2CREDIT Advantages/Disadvantages purchasing powerstandard of livingprovides emergency fundsbudgetingreceiptssafetyCan cost moreReduces comparison shoppingTies up future incomeCan lead to overspending
3Preventing Credit Card Fraud Carry only the cards you needKeep a list of # in safe placeNotify creditors if lost or stolenKeep copy of receipts to compare to billNotify creditor is discrepancy appearsSign new cardsDestroy (cut) expired cardsDon’t give numbers over phoneKeep card in view at all times
4Sources of Credit Merchants - retail stores Banks and Credit Unions Loans, Credit Vs. DebitFinance CompaniesSmall Loans, High RatesPawnshopsPrivate Lenders - family, friendsUnlicensed LendersLoan Sharks (lowest rate 120% - ILLEGAL!
5Kinds of Credit Open-Ended Credit (Credit Cards) Open 30-day accountsMust pay full balance each month (diners club/amex)Revolving credit accountsPay in full or min. paymentClosed-End Credit (Specified Amount)Installment loansService Credit (Service Given - Pay Later)Layaway Plans (Down Payment -weekly/mthly)
63 C’s of CreditCharacter - will you repay how much you owe, if you pay on time financial responsibility. (Credit history)Capacity - can you repay do you have $ left over after fixed expenses? Income/expenses (time at current job/house)Capital - value of what you own savings, investments, property. Assets (collateral)
7Credit Records/Reports/Bureaus A co. That gathers and sells credit information is called a consumer reporting agency (CRA) or credit bureaus.Computerized.Name, address, ss#, income, public records, current accounts, loans, bounced checks, payment patterns, sued, etc.Trans union, Equifax, and ExperianWho sees your report?Creditors considering granting you credit, employers for employment, insurers, court orders.Information stays on your report for 7 years!
8Credit Ratings Excellent Good Fair Poor Always pays bills on or before due date.Better if married, owns home, +5 yr. job.GoodPays bills on due date or within 10 day grace periodFairPays bills in grace period, occasionally longerSometimes assessed late chargesPoorMisses payments, reminders needed.Threats to collection agencyCredit Ratings
9Your Credit Rights Fair Credit Reporting Act. Promotes the accuracy and privacy of information in consumer credit reports.If denied credit you can get a free report.Right to present your side of the story in a brief 100 word statement.Equal Credit Opportunity Act.Lenders can’t discriminate on the basis of sex, marital status, race, religion, age (18), etc.Truth and Lending Law & Consumer Credit Protection ActKnow how being charged (APR, Annual Fee, etc.)
10Avoiding Unnecessary Credit Costs Accept only the amount of credit that you need.Keep cards to a minimum.Pay cash for small purchases.Shop for loans.Use credit to beat inflation.Time purchases carefully - know your billing dates.Take advantage of rebate programs.
11Creditors Calculate Finance Charges by: Adjusted Balance Methodpay finance charge only on unpaid amount$300 - you pay $250 (finance charge on)Previous Balance MethodMost expensive way. Pay finance charge on the whole month. (allows no deductions on payments made)Average Daily BalanceAdding all daily balances and dividing by the number of days in the cycle (25-30)$300 - you pay 250 got there on the 15th - $50 left300*15 50*15 divided by # of days
12How to Select a Credit Card Distribute HandoutStudy for short quiz tomorrow
13LOANS Secured loan - assets offered as collateral to guarantee payment Unsecured loan - no specific assets are pledged by the credit user as security. Co-signers must pay!
14BANKRUPTCY Involuntary - Debtor is declared bankrupt by a court Take assets and distribute (proportional share)Voluntary - a person asks to be declared insolvent (bankrupt) ON FILE FOR YEARS!!!!!!
15BANKRUPTCY Advantages Disadvantages Debts are erased. Exemptions are allowed.Certain income is unaffected.The cost is small.DisadvantagesCredit is damaged.Property is lost.Some obligations. remain (Taxes, Child support, alimony).Cosigners must pay.
16TYPESChapter 11 - for businesses can retain control or court appoints a trusteeChapter 7 (straight) - Liquidation, assets sold to get cash to pay off debts. Must give up all property except for exempted items.Chapter 13 - Court enforced plan to repay (3 yrs.) - keep all propertyReaffirmation - an agreement to repay after bankruptcy proceedings are completed
17TERMSReaffirmation - Agreement to repay some debts after bankruptcy proceeding are completedExempted items - property the law allows a debtor to keep or protect in declaring bankruptcyDischarge - the balance of debts no longer owed after bankruptcy