The Three “C’s” of Credit Capacity: Your ability to pay back a loan Collateral: Your assets used as a guide to determine your ability to repay the debt Character: Your reputation as a reliable and trustworthy person

Credit Terminology Principal: The actual dollar amount borrowed or charged. Interest: The percentage cost of borrowing or charging. Multiplied against the amount of principal owed per year. Finance Charge: The dollar cost of credit. Derived by multiplying the principal by the interest rate.

Credit Terminology Line of Credit: The maximum credit limit on a credit account. Equity: Value of property minus debt on property. People often borrow against this value in what are often called “2nd mortgages”. Collateral: Something of value that can be sold to satisfy a debt. Usually required to secure a loan.

Credit Card Facts Americans charged more than $980 billion on their bank credit cards in 2010 Americans paid $125 billion in credit card interest in 2009 The average credit cardholder has more than nine credit and charge cards Average credit card debt per household with credit card debt: $15,799

Benefits of Credit Earlier consumption; use of goods while paying for them Convenience Use for emergencies Establishment of a good credit history Consolidation of debts Identification

Credit Dangers Using credit to finance basic necessities, e.g. groceries, rent, bills. Paying one credit account with cash advances from another. Cash advances from credit cards Carrying and using several different credit cards Making only minimum payments on credit card bills.

Types of Credit Regular Credit Full balance due on billing Revolving Credit Minimum payment required, but balance can be carried over with interest charges. Installment Credit Equal monthly payments for specific term

Four Methods of Determining Credit Cost Cost of Credit Four Methods of Determining Credit Cost Previous Balance Average Daily Balance Adjusted Balance Past Due Balance Assume a $300 bill and a $150 payment. Interest rate is 18% per year (1.5% per month)

Different Methods of Computing Finance Charges Calculation Finance Type of Method/ Amount on which interest is due Calculation Finance Charge Balance Due Previous Balance $300 x .015 = $4.50 $4.50 $154.50 $300 despite payment Adjusted Balance $152.25 $150 balance on last day of billing period $150 x .015 = $2.25 $2.25 Average Daily Balance 15 days x $300 =$4500 15 days x $150 =$2250 30 days =$6750 $6750/30 =$225 $225x .015 = $3.38 $3.38 $153.38 $225 Past Due Balance $150 x .00 = 0 $0 $150.00 $0

Sources of Loans

Commercial Banks Accept deposits Lend money Transfer funds among banks, businesses, and individuals Offer checking, savings, and loan services to individual consumers Largest source of consumer loans (45%)

Credit Unions Owned and operated by members of companies or unions Offer low interest loans to members Provide savings and checking services Offer higher interest rates on savings than traditional banks 14% of Consumer loans

Consumer Finance Companies They finance department store installment debts Charge higher interest rates than traditional lender Consumer Finance Companies Make direct loans to consumers at high interest rates. Usually 20%-35% interest rates Make loans to those usually unable to borrow from traditional lenders with lower rates 23% of consumer loans

Credit Reports

Agencies

Credit Report Personal Information Credit Requests Credit Reviews Name, address, employer Credit Requests Credit Reviews Credit History/Condition Experian Example

Credit Score Factors Job History Residence History Credit Repayment Amount of current credit Amount of Debt (ratio of credit) Types of Credit

Credit Scores As of 12/3/2012

Loan Types Mortgage: Typically to purchase a home Consumer: For small purchases Equity: Borrowing against excess value in a home Re-Finance: Paying off one loan with another Payday: Short-term loan until next paycheck