© Goodheart-Willcox Co., Inc. 9 Credit

© Goodheart-Willcox Co., Inc. Understanding Consumer Credit Credit plays an important role in the economy Provides extra buying power that supports mass production and distribution –H–Helps make more goods and services available to consumers at lower prices. continued

© Goodheart-Willcox Co., Inc. Understanding Consumer Credit Credit is a medium of exchange It is an agreement between two parties –C–Creditor supplies money, goods, or services to the borrower –B–Borrower (DEBTOR) agrees to make future payment by a particular date or according to an agreed-upon schedule. continued

© Goodheart-Willcox Co., Inc. Understanding Consumer Credit There is a risk that the borrower cannot repay what is owed Creditors minimize risk by –h–having borrowers sign a contract –t–taking a borrower who defaults to court and even taking back property.

© Goodheart-Willcox Co., Inc. 4 C’s of Credit Character Capacity Capital Collateral Read more at yourstartup/a/4csofcredit.htm

© Goodheart-Willcox Co., Inc. Reasons to Use Credit Gives you the opportunity to buy costly items that you may not be able to buy with cash. continued

© Goodheart-Willcox Co., Inc. Reasons to Use Credit You can use goods and services as you pay for them Credit can be used as a source of cash for emergencies and unexpected expenses You can take advantage of sale prices when you don’t have cash. continued

© Goodheart-Willcox Co., Inc. Reasons to Use Credit Convenience –e–eliminates the need to carry a lot of cash –p–provides a purchase record –s–simplifies shopping by phone, mail, and Internet You can make purchases that are part of a long-range financial plan: education, furniture, vacation.

© Goodheart-Willcox Co., Inc. Drawbacks of Credit Use Using credit reduces future income Expense—using credit costs money (finance charges) Temptation—using credit makes it easy to spend money you don’t have Risk of serious consequences—financial problems arise when debts aren’t paid on time and in full.

© Goodheart-Willcox Co., Inc. Cost of Credit Most Costly than paying with cash Borrowers must pay principal plus finance charges Finance charges reimburse creditors for –t–the costs of making credit available –t–taking the risk that borrowers may default. continued

© Goodheart-Willcox Co., Inc. Cost of Credit Creditors –m–may borrow money to make credit available; when they borrow, they must also pay interest –l–lose the chance to invest money –i–incur costs for opening and servicing credit accounts –a–absorb losses of unpaid accounts and cost of collecting overdue debts.

© Goodheart-Willcox Co., Inc. Finance Charges The dollar amounts paid for credit Consist of two parts: 1.interest 2.Fees 1.Late fee, balance transfer, foreign transaction, cash advance fees, over the limit fees, etc. They are expressed as percentages.

© Goodheart-Willcox Co., Inc. Annual Percentage Rate (APR) The higher the APR, the more you pay Example: Interest for a $500 loan repaid in 12 monthly payments would cost –$–$50.08 at 18% –$–$58.72 at 21% –$–$67.36 at 24%.

© Goodheart-Willcox Co., Inc. Amount of Credit Used The more credit you use, the more you pay Example: Interest on a loan repaid in 12 monthly payments at an APR of 18% would cost –$–$50.08 for a $500 loan –$–$ for a $1,000 loan –$–$ for a $2,000 loan.

© Goodheart-Willcox Co., Inc. Length of Repayment Period The longer you take to repay what you borrowed, the more you pay Example: Interest on a $500 loan at 1.5% per month (18% APR) would cost –$–$50.08 if repaid in 12 monthly payments –$–$99.44 if repaid in 24 monthly payments –$–$ if repaid in 36 monthly payments.

© Goodheart-Willcox Co., Inc. Types of Credit Closed-end credit must be repaid by a certain date Open-end credit allows the borrower to use money for an indefinite period.

© Goodheart-Willcox Co., Inc. Closed-End Credit Most are installment loans that let you borrow a given amount of money and repay it with interest in regular installments Examples: –s–student loans, car loans, most home loans. continued

© Goodheart-Willcox Co., Inc. Closed-End Credit A secured loan requires collateral— finance charges may be lower because creditor can take property if loan is not repaid An unsecured loan—finance charges are usually higher because no collateral; borrower must have strong credit rating or a cosigner.

© Goodheart-Willcox Co., Inc. Open-End Credit Borrower can continue to use credit if he or she makes scheduled payments, pays finance charges, and stays within borrowing limit –R–Regular charge accounts –R–Revolving credit accounts Offered by retailers, merchants, banks, credit agencies. continued

© Goodheart-Willcox Co., Inc. Open-End Credit You must make at least the minimum payment each month Total amount you may owe at any one time is limited.

© Goodheart-Willcox Co., Inc. Establishing Credit Start with a job Open a savings account Open a checking account Apply for a credit card at a local department store or gas company.

© Goodheart-Willcox Co., Inc. Your Credit Rating Determines whether you can get credit and what you will pay for it Is measured by the 4 Cs—character, capacity, collateral, and capital A creditworthy applicant is judged to have the assets, income, and tendency to repay debt.

© Goodheart-Willcox Co., Inc. The Credit Report Three major national credit agencies sell credit reports to creditors –3–3 Agencies: Transunion, Equifax, Experian Each agency collects information about financial and credit transactions The information on these reports often differs Carefully review your credit reports and report errors to agencies. continued

© Goodheart-Willcox Co., Inc. The Credit Report The report lists –e–every credit account ever opened –o–outstanding balances –n–negative data, such as late payments, unpaid debts, bankruptcy.

© Goodheart-Willcox Co., Inc. Credit Scores A credit score is a numerical measure of a loan applicant’s creditworthiness The higher the score, the greater a person’s creditworthiness The lower the score, –t–the more trouble you will have getting credit –t–the more expensive credit will be. continued

© Goodheart-Willcox Co., Inc. Credit Scores Credit score factors: –B–Bill paying –D–Debt-to-credit-limit-ratio –C–Credit history length –R–Recent credit application –D–Different types of credit You may have more than one credit score generated by different agencies.

© Goodheart-Willcox Co., Inc. Credit Scores Best credit score possible: 850 Scores considered Good/Excellent Over 700!

© Goodheart-Willcox Co., Inc. Getting a Credit Card Common types of credit cards include –g–general-purpose –c–company or retail store –t–travel and entertainment.

© Goodheart-Willcox Co., Inc. Shopping for a Credit Card Understand possible fees, penalties, and consequences of failing to carry out the terms of the agreement Be wary of acceleration clauses, balloon payments, and add-on clauses.

© Goodheart-Willcox Co., Inc. The Contract Read the contract (application) thoroughly before signing it.

© Goodheart-Willcox Co., Inc. Disclosures Annual percentage rates: –W–What is the APR? –H–How long will a lower introductory rate last? What is the regular rate? –C–Can the rate be raised for any reason? –I–Is the rate fixed or variable?. continued

© Goodheart-Willcox Co., Inc. Disclosures What is the grace period? What method is used to calculate the interest rate? Is there an annual fee? If so, how much? What are fees for –l–late payments –e–exceeding credit limit –c–cash advances –b–balance transfers.

© Goodheart-Willcox Co., Inc. Subprime Credit Cards Easier to get; offered to those with poor credit histories Often carry high interest rates, large annual fees, and other charges Low credit limits Often a bad deal for consumers.

© Goodheart-Willcox Co., Inc. Managing Your Credit Know your financial personality. What are your money attitudes and habits?. continued

© Goodheart-Willcox Co., Inc. Managing Your Credit Keep track of spending –C–Create a budget –D–Don’t use more credit than you can pay off each month –S–Save your receipts and keep a log of credit charges.

© Goodheart-Willcox Co., Inc. Remember Alternatives to Using Credit Not to buy Pay with savings Postpone buying now and buy later with cash.

© Goodheart-Willcox Co., Inc. Check Monthly Statements Check statements against your own record of charges, payments, and credits.

© Goodheart-Willcox Co., Inc. Check Your Credit Report Regularly Find and correct errors immediately Make sure no one has applied for credit in your name.

© Goodheart-Willcox Co., Inc. Report Lost or Stolen Cards Keep a list of your credit cards—issuers, account numbers, issuer phone numbers Report lost or stolen cards right away If your card is lost or stolen, you are responsible for –$–$50 per card that is charged by others –n–no charges made by others if you notify the issuer before the card is used.

© Goodheart-Willcox Co., Inc. Handling Credit Problems Poor credit use consequences: –I–Inability to get loans and credit cards –P–Paying higher interest rates for credit –H–Having fewer housing choices –H–Having fewer job prospects because many employers check credit reports –P–Paying higher insurance premiums. continued

© Goodheart-Willcox Co., Inc. Handling Credit Problems Blemishes on credit reports: –A–Accurate negative information, such as missed or late payments, may remain on your report for seven years –B–Bankruptcies may remain on your report for 10 years. continued

© Goodheart-Willcox Co., Inc. Handling Credit Problems Actions taken to recover debts: –C–Collection agencies are hired to get payment –R–Repossession of property, including foreclosure –L–Liens against property –W–Wage garnishment.

© Goodheart-Willcox Co., Inc. How to fix bad credit R equest a copy of your credit report from a credit bureau and check for errors. P ay outstanding debts, Pay off those with the highest interest rates first. C ontact a nonprofit credit-counseling organization to work out a plan. –A–A counselor will help you consolidate your debts and will contact your debtors on your behalf to reduce or eliminate finance charges. S ell valuables or liquidate assets that will help you repay your debts. B uy the bare essentials (food and gas) and use the rest of your earnings to pay off your consolidated debts.

© Goodheart-Willcox Co., Inc. Bankruptcy Desperate debtors last resort—file for personal bankruptcy –C–Court excuses debtor from repaying some or all debt –D–Debtor gives up certain assets and possessions Two types—Chapter 7 and Chapter 13 Consequences of bankruptcy are severe.

© Goodheart-Willcox Co., Inc. Types of Bankruptcy

© Goodheart-Willcox Co., Inc.

The Easy-Access Credit Trap Easy-access credit includes –p–payday loans –p–pawnshops –r–rent-to-own –t–title loans A loan shark is someone who uses predatory lending tactics and easy- access credit.

© Goodheart-Willcox Co., Inc. Inform Creditors They may change payment dates and amounts if you have trouble paying bills.

© Goodheart-Willcox Co., Inc. Get Credit Counseling Use reputable nonprofit credit counseling services Avoid credit counseling firms that –c–charge high fees –d–demand that the debtor pay them rather than their creditors.

© Goodheart-Willcox Co., Inc. Consumer Credit Legislation Truth in Lending Law requires creditors to tell consumers what credit will cost. Equal Credit Opportunity Act prohibits creditors from discriminating against consumers Fair Credit Reporting Act requires accuracy and privacy of credit report information. continued

© Goodheart-Willcox Co., Inc. Consumer Credit Legislation Fair Credit Billing Act protects consumers from unfair billing practices Electronic Funds Transfer Act protects consumers in EFT transactions Fair Debt Collection Practices Act protects consumers against unfair methods of collecting debts. continued

© Goodheart-Willcox Co., Inc. Consumer Credit Legislation Preservation of Consumers’ Claims and Defenses Ruling protects debtors who have a legitimate dispute with a seller Bankruptcy Abuse Prevention and Consumer Protection Act –w–was meant to increase fairness of the bankruptcy system –m–makes filing for bankruptcy more difficult.