Obtaining Credit

Focus Questions When figuring the cost of credit, what four factors need to be considered? How do credit card contracts differ from loan contracts? What are four laws that protect the consumer in credit transactions?

Understanding Credit Principal Time Interest Rates

Principal In a savings account, the amount of money you deposit in your account is known as the principal and you earn interest on the principal

When you get a loan, the amount that you originally borrow or still owe is called the principal but this time you pay interest on the principal

Time When the repayment time is longer, your monthly payments are lower. However, taking longer to repay means that the total cost of your will be higher

Interest Rates Example On a thirty year home loan of $200,000, if the interest rate goes from 6 percent to 8 percent, the total cost for interest will increase by $96,634

Fees and Other Charges Finance changes are the costs you pay for credit Interest is one finance charge When you apply for a loan, there are fees to cover the costs of credit reports and appraisals

An appraisal is a professional estimate of the market value of property. An origination fee is a fee for starting the paperwork on a loan. When you use a cash advance on a credit card, you will be charged a fee as well as when you make a late payment.

Computing the Cost of Credit Multiply the amount of your monthly payment times the number of months you will be paying off the loan. Add the down payment, if any. Subtract the price of the item if you had paid cash, or subtract the amount of cash you receive if you are getting a loan. The difference is the cost of using credit.

Example You are buying a car for $5,500. You make a down payment of $500 and borrow the rest. The loan requires you pay $225 a month for 24 months. $225 times 24 months = $5,400 Plus down payment + 500 Total amount paid $5,900 Less Price of car - 5,500 Cost of credit = $ 400

Understanding Contracts Some loan contracts have a grace period an amount of time after the due date when a payment can be made without penalty

Comparison of Loan contracts and Credit Card Agreements Most auto and cash loan contracts include: Total amount loaned Amount of down payment (or trade in) Interest rate you will pay Special charges you will pay Total amount you will pay Total amount and due date of each payment

Most credit card agreements include: https://applynow. chase Most credit card agreements include: https://applynow.chase.com/FlexAppWeb/pricing.do?card=F CBV&page_type=appterms

Qualifying for Credit Lenders analyze risk by analyzing your Character your willingness to pay your bills on time Capacity your ability to pay your bills Capital is represented by things of value that you own, such as your car

Net Worth Assets money or anything else of value that a person owns Liabilities money or other debts that a person owes Net worth the difference in value between total assets and total liabilities

Credit Bureaus An agency that keeps records of the credit activity of individuals Three major credit bureaus Equifax Experian Transunion

Your Credit Information The credit bureaus obtain their consumer credit information from creditors such as banks, credit card companies, and other lenders Whenever you apply for credit, the lender will check your credit report and your credit score.

Credit Score A three digit number based on the information in your credit information. FICO score is the most widely used It takes into consideration like whether you pay your bills on time, how much debt you have, and how long you've had established credit.

The score is meant for a quick way for creditors to determine whether you are a good risk. FICO Score

Checking Your Credit Report The Fair Credit Reporting Act requires each bureau to provide consumers with one free credit report every twelve months, upon request. Credit scores are not free Go to AnnualCreditReport.com to request your reports

Components of a Credit Score Length of credit history Payment history Amounts owed New credit Types of credit used

Consumer Protection Laws Equal Credit Opportunity Act Truth in Lending Act Fair Credit Reporting Act Fair Debt Collection Practices Act

Equal Credit Opportunity Act Prohibits discrimination against a person applying for credit because of age, sex, marital status, religion, race, national origin, or the receipt of public assistance. If you are denied credit, you must be notified in writing.

Truth in Lending Act requires creditors to state, in writing, the APR and other finance charges This requirement applies to Banks, S&Ls, all credit card issuers, credit unions, consumer finance companies, and many other lenders. It allows you to compare the credit plans of different lenders.

Fair Credit Reporting Act Gives you the right to see your credit report and correct errors If you are denied credit, you must be told the name and address of the credit bureau that gave the report. If you find untrue statements in your credit record, give a corrected statement (in writing) to the credit bureau and ask them to check it out.

Fair Debt Collection Practice Prevents debt collectors from using harassment and even threats to collect the money owed. These practices are illegal.

Building A Good Credit Record Open a bank account Open a store charge account Avoid credit cards with high fees Take out a small loan

Assessment In order to compute the cost of credit, what four things do you need to know? Is it a good idea to spread out credit payments for as long as possible? Compare the cost of a $9,000 car loan at 8 percent interest over three year, four year, and five year periods What are the "three C's of credit"? How do lenders use them?

Assessment 5. How many free credit reports can you obtain in twelve months? 6. On large loans that are repaid over a long time, even small differences in the interest rate make a big difference in the cost. Why? 7. When you are getting a loan, why is it important to know the cost of credit?