2 What is credit and why is it so important to have good credit? Credit is an arrangement to receive cash, goods, or services now and pay for them laterFinancial institutions and merchants issue credit – called a creditorHaving the ability to borrow funds that we normally could not pay for with cashHomes, cars, education, appliances, electronicsUsing credit wisely keeps people out of trouble
3 Factors to Consider Before Using Credit Do you have the cash you need for the down paymentDo you want to use your savings instead of credit?Can you afford the item?Could you use the credit in some better way?Could you put off buying the item for a while?What are the costs of using credit?
4 Types of Credit 2 basic types Closed-end credit Open-end credit One-time loan that you will pay back over a specified period of time in payments of equal amountsIs used for specific purpose and involves a definite amount of moneyOpen-end creditIs a loan with a certain limit on the amount of money you can borrow – line of credit
5 Sources of Consumer Credit LoansInexpensive loans with low interest – parents, family members, friendsMedium-Priced Loans with moderate interest – banks, credit unionsExpensive loans with high interest – finance companies, retail storesCredit CardsUse money over time and pay it backGrace period – a time period with no finance chargeFinance charge – total $$ amount you pay to use credit
6 The Cost of CreditAnnual Percentage Rate (APR) is the cost of credit on a yearly basis, expressed as a percentageVariable Interest Rate – changes throughout the term of the credit issuedFixed Interest Rate – stays the same throughout the term of the credit usedSimple Interest – is the interest computed only of the principal (which is the amount you borrowed)
7 Applying for Credit “The 5 C’s of Credit” Character: Will you repay the loan?Capacity: Can you repay the loan?Capital: What are our assets and net worth?Collateral: What if you do not repay the loan?Credit History: what is your history with using credit?Credit Rating – is a measure of a person’s ability and willingness to make credit payments on time.Credit Bureaus – an agency that collects information on how businesses and people pay their bills.Experian, Trans Union, Equifax
8 Managing Debt The Warning Signs Making only the minimum payment each monthHaving trouble making the minimum paymentMiss loan payments or pay lateUse your savings for necessities such as food and utilitiesYou borrow money to pay off old debtsYou exceed credit limits on your credit cardsBeen denied credit because of a bad credit report
9 What are your options? Consumer Credit Counseling Service Counseling Services through banks, military, credit unionsCounseling through state and federal housing authoritiesBankruptcy
10 BankruptcyA legal process in which some or all of the assets of a debtor are distributed among the creditors because the debtor is unable to pay his or her debtsIt may also include a plan for the debtor to repay creditorsLAST RESORT!!!
11 Types of Bankruptcy Chapter 7 Chapter 13 A.k.a. “straight bankruptcy” Most of the debtors assets are sold of to pay the debt owedCertain assets are protected – Social Security, unemployment, net value of home or car, tools used for employmentChapter 13A debtor with regular income can work with the court to devise a payment planNot all assets are lost
12 Effects of Bankruptcy Credit can be very difficult to obtain You are forced to pay very high interest rates on loansMay not be able to get a credit cardBad credit can keep you fromGetting a jobRenting or buying a residenceBuying a car