Using Credit Chapter 6

Basic Concepts Can have an impact on attaining financial goals Can impact cash budgets Allows the acquisition of more expensive items without throwing a budget into disarray

Why Credit is Used To avoid paying cash for large outlays To meet financial emergencies Convenience Investment Purposes

Improper Uses of Credit Living beyond one’s means

Over Spending Hooked on credit and taking the bait getting deeper into debt

It Must Be Paid Back

Establishing Credit Open a checking and savings account. This signals stability to creditors Open one or two charge accounts. Use them periodically and pay the bill on time. Obtain a small loan and repay it promptly. The ability to obtain a large loan in the future is dependent on how you managed smaller loans

Build a Strong Credit History A bad history will prevent you from getting a loan with favorable rates

A Strong Credit History Makes it easier to secure a loan when it is needed.

How Much Credit Can You Stand Debt Safety Ratio = Monthly Consumer Credit Payments Monthly Take Home Pay Should not be more than 20% but preferably closer to between 10 and 15% of monthly take home pay

Open Account Credit Bank Credit Card – Visa and MasterCard Discover Card American Express Department Store Credit Cards Gas and Oil Credit Cards

Credit Agreement Line of credit – the maximum amount that a cardholder can owe at any time. Cash Advances Interest Charges Grace period – the amount of time you have to pay the bill prior to the card issuer imposing interest or fees. Minimum Monthly Payment Balance Transfers Other Fees – Membership, late, over limit

Credit Card Act of 2009 Finance Charges and Interest Rate Increases – 45 day notice of rate changes or changes in the agreement. – If rates increase the higher rate can only be charged on new purchases. The old balance is grandfathered. Payment Allocation and Fees – Fees for making a payment can not be charged unless last minute for payment by phone – If different interest rates, payments above the minimum must be applied to the balance with the higher rate – Over the limit charges can not be charged unless the cardholder directs the company to process over the limit transactions

Billing Statements – Must be sent 21 days before the due date – Payments received after a holiday or weekend must be considered on time. Minors & College Students – Under 18 cannot have a card unless emancipated – College students without an income cannot be issued a credit card Disclosures Statements must include payoff information, including the number of months to payoff the balance by paying only the minimum Card solicitations must explain that numerous credit report inquiries can lower you credit Score

Special Bank Credit Cards Reward Cards –Travel, Auto & Merchandise

Rebate Cards Cash Back

Other Types of Credit Card Affinity Cards – Cards with a cause, cards are issued in conjunction with a charity, political or other nonprofit organization Secured Credit Cards – Collateral is deposited with the credit card company to secure the limit on the card. Student Credit Cards – marketed specifically to college students Retail Charge Cards

Debit Cards Used in lieu of cash or writing a check

Revolving Credit Lines Overdraft Protection Unsecured Credit Line Home Equity Line of Credit

Obtaining Credit Credit Application & Credit Investigation

Managing Credit Cards Shop for the best deal – Annual fees – Interest rate – Grace period & method of calculating balances Review the statement Pay on time Avoid carrying a balance – Will avoid future finance charges

Credit Scoring

What Does the Score Mean

Earn & Maintain an Excellent Score Pay your bills on time If you are behind get current If you are having trouble contact the creditors and negotiate a payment plan Keep credit card balances low Pay off debt rather than moving it around Do not open credit accounts to increase your available credit Reestablish your credit history if you had problems in the past

Bad Decisions Stay On Your Record Bankruptcy10 years Defaults on a loan 7 years Default Judgments 7 years Late Payments 3 years Closed Accounts 3 years Late Payments over 30 days 3 years

The Cost of a Bad Credit Score Getting a Mortgage Securing a Car Loan Obtaining credit at a reasonable rate Your insurance Cost Getting a job or the promotion you earned

The Benefit of a High Credit Score

Avoid Credit Problems

Reduce the number of cards you carry Do not be tempted to accept pre-approved offers for credit Do not over spend Lenders look at total credit you have a available. A number of credit cards can prevent your approval for an auto or home loan. Pay off credit cards each month Protect your identity and your credit

Identity Theft

How Do They Get Your Identity Steal your mail Steal your trash Lost or stolen wallet Telephone solicitation Phishing Employment Records Medical Records

Protect Your Identity Shred anything with your name, social security number or account numbers

Protect Personal Information Never give dates of birth, social security number or account numbers over the phone

Shopping Online Go only to secure sites

s Phishing – s disguised to look like they come from a known bank or retailer

Medical Records Remove & shred labels from prescription bottles. Do not share your medical insurance card.

If You Are Overwhelmed Credit Counseling

If All Else Fails Bankruptcy Chapter 7 – Straight Bankruptcy wipes the slate clean assets in excess of the established exemptions are sold to satisfy as many creditor as possible Chapter 13 – Wage Earner Plan schedules debt repayment over future years usually 3 to 5. Creditors must approve the plan

Good Credit Will Never Fail You