What is credit? Borrowing $ to use today, with the promise to repay in the future
Kinds & Types of Credit Open-ended 30 day accounts revolving credit accounts Closed-ended installment purchase agreements installment cash loans Service credit Layaway plans
Sources of Credit Merchants Banks and credit unions Finance companies Pawnshops Private lenders
What are advantages of using credit? It’s convenient, you don’t have to carry large amounts of cash and you don’t have to write out a check. You can use goods and services before or as you pay for them. You can buy costly items that you might not be able to buy with the amount of cash available. It usually simplifies exchanges, returns, and internet and telephone orders.
What are the disadvantages of using credit? You reduce your future income. Using credit usually costs money (interest). The more you use and the more time you take to repay, the more you must pay in finance charges. You may be tempted to overspend because of impulse buying. Failure to pay promptly could result in a poor credit rating.
What is a credit score & credit report? Credit Score: a number between 300 (bad) and 850 (awesome) that rates your efficiency and ability to pay current and past debts Credit report: Your name, address, age, ss.#, employment info., accounts you have now, accounts you have had in the past, matters of public record, number of inquiries in the past 6 months, your credit score
Tips for using credit: 1. Know your rights & responsibilities (see laws) 2. Avoid finance charges by paying off balances right away (see how does it work) 3. Know your credit limit and stay well within it (*set it not to change)
I want a good credit score… how do I do that? Establish a steady work record. Pay all bills promptly. Open a checking account and don’t bounce checks. Open a savings account and make regular deposits. Apply for a small CC and make monthly payments. Co-signer- for beginning loans and better rates
How do credit cards work? Month 1: New shoes $100 End of the month bill comes: $100 total $10 minimum payment
Month 2 Leftover balance: $90 Groceries (new) $100 End of the month:mail $10 min. Balance of $190 interest rate of 10% $190+$19=$209 = $19 interest-$10 = $199 Minimum due: $10
Month 3 No new charges Previous balance $199 + 10% interest ($20) = $219- $10 minimum payment =$209 balance Next month: $209 + interest ($21)= $230 Minimum due: $10
So… what does it all mean? Total value of goods: $200 (by the way, your shoes are probably worn out by now and the groceries were all eaten) Total amount sent to credit card company: $30 Total amount still owed $220 (+you paid $30) so you pay $250 for $200 worth of items just to be able to pay for it over time.
Avoiding Unnecessary Credit Costs Accept only the amount of credit you need Keep credit spending steady when your income increases Keep the number of CC to a minimum Pay cash for small things Use credit to avoid price increases Time purchases carefully- know your billing dates
Can I get a loan or credit card? The 3 C’s Character- from you credit history, the lender attempts to determine if you possess the honesty and reliability to repay the debt. Collateral- what valuables do you have? Capacity- refers to your ability to repay the debt
Character Have you used credit before? Do you pay your bills on time? Do you have a good credit report? Can you provide character references? How long have you lived at your present address? How long have you been at your present job?
Collateral What property do you own that can secure the loan? Do you have a savings account? Do you have investments to use as collateral?
Capacity Do you have a steady job? If so, what is your salary? How many other loan payments do you have? What are your current living expenses? What are your current debts? How many dependents do you have?
What laws protect me? Truth in lending- ensures consumers are fully informed about cost and conditions of borrowing Fair credit reporting act- protects the privacy and accuracy of information in a credit check Equal opportunity act- prohibits discrimination in giving credit on the basis of sex, race, color, religion, national origin, marital status, age, or receipt of public assistance
What laws protect me? Fair credit billing act- sets up a procedure for the quick correction of mistakes that appear on consumers credit accounts Fair debt collection practices act- prevents abuse by professional debt collectors, and applies to anyone employed to collect debts owed to others; does not apply to banks or other businesses collecting their own accounts
Problems with Credit Credit counseling Debt consolidation Bankruptcy
Laws are complex (may require a lawyer) Some exemptions but could lose property Credit is damaged (10 yrs) Some things are exempt (child support and alimony) Designed to rescue the debtor from excessive debt
Preventing Credit Card Fraud Consumers’ Responsibilities Carry only the cards you need Keep a list of credit cards & their # in a safe place Notify creditors immediately when a card is lost or stolen Notify a creditor immediately- in writing- if a discrepancy appears Put cards back in wallet when done
Preventing Credit Card Fraud Consumers’ Responsibilities Sign newly issued cards immediately (consider using SEE id) Don’t give CC # to unknown companies Don’t allow CC # on checks Destroy carbons, CC slips, statements, canceled checks Don’t allow clerks to make a second imprint (watch carefully) Don’t write address, phone #, or other data on charge slips