CREDIT 101

BASICS TO CREDIT Credit _______ --The opportunity to borrow money or to receive goods or services in return for a promise to pay later Borrow ___________ -- To receive and use something belonging to somebody else, with the intention of returning or repaying it--often with interest in the case of borrowed money. Borrower __________ -- An individual who has received and used something belonging to somebody else, with the intention of returning or repaying it--often with interest in the case of borrowed money.

BASICS TO CREDIT _______ -- An obligation or liability to repay for something borrowed such as money to purchase a car. Debt _________ -- The original amount of money borrowed. Principal Interest _________ -- The cost of borrowing money.

CREDIT CARD ITEMS Credit card ____________ -- Any card, plate, or coupon book that may be used repeatedly to borrow money or buy goods and services on credit. ___________ -- The maximum amount of money that will be extended to a person by a financial institution or credit-card issuer Credit limit

CREDIT CARD ITEMS __________ -- Yearly charge for having a credit card or credit account. Annual fee Finance charge _______________ -- Total cost of credit, including interest and transaction fees. ______________ -- Fee charged when payment is received after the due date. Late fee

OBTAINING CREDIT _____________ -- Record of past borrowing and repayments. Credit History ________________ -- Evaluation of a borrower's ability to repay a loan based on his or her character, capacity and capital. Credit Worthiness _____________ -- Statements containing information about prospective customers furnished by credit bureaus, including his or her ability and willingness to repay debts, based on how reliably he or she has repaid debts in the past. Credit Report

OBTAINING CREDIT Credit Bureaus FICO Score Credit Worthy ____________________ -- Organizations to which business firms apply for credit information on prospective customers. _________________ -- Fair Isaac and Company software used by credit bureaus to calculate an individual’s credit risk provided to lenders; the higher the score the lower the risk but other factors are considered in addition to this score. FICO Score Credit Worthy ___________________ -- Having the ability and willingness to repay debts or the extent to which a person is deemed suitable to receive credit, especially as shown by reliability in repaying loans in the past.

FIVE C’s OF CREDIT ________ -- Creditors evaluate your debt-to-income ratio, how much you owe compared to how much you earn. High earnings and low debt, indicate a strong capacity to make payments on the loan in question. Capacity _____________ -- Creditors look at how creditworthy a borrower is likely to be, as determined by the borrower's handling of past debts and his or her stability in jobs and residences. Character Collateral ____________ -- Something of value (often a house or a car) that a lender has a right to take ownership of and use to pay the det if the borrower is unable to make the loan payments as agreed.

FIVE C’s OF CREDIT - Continued ________ -- Refers to your net worth: the value of your assets minus your liabilities. ________ -- Outside circumstances that may affect the borrower’s financial situation and ability to repay a loan, such as the local economy. If a borrower is a construction worker, and the housing market is slow, the lender may require more down payment, or a smaller loan amount. Capital Conditions

TYPES OF CREDIT Revolving Credit _____________________ -- Type of credit that does not have a fixed number of payments, in contrast to installment credit, with credit cards as main example __________________ -- Type of credit that has a fixed number of payments, with home or car loans as main examples Installment Credit

TYPES OF CREDIT Loan Leasing Line of credit __________ -- A sum of money provided temporarily on the condition that the amount borrowed be returned, usually with an interest fee Leasing __________ -- Paying for the possession of the property belonging to another person for a time period set by the lease or (landlord or owner) Line of credit ______________ -- A credit arrangement in which a bank agrees to lend money to a customer up to a specified limit. Generally arranged before funds are actually needed. Provides flexibility for customer when short-term cash is needed. Also called bank line or credit line.

CREDIT LAWS ________________________ -- Federal law that requires creditors to disclose finance charges and interest rates in a standard, uniform manner. Truth in Lending Act ___________ -- A law that establishes a maximum permissible interest rate for a particular type of loan. Loans at rates above the loans’ ceiling are illegal. Usury Law

CREDIT LAWS ___________ -- Legally declared unable to pay one’s creditors. Usually initiated by debtors as means to repay creditors. Creditors may file a petition against a debtor in an effort to recoup a portion of what they are owed. Bankruptcy Consequences of filing for bankruptcy: Can lose personal property such as a home or car Loss of privacy – the bankruptcy is a public record Credit Score and credit worthiness is dramatically lowered

THINGS TO CONSIDER WHEN BORROWING 20/10 Rule ___________________ -- Suggested rule to follow for being able to safely borrow. Never borrow more than _______ of yearly net income. 20% Monthly payments should be less than _____ of your monthly net income. 10%

THINGS TO CONSIDER WHEN BORROWING Annual Percentage Rate (APR) ______________________________ -- Percentage rate charged on the principal of a loan to be paid as interest in one year. Calculated on the declining balance of the loan. The Truth in Lending Act requires lenders to disclose this to prospective borrowers Prime Rate _____________ -- The interest rate charged by banks to their most creditworthy customers (usually the most prominent and stable business customers). %