Using Credit

What is Credit? Credit- Money borrowed to buy something now, with the agreement to pay for it later Over 80 percent of all purchases in the U.S. are made with credit rather than cash

History of Credit Early Years- The need for credit arose in the US when the country grew from a bartering and trading society to a currency exchange economy. One of the earliest forms of credit was the account at the general store

History of Credit (cont.) 1900’s Credit- Since the 1900’s, interest rates have dropped Record numbers of people declared bankruptcy because they overextended on credit Since 1920 buying on credit has become the American way of life No longer is credit saved for emergencies Prior to 1970, there was no consumer credit protection legislation; laws protecting consumers

History of Credit (cont.) Today- Credit is abundant and easy to get Merchants encourage consumers to use credit to buy all kinds of goods and services The Internet has opened new uses of credit cards that will increase debt into the future

Advantages of using credit: Able to buy needed items now Don’t have to carry cash Creates a record of purchases More convenient than writing checks Consolidates bills into one payment

Disadvantages of using credit: 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

Vocabulary of Credit Capital- Property you possess that is worth more than your debts This lets the creditor know you are worthy of borrowing money to Collateral- Property pledged to assure repayment of a loan If you fail to make your payments, your property will be repossessed Financial Charge- The interest you pay for the use of credit Line of Credit- A pre-established amount that can be borrowed on demand with no collateral Deferred Billing- A service available to charge customers whereby purchases are not billed to the customer until later

4 C’s of Credit Character 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 been at your present job?

4 C’s of Credit (cont.) Capital Do you have any valuable assets? What property do you own? Do you have a savings account or investments?

4 C’s of Credit (cont.) Capacity Have you been working regularly? 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?

4 C’s of Credit (cont.) Conditions What general economic conditions can affect your repayment of debt? How secure is your job? How is the employment situation in your geographic area?

Building a Credit History Establish a steady work record. Pay all bills promptly. Open a checking account and don’t bounce checks. Open a savings account and make regular deposits. Apply for a local store credit card and make regular monthly payments. Apply for a small loan using your savings account as collateral. Get a co-signer on a loan and pay back the loan as agreed.

Types of Credit Open 30-Day Accounts A consumer promises to pay the full balance each month

Types of Credit (cont.) Installment credit Merchandise and services are paid for in two or more regularly scheduled payments of a set amount. Interest is included. Retail businesses, such as car and appliance dealers

Types of Credit (cont.) Revolving credit Many items can be bought using this plan as long as the total amount does not go over the credit user’s assigned dollar limit. Repayment is made at regular time intervals for any amount at or above the minimum required amount. Interest is charged on the remaining balance. Retail stores Financial institutions that issue credit cards

Credit Card Terms Before selecting a credit card, learn which terms and conditions apply Annual Percentage Rate (APR)- The cost of credit, expressed as a yearly percentage Free Period (grace period)- Allows you to avoid the finance charge by paying your current balance in full before the due date shown on your billing statement Annual Fees- A fee each year for using the card Late Fees- A fee implemented when you don’t pay your bill on time

Credit History Credit History- The complete record of your borrowing and repayment performance Credit Bureau- A company that gathers, stores, and sells credit information to business subscribers Approximately 1200 across the nation distribute information concerning nearly 150 million consumers Credit Report- A written statement of a consumer’s credit history, issued by a credit bureau to its business subscribers

Your Rights Truth in lending act (1968) Ensures consumers are fully informed about cost and conditions of borrowing. Fair credit reporting act (1970) Protects the privacy and accuracy of information in a credit check. Equal opportunity act (1974) Prohibits discrimination in giving credit on the basis of sex, race, color, religion, national origin, marital status, age, or receipt of public assistance.

Your Rights (cont.) Fair credit billing act (1974) Sets up a procedure for the quick correction of mistakes that appear on consumer credit accounts. Fair debt collection practices act (1977) Prevents abuse by professional debt collectors, and applies to anyone employed to collect debts owed to others; does not apply to banks or other businesses collecting their own accounts.

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.

How much can you afford? The 20-10 rule. Your total borrowing should not exceed 20 percent of your yearly net income Example- You make $4000 a month, you should not borrow more than $800 per month You should not take on monthly credit card payments that total more than 10 percent of your monthly net income Debt does not include your house payment!

Bankruptcy Bankruptcy- A legal process that relieves debtors of the responsibility of paying their debts or protects them while they try to repay Involuntary bankruptcy- occurs when creditors file a petition with the court asking to declare the debtor bankrupt Voluntary bankruptcy- Occurs when you file a petition with a federal court asking to be declared bankrupt Chapter 11 bankruptcy- A reorganization form of bankruptcy for businesses that allows them to continue operation under court supervision as they repay their restructured debts Chapter 7 bankruptcy- A liquidation form of bankruptcy for individuals that wipes out most debts in exchange for giving up most assets Chapter 13 bankruptcy- A reorganization form of bankruptcy for individuals that allows debtors to keep their property and use their income to pay a portion of their debts over three to five years

Preventing Credit Card Fraud 1. Write “SEE ID” on your card – sign name too 2. Don’t allow your card out of your sight 3. Be Careful giving your account number 4. Don’t put your PIN on your card 5. Don’t carry cards that are not needed 6. Destroy your card if you receive a new card 7. Destroy your receipts 8. Don’t let others use your card 9. Invest in a safety deposit box