Presentation on theme: "Obtaining and Protecting Your Credit"— Presentation transcript:
1 Obtaining and Protecting Your Credit Lesson 6Obtaining and Protecting Your Credit
2 Learning ObjectivesExplain the concept of consumer credit, including major types and its benefits and drawbacksDescribe the keys to building and maintaining healthy creditIdentify ways to protect your identity
3 The Basics of Credit for Consumers You will almost certainly need or want to use credit at some point in your lifeUsed properly, credit can make it possible to purchase things that might be difficult to save the entire amount forUsed unwisely, credit can wreak havoc in your financial life!!!!!!Explain how the need for credit exists at some point in almost all people’s lives.Give examples of things it might be difficult to save for (college, car, etc)
4 Types of Credit It is essential to know about: the major types of creditthe advantages and disadvantages of eachthe laws that protect your right to get creditCredit for consumers fall into one of three categories:NoninstallmentInstallmentRevolving open-end creditDiscuss the importance of understanding the different types of credit. It is important to the financial plan.
5 Types of Credit The consumer borrows the money at the time of purchase Then the consumer pays off the entire amount within a short timeNoninstallment credit is typically issued by:department storesfurniture storesother businesses selling items that cost several hundred dollarsNONINSTALLMENT is credit that is extended for a short term, such as 30 days or lessDiscuss noninstallment credit. If you pay the amount in full, no interest will be applied. If not, it will.
6 Types of CreditNoninstallment credit encourages immediate purchases of specific itemsThis type of credit may be useful to a person who is expecting to receive money soon enough to repay the amount borrowedTell students to use this type of credit with caution.6
7 Types of CreditInstallment loans typically require the borrower to make monthly paymentsPart of each payment goes to reduce the principalMonthly payments also include interest chargesInstallment credit is also used for specific purchases but allows the borrower more time to repay the moneyPrincipal is the total amount of money outstanding on the loanDiscuss how installment credit differs from noninstallment credit.Tell students that the lender charges interest each month on the unpaid principle
8 Types of Credit Installment loans may span a few years These type of loans are generally used for purchases such as furniture, boats, and other large itemsNote that using installment credit does make the purchase of these items more costlyTake a look at Figure 9.1 to see how much interest you might pay over the life of a typical loan8
10 Types of CreditRevolving open-end credit allows consumers to borrow up to some preset maximum amount, such as $1,000 or $10,000Credit limit the preset maximum amount you can borrowConsumers can use revolving credit to make one purchase or manyThey can repay the entire amount borrowed at the end of the monthThey can also spread payments over a longer timeThey can continue to use the credit as long as they do not exceed their credit limitDiscuss how revolving credit is typically the most abused and mismanaged type of credit.Discuss how the minimum payments on these do not always cover the interest or fees owed.It is more difficult to pay off.
11 Math for Personal Finance Barbara borrowed $2,300 to buy some furniture and is paying 15 percent interest a year for the loan. The terms of the loan do not require her to pay off any of the loan balance during the first year. She only has to make interest payments.How much interest will she pay the first year if she does no reduce the principal of the loan?
12 Math for Personal Finance Solution: Barbara will pay $2300 x .15 = $345 in interest the first year
13 Advantages of Using Credit Credit helps you make large purchases soonerUsing credit simplifies your finances by eliminating the need to carry cash or checksUsing credit wisely can help you establish a good credit historyA good credit history can make it less expensive for you to use credit in the futureCredit history is the record of how one has used credit in the pastDiscuss the advantages of having a good credit history.People with good credit histories may be able to borrow at lower interest ratesExplain how credit helps you make large purchases sooner than you would if you had to save for the entire purchase price in advance
14 Math for Personal Finance Harlan used his credit card—a form of short-term credit—to charge three tanks of gas this month.If his charges were $43.12, $51.87, and $38.35, how much should he pay at he end of the month?
15 Math for Personal Finance Harlan should pay the bill in full: $ $ $38.35 = $133.34
16 Disadvantages of Using Credit It is often easier to get credit than it is to pay it backIf you borrow too much money, you may have difficulty making the paymentsA bad history can make borrowing more costly—or impossibleFailure to pay off loans can lead to bankruptcyDiscuss the importance of managing credit – it is important to the financial plan.If you borrow money to buy a car or house and fail to make payments, you could lose your possessions and all the money you have invested in themExplain what bankruptcy means – a legal process in which a court takes over certain aspects o a person’s financial life
17 Disadvantages of Using Credit Credit cards can tempt us to purchase things today when it would be wiser to save and pay for in fullCredit card interest rates are usually very highIt is wise to use credit cards for purchases you plan to pay off when the bill comes inCheck out for a payment calculator where you can plug in different balances and interest ratesExplain why it is extremely costly to carry a credit card balance from one month to the next
18 Math for Personal Finance Sabrina charges $800 at the local sporting goods store to buy some exercise equipment. The store offers no interest for 90 days if the balance is paid in full, or 24 percent annually if the balance is not paid in full prior to 90 days.How much interest will she need to pay if she lets the account go for 91 days before paying the bill?
19 Math for Personal Finance Solution: She will pay 2 percent--.02 a month, since the annual rate is 24 percent. At 91 days, she will owe for three months-3 x .02. Therefore, her interest will be $800 x .06 = $48
20 Credit Rights and Consumer Credit Laws Federal law helps protect your access to creditThis legislation requires creditors to notify applicants within 30 days if they will receive creditThey explain the reason for denial if credit is deniedRefer to figure 9.2 for other consumer credit lawsEqual Credit Opportunity Act prohibits creditors—people who provide credit—from denying credit based on gender, age, race, national origin, religion, and martial statusDiscuss the importance of knowing your rights and responsibilities for credit cards.
22 Check Your Financial IQ What are the risks and benefits of consumer credit?
23 Check Your Financial IQ Credit is convenient and can make certain purchases possible.But credit is costly and can lead to financial problems if used unwisely23
24 Building Good Credit We all want to establish good credit Having no credit history at all may result in paying more for credit risk (how do they know if you have not history to compare)Lenders often charge higher interest rates for people with less-than-good creditKnow the process by which you build good credit and how that information is collected and reported to creditorsDiscuss the importance of building good credit.
25 Your Credit HistoryEach person’s credit history is collected in an individual credit reportHow many times have you borrowed money? Did you pay it back on time?Lenders use this information every time you apply for creditEvery time you make a credit purchase, it will further establish your credit history, good or bad.
26 Your Credit HistoryPaying for utilities, such as electricity and phone, also shows up on your credit historyFailing to pay your utility bills will negatively affect your credit historyIt can also affect your ability to get credit in the futureDiscuss how each time you fail to pay a utility bill on time, it will negatively affect your credit history.Tell students to ask themselves each time they write a check or use a credit card if it will negatively hurt their credit report.26
27 Credit Bureaus and Credit Scoring Credit bureaus collect credit information on individual consumersThere are three main credit three main credit bureaus:EquifaxExperianTransUnion
28 Credit Bureaus and Credit Scoring Credit bureaus provide credit reports to potential lenders, employers, and others upon requestEveryone can access his or her credit report once every 12 months free of chargeYou will see the types of records being maintained by these credit bureaus regarding your personal credit historyCredit report shows every time you have applied for credit, whether or not you have paid your bills on time, if you have paid your credit cards in full every month or carried a balance, and if you have paid late feesDiscuss what is on a credit report.Discuss how you can access your credit report.
29 Credit ReportsWhen you apply for credit, the potential creditor will study your report and make decisions about extending additional creditReview your credit report now and make sure it contains accurate informationCompanies can make mistakes that can hurt your financial lifeFair Credit Reporting Act limits the sharing of your financial information only to firms that have a legal purpose to evaluate this informationDiscuss how it is important to act quickly to fix mistakes.Credit reporting agencies are required by law to remove incorrect entries. You will need proof!
30 Credit ScoreCredit score a number based on your credit history that assesses your creditworthinessCredit bureaus use your credit history to create a credit scoreIndividuals with higher credit scores get better interest rates on loansThey are determined to have a lower risk of defaulting
31 Credit Score Credit scores are often called FICO scores Credit scores are calculated based on a model created byFair Isaac Corporation (FICO)Credit scores are often called FICO scoresFICO scores will be between 300 and 850A higher score indicates better creditLook at figure 9.4 to see where most people’s credit scores fall
33 Credit Score FICO scores are broken down the following way: 35 percent based on your credit history30 percent based on how much of your available credit you are using
34 Check Your Financial IQ What are the elements of “good credit”?
35 Check Your Financial IQ Good credit means having a credit history that is generally free of credit problems, such as unpaid or late bills37
36 Threats to Your Credit: Identity Theft Identity theft occurs when someone uses your personal information without your permission for personal gainIdentity theft can occur without you even knowing itSomeone may use your personal information to open a credit account and buy a large purchaseThis account will be reported to the credit bureau under your nameWhen they don’t pay the bill your credit score will sufferExplain how identity theft can occur without you even knowing it until you request a copy of your credit report and find outDiscuss how protecting your personal information is key to your future access to credit and financial well being.
37 Threats to Your Credit: Identity Theft Some criminals use your personal information to establish totally new identities and engage in criminal activityPeople who have had their credit destroyed can no longer borrow money for anythingIdentity theft is illegal but is difficult to detectDiscuss how information may be stolen and you might not even know it.
38 Identity Theft Tactics Shoulder surfing occurs when someone in a public place skims personal information to use against you by overhearing your conversation or viewing your personal informationIdentity thieves use a variety of tacticsBe cautious when someone seems to be standing too close to you when you’re using a computer, using a credit card, etc.Discuss the importance of keeping your personal information out of the hands of anyone else.
39 Identity Theft Tactics Identity thieves have been known to go through a person’s trash to gather informationCredit card receipts, banking information, or unsolicited offers for credit cards can enable someone to profit from your identityShred documents such as these prior to disposing of them
40 Identity Theft Tactics Other tactics include:Skimming involves copying your credit card or debit card numbers from your cardsPretexting occurs when someone improperly accesses your personal information by posing as someone who needs data for one reason or anotherPhishing is when pretexting occurs online and can include ing you and asking you to verify account informationPharming uses viruses to redirect you from a legitimate website to an official looking website designed to obtain your personal informationStress the importance of checking your credit report regularly.
41 Protecting against and Reacting to Identity Theft Preventing the theft of your identity is well worth the simple investmentThe purchase of identity theft insurance may also be worth consideringRefer to figure 9.6 for some methods you should employ to prevent identity theft.
43 Protecting against and Reacting to Identity Theft Act quickly if you detect a sign of identity theftMonitor your credit report and protect yourself from identity theftIt is critical to your long-term financial healthDiscuss ways to prevent identity theft.Keep copies of financial documents.Empty mailbox every day.
44 Monitor Your Credit Report Check your credit report periodicallyReport inaccurate information to the three main credit reporting bureausFile a dispute related to the inaccurate informationThe credit bureaus will contact the creditor to verify the accuracy of information and change it if inaccurate
45 Check Your Financial IQ What is identity theft?
46 Check Your Financial IQ It is the improper use of personal information for gain49
47 SummaryCredit is the ability to borrow funds that will be repaid in the futureIt comes in a number of different forms such as:NoninstallmentInstallmentRevolving open-end credit
48 Summary Credit has advantages and disadvantages An advantage to credit is that it helps make large purchases easierA disadvantage is that credit can be costlyBuilding good credit history is important to your financial future
49 SummaryCredit bureaus maintain a complete history of your credit transactionsThey determine your credit score and report this information to interested partiesYou can obtain a free credit report from any one of the three credit bureaus to ensure that the report is accurate
50 SummaryIdentity theft is one of the fastest growing crimes in our countryIt is important to protect yourself against identity theftAct quickly if you suspect identity theftKeep copies of all correspondence and credit transactions