What is credit?

VOCAB TO KNOW! Credit : trust given to another person for future payment of a loan, credit card balance, etc Creditor : A person or company to whom a debt is owed Debtor : A person or company that owes a debt (has a liability) Debt (payments)-to-equity ratio : calculated by dividing total liabilities (or monthly debt payments) by net worth  Helps creditors/lenders determine an individual’s ability to manage monthly payment and repay debts

Sources of Credit Who approves/gives credit?  Banks  Credit Unions  Retail Stores  Finance companies*--your typical source; can charge high interest rates for those with low credit scores  Credit card cash advances  Savings & Loans  Internet stores  Mortgage brokers/lenders AVOID these sources!  “Payday” loan/check cashing companies— use your next paycheck as collateral for the loan; creates “vicious cycle” of borrowing  Predatory lenders (“sharks”)  Pawnshops (if you don’t pay your balance on loan)  Collateral-based  Balance owed + all added fees -- before the deadline, which is usually one to four months after the initial transaction  If you don’t pay or return for your item, the pawnshop keeps and can sell your item

Types of Credit  I.O.U. (personal loans)  Revolving Credit (credit cards)  Installment Loans  Student loans (subsidized and unsubsidized)  Real estate loans (mortgages)  Cash loans  Car loans AVOID ABUSIVE LENDING! 1. Have you shopped around for the best deal? 2. Do you feel the lender pressured you to take the loan? 3. Do you understand the terms of the loan? If the answer is not in your favor, don’t be afraid to ask and research—make an INFORMED decision!

Maintaining good credit  Always pay your bills on time.  Have checking and savings accounts that are current.  Avoid late fees.  Get a copy of your credit report every year. Check to make sure it is  accurate, and report any problems with it immediately.  Do not live off credit or be tempted to use credit to spend beyond your means.  Use credit card numbers only when you are sure the transaction is secure.  BE YOUR OWN BEST FRIEND! 1. What is the annual fee? 2. What is the annual percentage rate (APR)? 3. When are payments due? 4. What is the minimum payment required each month? 5. Is there a grace period? 6. Are there other fees associated with the credit, such as minimum finance charges? 7. What is the credit limit? 8. What are the penalties for late or missed payments? 9. What are the terms and conditions of the credit? What else is included in the fine print?

Costs of Credit When should I use credit?  In times of emergencies, family crisis, unexpected illness, etc.  As convenient way to manage income by keeping track of spending—if bills are paid in full each month  Benefit of having large items such as a home, car, and appliances while still paying for them When shouldn’t I use credit?  If you cannot control spending beyond one’s means  Creates fees, compounding interest  When credit takes away your needed income, just to pay off your loan(s)  Think about wants vs. needs!  When there is concern that the credit cards/numbers may be stolen  Think about lender reliability and security

Keep in mind!  The shorter the loan period, the lower the price of the product purchased on credit (and vice versa)  Less interest is being paid!  Try to avoid paying only the minimum amount due  Prepayment on a loan can reduce the time and cost of the loan  Making larger payments than required  Check to make sure there aren’t any fees to do this  Your lender can deny loans based on your credit history, credit score, inadequate income, or lack of assets  ALWAYS compare interest rates and fees before taking out a loan or applying/using a credit card  Check whether your interest rate is fixed or variable; the total cost is the amount borrowed plus the interest paid over time  Check if/what type of collateral is needed for certain loans  Assets, co-signers…  What happens if you default?