Sherenna Vandiver Business Essentials

Part I

 Credit is an agreement to get money, goods, or services now by promising to pay later.  Creditors charge a fee (interest) for using their services.

AdvantagesDisadvantages  Convenient  Useful in an emergency  Helps to establish a credit rating  Helps you keep track of your spending  Contributes to the growth of the economy  Costs more  Can lead to overspending  May lower your credit rating if handled improperly *Credit is available through charge accounts, credit cards, banks, businesses, consumer finance companies, and pawnshops.

Regular – requires you to pay the full amount in a certain amount of days with no interest charged. – If not paid in full, interest is charge. Revolving – Allows you to borrow or charge up to a certain amount of money and pay back a part of the total or the entire balance each month. – Interest is charged on the unpaid amount Budget – Lets you pay for costly items in equal payments spread out over a period of time. – Each payment includes part of the total due on the item plus interest.

 Single-Purpose ◦ Allows you to buy goods or services at the business that issued the card. (Macy’s)  Multi-Purpose ◦ Also called bank credit cards because that is who issues it ◦ May be used at multiple stores (Visa, Master Card)  Travel and Entertainment ◦ Usually work like regular charge accounts, but are used with purchases connected with travel, business, and entertainment. (Restaurant and hotel bills, etc.)

Part I Key Words  Credit  Charge account  Creditor  Revolving account  Debtor  Consumer credit  Installment loans  Interest  Commercial credit  Credit rating 1. Lends money or provides credit ________________ 2. A form of credit account, which allows one to borrow or charge up to a certain amount of money and pay back a part of the total each month _____________________ Loans repaid in regular payments over a period of time _________________ 4. Credit used by businesses to buy goods, pay salaries, or buy property ________________________ 5. The one who borrows the money or uses the credit _________________________ 6. Credit used by consumers for personal purchases _________________________ 7. The opportunity to obtain money, goods, or services now in exchange for a promise to pay in the future _______________________ 8. Creditors usually charge ____________________ or a fee for using their money 9. Some factors that determine a person’s _____________________ are income, current debt, and debt history. 10. A short term credit arrangement provided by a store or company to purchase their product. ________________________

Part II

 The five C’s creditors use to consider a borrower’s credit worthiness are ◦ Capacity to pay – They will check to see if you have a job, how much you make, how long you have been employed, how much debt you already have ◦ Character – They want to know what type of person you are and may ask for credit references (people who you have borrowed from before) ◦ Credit history – They will check with a credit bureau (an agency that collects information about you and other consumers) that will tell them whether you pay your bills on time or have failed o pay debts ◦ Capital – They will check to see if you have things beyond what you owe (cash, savings, investments, possessions) so that they know you can pay them back by selling something or with your cash if you were to lose your job. ◦ Collateral – consists of your property or valuables. Collateral is used as security for a loan. If you fail to pay back your loan, the creditor can take whatever you put up as collateral (or security)

 Installment Loans – may require a down payment (portion of the total cost that you pay when you purchase a product). The principal is the amount of money you still owe and on which the interest is based.  Cash Loans – can be used to purchase an item anywhere and is paid back like an installment loan  Secured Loans – if the loan is backed by your collateral  Unsecured Loans – no collateral is required, often higher than a secured loan because of the increased risk

 APR – Annual Percentage Rate (determines the cost of your credit on a yearly basis), best rate to look at to gauge the cost of your credit  Finance Charge– total amount it costs you to finance a loan stated in dollars and cents (includes all fees such as the application fee)

 Spend less than 20% of your income on credit payments  Make more than the minimum payment each month  Avoid overextending (using more than you can pay back) your credit

Part II Key Words  Credit bureau  Principal  Annual percentage rate (APR)  Secured loan  Grace period  Unsecured loan 1. A loan that is backed by collateral. 2. A loan that is not backed by collateral. 3. An agency that collects information about you and other credit consumers. 4. This determines the cost of your credit on a yearly basis. 5. The amount of money owed and upon which the interest is calculated. 6. The number of days available to pay a credit card balance without having any interest changed.

Part II Key Words  Cosigner  Down payment  Finance charge  Variable rate 7. An initial portion of the total cost paid with cash or with a check. 8. Someone who agrees to make payments on a loan if you fail to do so. 9. The cost of credit stated in dollars and cents. 10. A type of loan where the rate changes as interest rates in the banking system change.

Part II Key Words  Credit limit  Repossess  Garnishment of wages  Cash advance 11. The maximum amount you can spend or charge on a credit account. 12. The legal right to take back collateral. 13. Something you get when you borrow money on a credit card rather than use it to make a purchase. 14. When a creditor takes all or part of your paycheck if you miss credit card payments.

Part III

 Federal and state governments have passed laws to help consumers with credit problems.  The Federal Trade Commission enforces federal credit laws.  Consumers have the right to: ◦ Be informed of the terms and costs of credit ◦ Know what’s in their credit files ◦ Have billing mistakes resolved ◦ Be protected from collection agents

 Equal Credit Opportunity Act ◦ Credit applications can be judged only on the basis of financial responsibility ◦ Only allows for denying credit based on large current debts, low income, or poor record of making payments in the past ◦ Requires that all credit applicants be informed of their application status (accepted or rejected) within 30 days.  Fair Credit Reporting Act ◦ When you apply for and use credit, the information goes into a file at one or more credit bureaus. ◦ Gives you the right to know what’s in your credit file ◦ You must be notified when an investigation is being conducted on your credit report. ◦ Only authorized persons can see a copy of your credit report (when you apply for additional credit, a job, or insurance)

 Fair Credit Billing Act ◦ Requires creditors to correct billing mistakes brought to their attention.  Fair Debt Collection Practices Act ◦ Made illegal some practices of bill collecting like threats of jail, calling late at night, and harassment at work  The FTC (Federal Trade Commission) is responsible for regulating business activities including enforcing the laws on credit.

Part III Key Words  Usury law  Truth-in-lending disclosure  Credit counselor  Collection agent  Consolidation loan  Bankruptcy  Fair Credit Billing Act 1. Person who has the job of collecting debts that are overdue. 2. Law designed to limit rates consumers can be charged for credit. 3. A document that informs consumers about all the costs of borrowing money. 4. A person who helps people with credit problems. 5. A loan that combines all of a person’s debt. 6. A legal process in which some or all of the assets of the debtor are distributed among the creditors. 7. A law, also know as the Truth in Lending Law, that requires creditors to provide information about credit to consumers and protects consumers if their credit cards are lost or stolen.

Part III Key Words  Consumer Credit Protection Act  Equal Credit Opportunity Act  Fair Credit Reporting Act  Fair Debt Collection Practices Act (FDCPA) 8. A law against denying credit on the basis of gender, age, ethnicity, or religion. 9. A law giving people the right to know what is in their credit file at credit bureaus. 10. A law requiring creditors to correct billing mistakes brought to their attention. 11. A law that protects debtors from unfair methods or practices used by collection agencies.

What creditors want to know about you?

 Report that provides insight into your financial status and obligations.  contains information about your credit  some bill repayment history  the status of your credit accounts This information includes  how often you make your payments on time  how much credit you have,  how much credit you have available  how much credit you are using  whether a debt or bill collector is collecting on money you owe. Credit reports also can contain  rental repayment information if you are a property renter  public records such as liens, judgments, and bankruptcies

 Lenders use these reports to ◦ help them decide if they will loan you money, ◦ what interest rates they will offer you, or ◦ to determine whether you continue to meet the terms of the account.  Other kinds of companies can purchase reports to ◦ help inform them while making a wide range of business decisions such as  providing or pricing insurance;  renting you a residential property;  providing you with cable TV, internet, utility, or telecommunication services; and  (if you agree to let them look at your consumer report) making employment decisions about you.

 Credit reporting companies (also known as credit bureaus or consumer reporting agencies) compile these reports.  The three most popular used are ◦ Expedian ◦ Equifax ◦ TransUnion

 Your credit score is based on your credit report  Your credit score is called FICO  Range between  The higher the number, the better the score  The higher your score, the more favorably lenders look at you for a credit risk

 The FICO SCORE range is 300 – 850, with the higher number representing less risk to the lender or insurer.  Consumers with high FICO scores (usually around 760 or higher, though every lender is different) are likely to get the best rates when they borrow, as well as the best discounts on insurance.  There is a popular FICO score chart that describes the main factors that go into these scores:  Payment History (35%)  Debt/Amounts Owed (30%)  Age of credit history (15%)  New credit/inquiries (10%)  Mix of accounts/types of credit (10%)

Payment History (35%) Debt/Amounts Owed (30%) Age of credit history (15%) New credit/inquiries (10%) Mix of accounts/types of credit (10%) James and Jonnie: James has two credit cards in his name with a credit line of $5,000 each. The balance on one is $500 and $1200 on the other one. His wife has a Belk, Target, and Macy’s credit cards. The maximum balance on each credit card can be up to $2,000. She has those paid off as of this month. They have a mortgage (still owe $98,000) and two car payments (which still total $26,000) which they have paid late on less than 5 times in 10 years. Several banks have pulled credit inquiries on their credit reports. They have never had a bankruptcy or been turned over to a collection agency. Sam and Sue: Sam has a business with a line of credit up to $5,000. Currently, he has a balance of $3,500. They have no department store credit cards. They have a mortgage (still owe $96,000) and a boat payment (still owe $28,000). They have been late only a handful of times in the past 10 years. They have never had a bankruptcy, been turned over to a collection agency, or defaulted on a loan. They have one credit card with a $2,000 limit which is maxed out at the moment. They are making more than the minimum payments each month.