7Types of Consumer Credit Charge Account credit provided by a store or company for customers to buy its products
8Types of Consumer Credit Credit Card – can be used in many different placesIssued by banks (i.e., Bank of America Visa card)Some have annual fees ranging from $25 to $80Creditors earn money from interest charges, annual fees, and penalties
9Types of Consumer Credit Installment Loans – loans repaid in regular equal payments over a period of timeIncludes student, car, and home improvement loansDebtor receives loan for a certain about of time (i.e., 60 month loan)Debtor makes equal monthly payments that cover loan plus interest
10Types of Consumer Credit Mortgage Loan – a form of installment loan, only it is written for a long period of time (15 – 30 years)Home serves as collateral, something of value the bank can take
11Types of Loans Short-term: one year or less Medium-term: one to five yearsLong-term: more than five yearsStore CardCar LoanMortgageCredit CardStudent Loan
13Advantages of Using Credit ConvenientShop and travel without carrying large amounts of cashBuy expensive items (like cars) now and use right awayGood for emergencies (i.e., unexpected car repairs)Establish Credit RatingA credit rating is a measure of a person’s ability and willingness to pay debts on time.Good ratings tell other lenders you are a responsible borrower and a good credit risk.Contribute to the Growth of EconomyConsumers are able to buy more goods and servicesBusinesses can hire more workers to produce more
14Disadvantages of Using Credit Easy to MisuseTempting to buy things you cannot afford or don’t needCan be difficult to resist sales or offers for more creditHigher CostThings cost more when using credit instead of cash because of the interest feesCommitting Future IncomeDebt must be repaid
15The Truth About CreditThe more credit card bills you have, the harder they are to pay.After a while, you may reach your credit limit (point where you cannot charge anymore).Late or missed payments lower your credit rating!
16Creditworthiness (3 C’s) When you apply for credit, creditors want to make sure you are worth the risk.
173 C’s: Capacity Capacity is the consumer’s ability to repay the loan. Creditors look for:Verified employment and incomeDebt Ratio – current amount of debt compared to income
183 C’s: CharacterCharacter is the consumer’s proven trustworthiness in repaying debts.Creditors will check:Credit referencesCredit report
193 C’s: CapitalCapital is the amount of money the applicant has beyond their current debts.Creditors will check:SavingsInvestmentsPotential collateral
20Creditworthiness – The 3 C’s Your 3 C’s will also affect your credit limit.Debtors are usually allowed a higher limit if bills are paid on time.Your 3 C’s may affect your annual percentage rate.Annual Percentage Rate (APR) – credit interest rate calculated on a yearly basisCredit cards might offer a low introductory APR such as 3% but then your rate could jump to 20% after a few months.When comparing APR, read the fine print! Many will say “APR as low as…” which means not everyone will qualify.
21The Importance of Credit Reports Maintaining CreditThe Importance of Credit Reports
22Purpose of a Credit Report Data CollectionTrack your personal, financial, and employment information over timeCredit HistoryCredit lenders examine your past credit behaviors to determine how you might handle credit with them in the futureEmploymentNot all employers will check it, but some what to see that you have demonstrated responsibility in your personal and professional life
23What is in a credit report? Personal InformationName, address, social security number, date of birth, employment informationCredit AccountsType of account, date account opened, credit limit / loan amount, current balance, payment historyCredit InquiriesAll creditors who have checked your credit report in the last two yearsPublic Record / Collection ItemsBankruptcies, foreclosures, overdue debt collection, etc.
24Credit Bureaus The three major credit bureaus are: TransUnionEquifaxExperianConsumers have the right to request one free credit report per year from each bureau.You should check your credit report on a regular basis to protect yourself from identity theft.