2 What is credit?The reputation one has built in his or her dependability in regard to paying back borrowed money
3 Four C’s of Credit Health 1. Credit History:How faithful have you been at paying back borrowed money?
4 2. Character Criminal past? Anything in the person’s history? 3. Capacity to payWhat is the person’s monthly income and can he or she handle a monthly payment schedule?
5 4. CapitalHow much does the person have in the bank?
6 Credit Rating Entitled to one free credit report a year Three main credit bureaus:Trans UnionEquifaxExperian
7 FICO (Fair Isaac Corporation) Range from660 borderline sub-prime (high risk)
8 FICO Factors 35% punctuality of payments in the past 30% capacity used (maxed out?)15% length of credit history10% type of credit used (installment, revolving)10% recent applications for credit/recent credit obtained
9 Credit Cards Convenient Easy to get, Easy to use Risks are high Theft and fraud
19 Homework for FridayRead “Deter, Detect, Defend, Avoid ID Theft” and “Red Flag Rules”Answer questions: 1-4 from Deter, 5-9 from Red Flag1. What are the ways in which credit card account information is fraudulently obtained?2. What risks do creditors take when issuing unsecured credit cards?
20 3. What incentive exists to compensate creditors for taking the risk of extending credit? 4. What would happen if government imposed limits to the amount of interest these providers could charge?5. What are the Red Flag Rules?
21 6. Whom do the Red Flag Rules apply to? 7. Who opposes the Red Flag Rules? Why?8. What are the benefits of the Red Flag Rules?9. What are the costs of the Red Flag Rules?