2 Overview: Credit 101Credit: someone is willing to loan you money - called principal - in exchange for your promise to pay it backInterest: amount you pay to use someone else’s money.
3 In addition to the APR, there may be other costs of using credit Annual Percentage Yield (APR): amount it costs you a year to use credit, expressed as an interest rateIn addition to the APR, there may be other costs of using creditAnnual Fee: yearly charge for the privilege of using credit.Finance Charge: Actual dollar cost of using credit, which is calculated by a lender.Origination Fee: Charge for setting up the loan.Over-the-limit Fee: Spending more than your limit.Late Fee: Penalty for making a payment after the due date.Universal Default: Hike in interest rate because you made 1 late payment.
4 Need to KnowGrace Period: the number of days in which no interest or finance charges will apply.Minimum Payment: The smallest amount you must pay on your credit card each month (usually 2%).Credit Limit: The maximum amount that you can charge on your credit card.Loan Term: The length of time you have to pay off the loan.
5 5 C’s of Credit Capacity –Can you repay the loan? Collateral – What if you don’t repay the loan?Capital – What are your assets and net worth?Credit History – What is your credit history?Character – Will you repay the loan?
6 Credit Benefits Access to cash in an emergency The ability to use it nowSafety and convenienceEarn bonus points or miles
7 Comparing Credit Cards What to look for:Do I QualifyAPRLoan TermFeesPrepayment PenaltiesMaximum Loan AmountMinimum Payment Amount
8 Type of CreditInstitutionFeaturesCredit CardBanks, credit unions, stores, and gas stationsSome types of credit cards can be used just about anywhere, some only at a specific place.No payoff deadlineMonthly minimum payments vary, based on the balanceUsually has the highest rate of these four types of creditInstallment LoanBanks, credit unions, auto dealers, and other financial institutionsTypically used for large purchases such as a car or an applianceLoan term can vary from a few months to many yearsMonthly payment amount are often set for the life of the loanUsually has a lower interest rate than a credit card
9 Banks, credit unions, stores, and the federal government Type of CreditInstitutionFeaturesStudent LoanBanks, credit unions, stores, and the federal governmentUsed for tuition and other college expensesDepending on your income level, some loan programs let you delay making payments until you graduateLoan term is usually up to 10 years, depending on the amount borrowedMonthly payment amounts are usually set annuallyUsually has lower interest rate than an installment loanMay provide an income tax break on interest paid to the lenderMortgageBanks and credit unionsUsed specifically for a loan to purchase a homeUsually repaid over yearsMonthly payments may be set for the life of the loan, or changed more frequently, depending on the type of interest rateUsually has a lower interest rate than an installment loan
10 Your Credit RecordCredit Report You credit history, a record of your personal (or family) financial transactions.Credit History It is very important to an individuals ability to obtain credit. It is the equivalent of his credit reputation.Credit ScoringLenders use a mathematical model to produce a credit score for you. The score helps lenders predict the likelihood that you will pay your bills as promised.
11 3 Credit Reporting Agencies Equifax Information Service CenterP.O. BoxAtlanta, GAExperian National Consumer Assistance CenterP.O. Box 2104Allen, TXTrans Union Corporation Consumer Disclosure CenterP.O. Box 390Springfield, PA
12 Most popular Credit Score The score ranges from about 300 – 850The higher your score the lower risk you are for the lenderA credit score of 680 or above is goodFICOMost popular Credit Score
13 A good credit history just takes discipline: Always pay your bills on time.If you have a savings account, it’s good to make additional regular deposits, no matter how small.Be choosy about your credit cards and loansApply for only the ones you needKeep them for a long timeIt is better for your score to maintain a low balance on one card and pay it off each month than to have no balance at all.
14 How to hurt your credit history and credit score: Make late paymentsJust one missed payment can affect your credit report.Writing checks when you do not have enough money in your account to cover themHaving a lot of credit cards and loansMaintaining high balances on your credit cards and loansChanging credit cards frequently
16 Truth in Lending Act - 1968 (Consumer Credit Protection Act) Requires the credit card issuing company to disclose to the consumer:APR that will be chargedHow the APR is determined if it is a variable rateThe method for computing the balance at the end of the monthThe annual fee that will be chargedThe amount of the minimum finance chargeTransaction fee for purchasesIt covers four major areas:It requires lenders and merchants to fully disclose in writing the total cost of using their credit.It requires lenders and merchants to be truthful in their advertising about the cost of using their credit.It gives consumers the right to cancel credit within three business days on certain types of credit.It limits the liability of a credit card holder to $50 per card in case of unauthorized use.
17 The Fair Credit Reporting Act 1971 Is designed to provide access to personal credit information on file with credit bureaus.Requires the credit bureau to investment errors and correct the report.Borrower’s have 30 days to review their file without charge if they are denied credit.For a fee of approximately $10, they can review their file at any time.
18 Fair Credit Collection Practices Act Protects you from the harassment of creditors. The debt collector is not allowed to:Use abusive language with youCall at unreasonable hours or an excessive number of timesThreaten to notify your employerAttempt to collect more than you oweSend you misleading letters that appear to be from a government agency or a court of law
19 Top Ten Questions to Ask Yourself Before You Sign on the Dotted Line Do I really need this item right now or can I wait?Can I qualify for credit?What is the interest rate (APR)?Are there additional fees?How much is the monthly payment and when is it due?
20 Can I afford to pay the monthly payments? What will happen if I don’t make the payments on time?What will be the extra cost of using credit?What will I have to give up to pay for it? (Opportunity cost)All things considered, is using credit worth it?
21 How to Avoid the Pitfalls Always read the fine print of a credit card or loan application before you sign on the dotted line.To avoid the higher interest rates of credit cards, consider a loan for large purchasesBe choosy about your credit card, and don’t apply for more than you actually needPay as much as you can every monthPay a bill at least a week before it is dueArrange for automatic payments of your monthly billsGet into a saving mode so you rarely need credit or loans for monthly purchases
22 Can you Believe?_____% of students with a credit card don’t repay the entire balance each month.2. _____% of teenagers say they have never discussed using credit cards responsibly with a family member.2868
23 _____% of teenagers say they are pretty familiar with credit cards 5. _____% of teenagers have access to a parent’s credit card.6. _____% of teenagers aged already have a credit card in their own name.56931