made from

the past and lender’s usually don’t give credits to someone with a bad payment

history. For example, people that have late payments, missed payments, and overall

financial irresponsibility (Dhir, 2023).

Lastly, Debt-to-Income Ratio (DTI) is also a part of a lender’s evaluation of

an individuals’ creditworthiness. Lenders use this to determine the financial stability

of the borrower, if they are financially stable or not.

Factors Considered in Determining Creditworthiness

 The Equal Credit Opportunity Act (ECOA) ensures that all credit applicants

have equal rights and prohibits discrimination in credit decisions based on factors

such as race, nationality, age, sex, marital status, and others.

● Age

Regarding age, while creditors may ask for an applicant’s age on a

credit application, they cannot deny or lower credit based solely on age if the

person is old enough to sign a contract. Additionally, a credit account cannot

be closed because someone reaches a certain age or retires.

● Public Assistance

When it comes to public assistance, individuals cannot be denied credit

simply because they receive Social Security or other public assistance

benefits. However, relevant information about this income source may be

considered to assess their creditworthiness.

● Housing loans

The ECOA also applies to housing loans, for example, mortgages or

home improvement loans. It prohibits discrimination based on the race or

nationality of people in a neighborhood where an applicant lives or intends to

purchase a home, a practice known as redlining.

Factors Influencing Creditworthiness

The 5 C’s of Credit

 This is a system that lenders look into to determine the creditworthiness of an

individual. It includes the five (5) C’s which are the character, capacity, capital,

collateral and conditions that may affect the lender’s judgement of giving loan to

this individual. Understanding this system can also help an individual boost their

creditworthiness and qualify for credit (Capital One, 2023).

1. Character - It refers to a person’s credit history, looking into their past

payments and how they managed their debts in the past. To assess an

individual’s credit risk and establish if they qualify for a loan and credit,

lenders will review their credit scores and reports. Information on a person's

payment history, amount of debt, and negative information such as late

payments are all included in their credit reports (Capital One, 2024).

2. Capacity - After assessing their credit history, lenders will now assess their

ability to repay loans. This is where the debt-to-income ratio comes in hand as

it looks into how much debt an individual has compared to the income they

earn. To show that an individual has the capacity to take additional debt, it is

advisable to have a low DTI ratio, 36% or less (Capital One, 2024).

3. Capital - This one includes an individual’s savings, investments and assets

they are willing to put towards a loan. Paying down your loans usually comes

primarily from your household income. However, capital gives the lender more

security in case something unforeseen occurs that could impair your ability to

repay them, like losing your job (Capital One, 2024).

 4. Collateral - It is something that an individual can provide as security, usually

a secured loan and secured credit card. Lenders can take an individual’s

collateral if they aren’t able to make payments. By providing collateral, it can

help them secure a loan if they don’t qualify based on their credit worthiness

(Capital One, 2024).

5. Conditions - Lastly, this contains other information that may help boost your

creditworthiness and qualify for credit. External factors like economic

conditions, industry trends can be a factor in evaluating their risk.

What can you do to improve your credit score?

A credit score provides a snapshot of the details in your credit report at the time it’s

calculated. To improve your score, start by reviewing your credit report for accuracy.

The most effective way to boost your score in the long term is by practicing

responsible credit habits, such as paying bills on time, reducing balances, and using

credit wisely.

1. Obtain your credit report and verify its accuracy. You can request a free report

annually from each of the three national credit reporting agencies.

2. Pay your bills promptly. Paying on time is important for improving your credit

score. You can set up automatic payments from your bank account, but

ensure sufficient funds are available to avoid overdraft fees.

3. Understand how your credit score is calculated. Your score typically depends

on factors like:
 ● Do you pay bills on time? Late payments, accounts sent to collections,

or bankruptcies will negatively affect your score.

● How much debt do you owe? Having balances close to your credit

limits can decrease your score.

● How long is your credit history? A shorter history may impact your

score, but timely payments and low balances can offset this.

● Have you applied for new credit recently? Too many recent credit

applications can hurt your score, though checking your own credit

report or prescreened offers doesn’t count.

● What types of credit accounts do you have? How many are they? A

mix of credit cards and installment loans may improve your score, but

too many finance company accounts or credit cards can lower it.

4. Learn the legal ways to improve your credit report. The FTC’s guide, Building

a Better Credit Report, offers advice on correcting errors, managing debt, and

avoiding scams.

5. Be cautious of credit-repair scams. In a lot of cases, you can fix your own

credit effectively.

The Cost of Credit

The first thing you should do if you're thinking about taking out a loan or

creating a credit account is figure out how much it will cost overall and if you can

afford it. It is therefore wise to weigh your options in order to obtain the best

conditions. The annual percentage rate (APR) and the finance charge are two
important ideas to remember. Making sense of these terms will enable you to decide

on your financial obligations.

Annual Percentage Rate

Formula:

Where

r = simple interest rate

n = Number of payment periods in one year (12, if payments are monthly; 52, if

weekly)

Finance Charge

Formula:

Finance Charge = Principal x Rate of interest x Time

Importance of Creditworthiness

Creditworthiness plays a vital role in various financial aspects like determining

whether you are qualified to apply for a loan. Your creditworthiness will be the basis

of whether lenders will or will not allow you loan. It can also help with your

employment because some companies run pre-hiring background checks to their

future employees and it may include your credit reports (Akin, 2023).

Improving Creditworthiness

Improving your creditworthiness is a necessary key to securing loans,

obtaining good interest rates and enhancing one’s financial opportunities. According

to Equifax, a person's credit score may be raised by using these particular strategies.
1. Reviewing your Credit Reports - For most individuals, this is the first step in

improving your credit score. By checking these reports, they will be aware of

the unpaid balances that are needed to be paid immediately. It is also

important to check if there aren’t inaccuracies or signs of identity theft or fraud

going in your account.

2. Timely Payments - One of the best things that an individual can do to

improve their creditworthiness is to pay their debts in a timely manner and

avoid late payments. An individual’s payment history can be evaluated by how

consistent they are in paying their debts on time and lenders will see if you

are capable of always paying it on time. If an individual struggles on paying on

time, one can set up alerts so that they will be reminded.

3. Keeping your Credit Utilization Rate Low - According to Experian (2023), it

is the percentage of available credit that an individual is using on their credit

cards and other lines of credit. It is often advised to keep your credit utilization

rate lower than 30% or even as low as 10% (for these individuals, they usually

have exceptionally high credit scores). To make sure that their utilization rate

will remain low, a person can also ask their bank for an increase in their credit

limit.

4. Limiting your Requests for New Credits— and the Hard Inquiries with

Them - There are two different kinds of credit history queries, commonly

referred to as soft and hard inquiries. A typical soft inquiry could involve you

running your own credit report, granting permission to a prospective employer

 to run your credit, checks from financial institutions you currently do business

with, or credit card companies running credit reports to see if they want to

send you pre-approved credit offers. Your credit score is unaffected by soft

inquiries. On the other hand hard inquiries can affect your credit scores.

Credit cards, mortgages etc. are some of the examples of a hard inquiry.

Getting hard inquiries occasionally is unlikely to have a big effect. But if you

have a lot of them in a short amount of time, your credit score may suffer.

Banks and other lending services may interpret your demand for money as an

indication that you are having financial problems and present a greater risk.

Applying for new credit should be avoided for a while if your goal is to improve

your credit score (Lake, et.al, 2024).

5. Keeping your Old Accounts Open - How long you've had credit accounts is

taken into account by the age-of-credit aspect of your credit score. It is

advisable to avoid closing old accounts that an individual isn’t using because

it still contributes to their overall credit score. Closing credit cards while you

have balances on other cards will reduce your available credit and raise your

credit utilization ratio. That can deduct a couple of points from your credit

score (Lake, et.al, 2024).

6. Making Use of Credit Monitoring Services - Utilizing these services can

help individuals be at ease at looking at their credit score overtime. These

services keep an eye out for any changes to your credit report, like closed or

recently opened accounts. Numerous excellent credit monitoring services can

assist you in avoiding fraud and identity theft. For instance, you can get in
 touch with the company to report potential fraud if you receive a notification

that a new credit card account that you don't remember opening has been

recorded to your credit report (Lake, et.al, 2024).

Identity Theft

By definition, identity theft is the crime of using another person's financial or

personal information for fraudulent purposes, such as carrying out unauthorized

transactions or purchases. Identity theft can take many various forms, and the

victims usually suffer consequences to their reputation, finance, and credit. Since the

criminal will have access to a list of resources linked to the stolen identity, all

confidential personal information is at risk. Then, using these stolen tools, accounts

can be created in a variety of firms, including, insurance, banking, medical and so on

(Hussain and Cheng, 2024).

How Can Thieves Get Your Data

There are varieties of ways that a thief can steal your information. Some look

into trash cans and garbage to find old accounts, statements and other documents

that contain personal information that they can use to get into your accounts

unauthorized. Moreover, with technological advancements, they can hack systems

and access confidential information, use malware that can gather information and

deceptive emails and text messages. These are only some of the ways a thief can

get to your data and use it for malicious purposes (Hussain and Cheng, 2024).

How to Protect Your Data and Information From Identity Theft

 To decrease the chances of your information being stolen, and your accounts

getting hacked into. These are some of the things that an individual needs to keep in

mind to protect themselves from this crime.

1. Keeping Personal Documents Secure - According to Ken Paxton, it is the

most important step in protecting your information from identity theft. Storing

documents like statements, credit cards, papers in a safe place is advised.

Sharing personal and financial information should be done with care and only

be given to requestors that you have established a trusted relationship with.

Furthermore, when an individual has documents that they no longer need, it

should be shredded before discarding it in trash to ensure that the information

is not shown in the paper.

2. Using Strong Passwords - According to Lifelock, Identity thieves may find it

more difficult to access your accounts through hacking techniques like

credential stuffing and password spraying if you have strong password

security. You can create and manage secure passwords with the use of

password managers. The majority of password managers are accessible for

mobile devices as well as laptops, allowing you to stay safe no matter where

you go.

3. Being vigilant online - Watching out for phishing scams. Be wary of emails

or texts that claim you owe money, instruct you to open an attachment, or

request personal information. Verify the sender's email address and the

website, and avoid clicking any of the message's links. If you believe the
 message to be genuine, get in touch with the business independently using

the details provided on a bill or their website (Luthi, 2024).

4. Monitoring your credit reports and account regularly - According to Ken

Paxton, as soon as you receive your credit billing statement and bank account

statement, open it and read it. Verify for any unlawful withdrawals or charges,

and report any right away in writing and over the phone. Know when your bills

and financial statements typically come each month if you receive them by

mail. If they are late, give the company a call. If someone has altered your

mailing address to conceal fraudulent charges, statements can be missing.

C. Credit Cards

According to Taneja (2024), with the help of a credit card, customers can

make purchases both online and offline and are expected to pay back the balance

within a predetermined amount of time. Credit cards are financial tools. With a credit

card, which essentially acts as a short-term loan, the user can make purchases up to

their credit limit, and those purchases are added to their credit balance. Users can

choose to make interest-bearing installment payments or return the entire amount

owed before the due date to avoid paying interest. The credit limit is set by the

issuing financial institution and depends on a number of factors, such as the credit

history and income of the borrower. When used responsibly, a credit card can

improve a user's credit score and make it easier to apply for loans in the future.

However, when used improperly, the relatively high interest rates can result in a

large debt accumulation. Therefore, efficient financial management requires a grasp

of the terms and conditions related to credit card usage.

There are three types of payments in credit card to remember

Statement balance is the total amount due at the end of your billing cycle. If

you pay this balance in full each month, you won’t incur any interest on your

purchases. This helps you avoid additional fees and maintain a healthy credit score.

It's important to stay on top of your payments to fully benefit from your credit card.

Always review your statement to ensure you know the exact amount due (Taneja,

2024).

Minimum payment is the smallest payment you can make to maintain the

status of your account by the deadline. By making this payment, you can stay away

from possible penalties and late fees. Paying the bare minimum, however, may

result in interest being charged on the outstanding amount. Making prudent payment

decisions is essential to preventing long-term debt. Always verify the precise

minimum amount needed by consulting your statement (Taneja, 2024).

Current balance indicates the entire balance due on your credit card, taking

into account all of the purchases made since the end of your billing cycle. This

covers all up to that point purchases, payments, and fees. As you complete new

transactions, it is updated in real-time. You can better control your spending and

prevent overspending by keeping track of your current balance. (Taneja, 2024).

Types of Credit Cards

Secured Credit Cards are usually given to people who want to establish new

credit or repair their credit history. For these cards, the applicant needs to fund an
associated bank account or provide a refundable security deposit. The cash that is

deposited acts as collateral to secure the credit limit that is linked to the card. The

card issuer may keep the security deposit if the cardholder defaults on payments.

Because of this mechanism, which reduces the lender's risk, more customers can

choose secured credit cards. Because of this, obtaining one is typically simpler than

with the majority of unsecured credit cards. All things considered, secured credit

cards can be a useful instrument for building or enhancing one's credit profile

(Taneja, 2024).

Unsecured Credit Cards are the most prevalent kind of credit card, making

them a well-liked option for customers. An unsecured credit card can be opened and

used without requiring a deposit, in contrast to secured credit cards. Instead, the

credit card issuer evaluates the applicant's creditworthiness by looking at things like

income, credit history, credit score, and current debts. The outcome of this review

procedure establishes whether the application is accepted or rejected. Because it

can result in more credit card options, higher credit limits, and lower annual

percentage rates, maintaining a high credit score is crucial. Better terms on future

credit products are also more likely to be obtained with a positive credit profile. All

things considered, unsecured credit cards provide advantages and flexibility to

eligible applicants (Taneja, 2024).

Student Credit Cards are specific financial products made for people who

are attending college. These cards are available to students and work similarly to

unsecured credit cards. The application process is made easier by card issuers'

recognition that students might not have large bank accounts, high incomes, or long
credit histories. As a result, students typically find it simpler to apply for and receive

these cards. But most of student credit cards have lower credit limits. This restriction

promotes responsible credit use and aids students in gradually creating their credit

profiles. All things considered, student credit cards are useful instruments for helping

young adults build credit while handling their financial obligations (Taneja, 2024).

Store Credit Cards are credit cards that particular retailers issue with the goal

of improving consumer interaction. The purpose of these cards is to encourage

customer loyalty and retention by offering customized benefits. Store credit cards

frequently come with reward programs that let users accrue points for things they

buy at the store. They might also have benefits like longer return policies and special

cardholder discounts. Retailers can develop a closer relationship with their

customers by offering incentives for spending money at their stores. It's crucial for

customers to understand, though, that store credit cards usually have higher interest

rates than regular credit cards. All things considered, regular shoppers may benefit

from store credit cards if they use them sensibly (Taneja, 2024).

Reward Credit Cards are financial goods that companies frequently offer in

collaboration with financial institutions. With these cards, users can use their

purchases to accrue reward points, cashback, or travel miles, among other benefits.

Rewards credit cards are a useful tool for brands to increase customer loyalty and

retention by offering incentives for purchases. These cards appeal to a lot of

customers because of the value they add to regular transactions. Rewards schemes

can also be customized to match the preferences of individual customers, which

boosts involvement even more. It is imperative that cardholders comprehend the

terms and conditions linked to rewards, encompassing possible charges and interest

rates. All things considered, people who use rewards credit cards responsibly and

pay off their balances on time can reap big rewards (Taneja, 2024).

Business Credit Cards are made to help small business owners efficiently

manage their cash flow. These cards are especially designed to satisfy the special

requirements of corporate operations. One of the main advantages is that it can help

businesses expand by offering incentives in the form of rewards for purchases, like

online advertising. Furthermore, a lot of business credit cards provide free employee

cards that are connected to the main account, making it simpler to track expenses.

Owners of businesses can assign spending while still keeping control over their

finances thanks to this feature. Additionally, these cards frequently have greater

credit limits, meeting the monetary needs of companies. All things considered,

business credit cards give small business owners useful tools to improve financial

management and streamline expenses (Taneja, 2024).

Pros and Cons of using Credit Card

According to IDFC FIRST BANK (2021), users should carefully weigh the

many benefits and drawbacks of credit cards. Positively, they offer convenience by

enabling users to make purchases without having cash on hand. As long as

balances are paid off on time, they also aid in preventing debt accumulation. Credit

cards also make recordkeeping easier by providing thorough monthly statements,

which can be very helpful come tax time. They also permit low-cost loans, allowing
borrowers, so long as they can pay back the fees on schedule, to make essential

purchases prior to payday. Additionally, using credit cards sensibly can help

establish a solid credit history, which will enhance future borrowing opportunities.

Credit cards also frequently offer member benefits like cashback and discounts.

Credit cards typically offer purchase protection, giving consumers a layer of security

when disputing charges or handling defective products.

On the other hand, there are significant disadvantages to credit card use.

Because of how simple it is to use, users may feel tempted to spend more than they

have budgeted for. If balances are not paid in full, interest charges can mount up

quickly, raising the total cost of purchases. Furthermore, the value of any rewards

accrued may be reduced by the annual fees and different cash advance charges

associated with certain credit cards. Because credit cards are frequently the target of

scammers, users must also make a commitment to regularly reviewing their

statements in order to ensure accuracy and guard against fraud. Last but not least, if

consumers overlook the fine print, alluring introductory interest rates could turn out to

be deceptive and result in far higher rates after the promotional period expires. In

general, people need to consider these.

Types of Credit Card Fees

Annual Fee is a charge that the cardholders must pay in order to keep their

cards. It is charged annually for the perks along with services offered by the card.

These fees could range between hundreds and thousands of dollars, depending on

the card's features. Higher annual costs frequently include more premium benefits

such as travel vouchers and special access to events, and lower yearly prices
provide fewer benefits. With these advantages and services, cardholders were given

a chance to consider which perfect subscription fits their needs.

Interest Fee, also known as Annual Percentage Rate (APR), was charged for

using the credit card. This fee is applied to any balance that is to be paid after the

specified due date. This fee can be illustrated as a percentage and is charged

monthly. The longer the amount due has not been paid off, the more interest the

cardholder will pay.

Foreign Transaction Fee is charged by a bank or card company when the

cardholder makes a purchase or any transaction outside of the whole country. It is

intended to compensate for the costs associated with changing one currency to

another. Because the process takes longer, the fees are usually higher. Some cards

do not charge this fee, particularly travel-oriented cards designed to attract travelers

and encourage them to use their cards internationally.

Over-limit fees are charged when a cardholder uses the card beyond its limit.

This fee is a penalty for exceeding the approved borrowing limit and is meant to try

and discourage cardholders from overspending. Though the cost will not exceed the

amount spent by the cardholder, it is still subject to bank restrictions. After spending

beyond the card's limit, the next transaction may decline when this fee occurs.

Cash Advance Fees were imposed when cardholders used their cards to

withdraw money. Cash advances have higher interest rates than normal card

purchases. The interest on this fee begins immediately when the cash is withdrawn.
Cash advances are not useful because they do not provide rewards such as reward

points, unlike regular purchases. Cash advances can be an easy and quick way to

receive cash, but they may also cause cardholders into debt if not handled properly.

How to use your credit card responsibly?

Credit cards make it easier to make purchases along with conducting other

kinds of transactions. However, if not used carefully, it might lead consumers into

debt. Using a credit card cautiously is important for financial stability. By following

these guidelines, customers are still able to benefit from credit cards while avoiding

risks. These suggestions can help the cardholder learn how to use a credit card

responsibly.

Pay your credit card bills on time. This is one of the most crucial aspects of

using a credit card properly. Paying on time may help to prevent incurring interest

fees. Overdue payments show up on the user's credit report and lower the user's

credit score, making it hard to apply for loans in the future.

Use the card for needs, not wants. Focus on essential expenses like bills

and groceries. Credit cards can be used during important situations. It is a smart

approach for responsible financial management. This strategy avoids causing

unnecessary debts and spending too much on things that are not necessary.

Take advantage of your credit rewards. Many credit cards offer rewards

including cash back, travel credit, and purchase discounts. Card issuers also provide

an incentive boost after spending a minimum amount by a specific date. Maximizing

the card's benefits can help to lower the overall cost of purchases. Understanding

the card's rewards might help determine whether the yearly cost is worthwhile.

D. Consumer Loans

What is a Consumer Loan?

According to the Corporate Finance Institute (CFI), a consumer loan is a loan

given to consumers to finance specific types of expenditures. It is any kind of loan

that a creditor extends to a customer. This loan may be secured, meaning it is

backed by the borrower's assets, or it may be unsecured, meaning the borrower's

assets are not used as collateral. Furthermore, It is a category of lending products

designed to help an individual finance a wide range of consumer purchases, from

day-to-day shopping needs to major life events such as buying a home (First State

Community Bank, 2021). There are a variety of consumer loan options available to

borrowers, depending on the type of purchase an individual intends to make.

Types of Consumer Loans

There are many types of consumer loans according to what an individual

needs and what they are looking for. It can vary from small purchases to big ones

like a car or a home. This report will look into the different types of consumer loans

and what they can offer to an individual.

1. Educational/Student Loan - It is a type of consumer that is usually used by

students. It allows a student to fulfill their educational needs in the form paying

tuition and school fees. It greatly helps students continue to pursue their
 education until graduation where the repayment of the loan usually starts

(Wallstreetmojo Team, 2024).

2. Credit Cards - This is one of the most widely used and popular types of

consumer loan. Credit cards are often used to finance daily needs like

groceries and such. For this type of consumer loan, an individual needs to

keep in mind that the interests in this are higher and failure to pay can cause

penalties and a decrease on their credit score (Wallstreetmojo Team, 2024).

3. Mortgages - It is a form of consumer loan where it is used to buy a home.

Unlike credit cards or student loans where you don’t have a collateral

(unsecured loans), this loan is a secured loan because the house itself will be

your collateral. Before a bank or other lenders give the type of loan to an

individual, their credit score and the ability to down payments are looked into

to ensure that an individual is capable of paying said loan (Wallstreetmojo

Team, 2024).

4. Auto Loan - This loan is mainly used for purchasing a car. Like mortgages, it

is also considered as a secured loan because the collateral for this purchase

is the car itself. There are also lenders that give unsecured loans for this but

you usually need a great credit score to acquire this loan. These loans are

usually available in banks or the car dealership itself (Wallstreetmojo Team,

2024).
Advantages and Disadvantages of Consumer Loans

There are many advantages that come from using consumer loans. According

to Entercard, it is advantageous for someone that wants to borrow a one-time

amount that you pay back following a set down payment plan. Furthermore,

consumer loans provide an individual a structure and predictability on how much

they need to pay back at the end of a month. It also has a lower interest than credit

card debt, allowing an individual to feel more comfortable loaning for their purchases.

Consumers also enable a refinance for the smaller and also the bigger and

expensive loans.

With advantages present, there will also be a disadvantage on using

consumer loans that one must be aware of. One of the disadvantages that an

individual may experience is getting carried away easily. According to Entrepreneur

The Arts (2019), with how many sources that provide consumer loan comes with a

sacrifice. Doing these loans in commercial banks is already a given, on the other

hand, some individuals go for suspicious lenders that are illegal or risky in

desperation. This happens because once an individual takes out a loan, it becomes

easier to loan again and again without knowing that they are in a pile of debt. After

an individual realizes this, a person will be left with debts they don’t have the

capability to pay off each month, with compound interest also added to the loans.

By having the knowledge of these advantages and disadvantages, it can

greatly help individuals plan their loans to their capabilities without going over what

they can afford to pay. To avoid big debts, it's also always advisable to manage your
finances and do research before applying for certain loans (Entrepreneur The Arts,

2019).
IV. CONCLUSION

In conclusion, good credit management is critical to preserving one's own

financial stability, especially in light of the substantial influence that consumer debt,

particularly student loans, has on one's capacity to reach important life milestones.

Achieving long-term financial goals and maintaining financial stability require an

understanding of the different forms of consumer credit, including installment,

revolving, secured, and unsecured credit, as well as the promotion of responsible

usage.

Developing a consumer credit plan is essential to successful money

management. People can create a strong basis for their financial health by

methodically assessing their financial status, establishing specific credit goals, and

selecting the right kinds of credit. Effective budgeting techniques and knowledge of

consumer rights can greatly improve creditworthiness, and in the current digital

environment, taking preventative measures to guard against identity theft is crucial.

Additionally, when used sensibly, credit cards and consumer loans can

increase one's purchasing power and financial flexibility, they are vital financial tools.

Credit cards come with risks of creating debt if they are not used responsibly, despite

their convenience and potential benefits. On the other hand, consumer loans offer

structured repayment plans for a range of purposes, from major purchases like

homes and cars to education. The conditions of both financial products, any possible

fees, and the borrower's capacity to repay must be carefully considered.

Encouraging responsible credit practices and financial literacy is essential for

negotiating the complicated world of consumer credit and allowing people to make
decisions that support long-term stability and financial health.
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