CREDIT CHAPTER 11

What is Credit? Section 1

What is Credit? Credit- is the ability to borrow money in return for a promise of future repayment Giving up the ability to spend in the future in order to spend now

Saving Giving up spending now for the ability to spend later

Interest Charge for unpaid balances Giving up more future spending than original cost Spend $100 Interest is 12% APR (annual percentage rate) Interest per month would be 1% $1 of interest for one month $12 of interest for one year This is assuming you don’t add to the amount

Grace Period Is the time between the billing date and the payment due date when no interest is charged 20 to 25 days If not paid off: Interest is charged from the date of your purchase

Minimum Payment 2 percent (%) of your total balance Example: $100 balance$1000 x.02 $2 $20 As your balance goes down so does your minimum payment Paying off a big charge little by ever-so-little also means that a $1,000 debt can turn into a 22-year commitment -- and that you'll accumulate thousands more in interest in the meantime

Next Month Minimum Payment $1000 starting balance + 20 interest (24% APR) min. payment (usually 2% of balance) - $ next months balance interest min. payment $ next months balance

Opportunity Cost Is giving up what you would spend in the future with the money you spent on interest plus the cost of the item you bought now

Other Never borrow more money than you can easily repay Renting- money paid towards shelter without anything to show for it Owning- using credit to live in a home while making payments; over time the home builds equity Equity- difference between amount owed on a home and the home’s value Investment- value of a product that grows over time

Other Credit Limit- maximum amount you are allowed to charge on your account Tax advantage = property tax and interest paid for home loans are deducted from taxes Investing in yourself = education or training = higher income Budget borrowed money repayments

Health Insurance doesn’t pay for everything, BUT things happen so sometimes you will have to borrow money to pay for living expenses

When to Borrow 1. Is it important that I buy the good or service I want now? 2. Do I have to borrow to buy the product? 3. Can I afford to make the payments on the loan? 4. Will I be able to buy other products I want more if I borrow to buy this product?

How much to Borrow No more than 20 to 25% of take home pay $1000 x.20 or.25 = $200 to $250

How to Qualify for Credit Section 2

Credit Worthiness Is a measure of your reliability to repay a loan To be credit worthy you must have the ABILITY and WILLINGNESS to pay your debts

Character Is a measure of your sense of financial responsibility Do you take your obligations seriously?

Other Character Check 1. How long have you worked at the same job? 2. How long have you lived at your residence? 3. Do you have good work and school attendance? 4. Do you save regularly?

Character History A record of your past borrowing and repayments Most important factor is: ALWAYS pay on time

Cosign a loan Parent/adult agrees to pay the debt if you don’t Not recommended to do this for friends or irresponsible family members

Capacity Is a measure of your financial ability to repay a loan

Are you Financially Over Extended? Lenders will require all debt payments then they will calculate the percentage to see if you can take on another loan

Capital Is the value of what you own savings, investments, and property  More capital you have the safer you are to loan to

Credit Bureau Is a company that collects information about consumers’ credit history and sells it to lenders

Information on Application Liabilities are your debts Assets are things you own

Credit Rating Is a measure of your credit worthiness Lenders have computerized systems called FICO (Fair Isaac Corporation) Scores from 100 to 800 The higher the number the better Always pay on time and don’t take on more debt that you can easily repay

Credit Reporting Companies Equifax Experian TransUnion Check once a year from each company

Sources of Consumer Credit Section 3

Types of Consumer Borrowing 1. Loans 2. Credit Card Accounts

Loans Given a certain amount of money all at once to make your purchase Make specified payments with interest by a certain date

Credit Card Accounts Amount purchased is added to account Pay what you want each month as long as you are paying the minimum required

Secured Loan Is backed by something of value pledged to insure payment Safe for lender Not safe for borrower

Collateral Property pledged to back a loan Car Boat Home Etc.

Installment Loan Is repaid in a certain number of payments with a certain interest rates

Unsecured Loan Is not backed by collateral Lender lends based on your credit worthiness Higher interest rates Credit cards are considered unsecured loans because it’s an unspecified amount Up to the customer’s credit limit  Date specified = closed-end  Date not specified = open-end

Other Sources of Loans Finance Companies High interest rates because the borrower has higher risk Life Insurance Lower interest rates because the loan can be deducted from the life insurance policy if borrower passes away Credit Card Cash Advances Very high interest rates 17 to 24% Can get borrower into a lot of financial trouble

Sources continued Pawn Brokers Give up property to get money To get property back, borrower pays a high fee Rent to Own Companies Rent property until you pay it off Pay a lot higher for the item rented

CREDIT CARDS Regular Charge Account You must pay your balance each month in full with in a specific amount of time No interest rate since you are not borrowing money Revolving Charge Account Allows you to carry a balance from one month to another Pay interest

Sources of Credit Cards Large Company Visa MasterCard Discover American Express Small Company Banks Gasoline Universities Charitable organizations credit unions

Credit Card Incentives Incentive Anything that is given in replacement of a particular agreement or action Examples: Free stuff (hats, shirts, cups, tickets, etc.) Points to win things later Money to Charity Money to Schools Low interest rates: 0% APR for one year! Purpose Encourages you to use their card

Credit Card Costs Annual fees $15 to $100 One time fee for the use of the card Interest On all unpaid balances 3.9% to 24% 0% for 6 months to get you to pay on credit card; buy interest builds if you don’t pay it off in the 6 months  This is called back pay

Loan as Alternative Interest on a loan is lower than on a credit card Loans are closed-end

Minimum Payment Trap Interest plus a little more This is encouraged to extend amount of money paid in interest More money on credit card and the longer it stays the more money you will pay the credit card company

Credit Rights and Responsibilities Section 4

Consumer Credit Rights Truth in Lending At in 1968 Requires banks to calculate credit costs in the same way 1. Finance charge 2. Annual Percentage Rate (APR) Finance Charge Is the total cost a borrower must pay for a loan Includes Interest fees

Consumer Credit Rights continued Annual Percentage Rate Is the finance charge calculated as a percentage of the amount borrowed  The laws does not guarantee that you will pay the lowest amount possible  Getting the best deal is up to you

Equal Credit Opportunity Act It is illegal to refuse credit based on: Race Color Religion National origin Sex Marital status And age

Fair Credit Reporting Act If you have been refused credit You have 30 days to request a free copy of your file

Consumer Credit Reporting Reform Requires credit bureaus to investigate disputed items on a credit report with in 30 days

Credit is a PRIVILEGE not a RIGHT

Refused Credit? Gather contact info from lender who refused you credit Request a credit report Study report for inaccuracies Report any errors Write up to 100 word statement explaining uncontrolled circumstances  Check every 6 months on all 3 credit reports for errors

Fair Credit Billing Act Part of the Truth in Lending Act Helps correct credit card billing mistakes Credit Bureaus must resolve the dispute with in 90 days May not pay interest unless they deny the dispute

Fair Debt Collections Practices Act of 1977 Law prohibits the use of harassment or abusive conduct Threatening phone calls Deceptive means to get information

Consumer Credit Responsibilities Lenders will not limit your credit Use common sense when taking on more debt Use Self Control Pay more than minimum balance Avoid too many credit cards Pay in cash Keep accurate records

Maintain a Good Credit Rating Section 5

Start Small It is easier to handle small limits than a card with a large credit limit Don’t miss a payment Save regularly Shows you can manage your money Married or not if you name is on the card it’s a part of your credit Counts equally on the credit report

Common Credit Mistakes Not paying bills on time Not contacting lender when a problem arises Read what you sign You are legally bound to anything and everything you sign Make sure you understand it, if not, don’t sign until you do You have to fulfill what you signed

Acceleration Clause Says that the entire debt is immediately due if you miss a payment

Balloon Payment Large payment at the end of the loan + Low payment until the end - Pay large amount at end

Bankruptcy Is a legal process in which people who cannot pay their debts must surrender most of their property The court sells the property to help pay the debts In exchange for not paying the rest of the debt Two Kinds: Chapter 7- total amount of debt forgiven Chapter 13- smaller payment plans to pay debt; partially forgiven (discharged) but not all

Price of Bankruptcy No property (boats, expensive vehicles, etc) 10 years on credit report Have trouble finding a place to rent Have trouble getting credit Gives you a new start, but is not recommended unless absolutely necessary Keep what is absolutely necessary for living Bed, couch, lamps, clothes, shoes, etc

True-Name Fraud Involves using someone else’s identity to get cash or buy products using credit Criminals need your SSN Credit card Driver’s license The business responsible for debt Ruin credit record (at least for a while if you catch it in time)

How to Protect Yourself Never give your SSN, unless necessary Keep your personal documents in safe place Keep track of your bills Contact business if you find a mistake Guard your personal belongings Shred anything with your name, address, and other personal information

Eleven Danger Signals of Debt Problems 1. Paying only minimum balance and continuing to use the card 2. Regularly using 3 or more cards 3. Missing payments, late payments 4. Receiving second and third notices from creditors 5. Borrowing money to pay old debts 6. Using savings or credit cards to pay normal bills 7. Intentionally using overdraft or automatic loan features on checking accounts 8. Not talking to your significant other about money or ONLY talking about money 9. Rely on extra income to make ends meet 10. Owe more than 20% of monthly income in debt 11. No savings for emergencies

10 Tips to Credit Discipline 1. Don’t have more credit cards than you need 2. Think it over before using 3. Combine your credit use with a savings plan when card is paid off continue with that amount in your savings 4. Pay part of a purchase with cash before using credit 5. Keep all receipts 6. Keep a record of purchases 7. Review each statement 8. Stop using credit when payment is 15% or higher 9. Don’t charge more than you can pay off in one billing cycle 10. Keep credit cards out of reach to avoid impulse shopping