CREDIT: BUY NOW, PAY LATER

It’s important for all of us to establish good credit. 28% of students with a credit card don’t repay the entire balance off each month. 68% of teenagers say they have never discussed using credit cards responsibility with a family member. 9% of teenagers have access to a parent’s credit card. 31% of teenagers age already have a credit card in their own name.

Credit: is when someone is willing to lend you money. Interest: is the amount you pay to use someone else’s money.

Biggest cost of using a credit card is the interest rate. All interests rates are quoted as an Annual Percentage Rate (APR). APR: the amount it costs you a year to use credit, expressed as a percentage rate. It includes the interest, transaction fees, and service charges.

Advantages: Able to buy needed items now and in emergencies Don’t have to carry cash Creates a record of purchases More convenient than writing checks Consolidates bills into one payment Earn bonus points or miles.

Disadvantages Interest (higher cost of items) May require additional fees Financial difficulties may arise if one loses track of how much has been spent each month Increased impulse buying may occur

Three C’s determine creditworthiness Creditworthiness – means that you are a good risk. 1. Character: Will you repay your debt? From your credit history, does it look like you possess the honesty and reliability to pay credit debts?  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?

2. Capital: What if you don’t repay the debt?  What property do you own that can secure the loan?  Do you have a savings account?  Do you have investments to use as collateral? 3. Capacity: Can you repay the debt?  Do you have a steady job? 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?

Your responsibilities  Borrow only what you can repay.  Read and understand the credit contract.  Pay debts promptly.  Notify creditor if you cannot meet payments.  Report lost or stolen credit cards promptly.  Never give your card number over the phone unless you initiated the call or are certain of the caller’s identity.

You can begin to establish credit by: 1.Finding a job that can pay a steady income. A good job history establishes a record that others can look at. 2.Open up a checking and savings account. 3.Apply for a credit card through a local bank. VISA/MasterCard a.Apply with the branch you locally have an account with. b.Some offer low interest rates, with low credit limits. c. Credit limits : maximum amount a card holder can buy on credit. 4.Apply for a small short term loan for something you need or want. a.Ask parents to co-sign. b. Co-sign : the person who co-signs becomes legally responsible for paying off the loan if the person taking out the loan fails to make the payments.

When to Borrow Some people do not use credit wisely. They borrow for what they want. Then when they really need to use credit, they are unable to get a loan, or they take on more debt than they are able to repay. Before you borrow, ask yourself four questions: 1.Is it important that I buy the good or service I want now? 2.Do I have to borrow to buy the product? 3.Can I afford to make the payment on the loan? 4.Will I be able to buy other products I want more if I borrow to buy this product?

A basic rule of thumb is that your total debt payments (excluding housing costs) should be no more than 20 – 25% of your take-home pay. For example if you take-home pay is $500 per month, your total debt payments should be no more than $125 per month. $500 x 0.25 = $125

If your payments require more than % of your take-home pay, they will start seriously affecting your daily life. If this occurs your flexible spending like entertainment and eating out will be affected.

ESTABLISHING A GOOD CREDIT RATING Credit rating : a measure of your creditworthiness Based on your past record for borrowing money. Lenders often compute a numerical credit rating by using a computerized scoring system called FICO. The FICO system will give you a score between 100 and 800. * Payment History (most important factor in your score) * Current Debt (too much, will not be allowed more) * Length of Credit History (longer history = less risky) * New Account Inquiries (too many = risky)

Credit score: consists of a list of items that reflect how risky an applicant is as a debtor (borrower). Points are assigned on how the applicant rates on each item. They are then added up for an overall score. They can also use the information to predict what your score might be. Credit bureaus: they collect information on you and sell it to lenders for use in establishing your credit rating. (if you borrowed money, bounced a check, taken to court, etc…)

Credit history/Credit report : your record of borrowing money and repaying for the last 7 – 10 years. 4 major categories of information that appear on a credit report 1.Identification and employment data 2.Payment history 3.Inquiries 4.Public record information 3 major Credit reporting agencies (Equifax, Experian, Trans Union) Federal Government has passed several important consumer credit laws.

Truth-in-Lending Act (1969)  Contracts clearly state finance charges and must be expressed as the APR.  Everyone must report the costs the same way, know what your paying.  Helps compare costs Fair Credit Reporting Act (1971)  Credit bureaus cannot circulate inaccurate credit information  Anyone denied credit because of their report has a right to know why.  You have a right to request a copy.

Consumer Credit Reform Act (1996) Reformed the Fair Credit Reporting Act. States that if you disagree with an item on your report, the credit bureau must investigate it within 30 days. Equal Credit Opportunity Act (1975) Banned discrimination because of gender or marital status in the granting of credit. Fair Credit Billing Act (1975) Consumers have the right to settle disputes with retail stores and credit card companies before any information is reported to the credit bureau. If you think there is a billing error you have 60 days after receiving the bill to report it in writing, the creditor then must respond within 30 days and resolve the issue within 90 days. Fair Debt Collections Practice Act (1977) Forbids abusive practices by debt collectors. Forbids harassing, abusive conduct.