1. “Credit”; another word for “Borrowing”

2. What is Credit? Credit is borrowing or taking a loan!
If you buy something on “credit” you are receiving the goods or services today and will pay the bill later.
Many goods and services are paid for with credit. Even basic things like your electric bill.
Borrowing money to buy a car or home is the most significant example of credit.
A credit card is borrowing as well as the bank pays off your vendors and you then owe them.

3. advantages of credit Advantages:
Able to buy needed items now like education, homes, and cars.
Don’t have to carry large amounts of cash to buy goods and services
If managed wisely, it builds your credit rating allowing you to borrow money at lower interest rates!
teens – lesson 7 - slide 7-A

4. Disadvantages of Credit
Paying Interest expense on loans means paying a higher total cost for items (education, cars, homes, etc.)
May incur additional fees beyond interest expense (loan processing costs)
Financial difficulties and a poor credit rating will occur if one cannot pay off credit/debt. 

5. You receive goods or services today
Purchasing on Credit
You receive goods or services today
For the promise to pay back the determined amount of money in the future
Credit availability depends on if lenders trust that you will pay back the loan. Determined by your credit rating and the amount of your monthly gross income.

6. the three C’s of credit
CHARACTER—has your past shown you are a good credit risk?
Determined by your credit score (history) and employment record. Have you shown the consistency and reliability to pay back loans in full and on time?
CAPITAL—do you have additional assets if you lose your job?
Do you have any valuable assets such as savings, investments, or other assets that could be used to repay the debt if income suddenly is unavailable or insufficient to make payments?
CAPACITY—do you have the current income to repay the debt?
Have you been working consistently in a job that is likely to provide you enough income to pay back this loan and any other debt or expenses you already have?
teens – lesson 7 - slide 7-B

7. Government (Student and Home Loans)
Sources of credit
There are many sources of credit including…
Private mortgage companies
Depository institutions
Automobile dealerships
Government (Student and Home Loans)
Credit card companies
Pawn shops
Department Stores & Gas Stations
What credit sources provide the most favorable terms?

8. Types of Credit and Collateral
Closed-end Credit (Installment Loan)
Open-end Credit (Revolving Credit)
Alternative Credit
What is collateral?
An asset used to secure the loan in the event that borrower cannot repay the loan.

9. Closed-End Credit (Installment Loan)
What it is…
Loan in which the borrower must repay the amount in a specified number of equal payments or installments
Features…
Contract outlining repayment terms
Examples…
Mortgage loan
Automobile loan
Personal loan
Student loan

10. Example Closed-end Credit or installment Loan
Liam applied for a $10,000 automobile loan at 8%. He signs a contract with the lender to pay $ per month for 36 months to repay the loan.
$313.36
Liam could pay more than $ per month to pay off the loan earlier, but he must pay at least $ per month.

11. Open-End Credit (Revolving Credit)
What it is…
Extended line of credit established in advance
Features…
Loan may be paid (usually monthly) in a single payment or series of equal or unequal payments
Example…
Credit Card (No Collateral)
Home Equity Loan (Collateral is home)
Bank Line of Credit (No Collateral)

12. Example Open-end or Revolving credit
Whitney charged $200 to her credit card which has a 13% interest rate. She receives her credit card bill with a $20 minimum payment.
Whitney has many options for paying back the $200 as long as she makes the minimum payment.
$200 $0
$34.61
$20
$30
$40
$50

13. Alternative credit Alternative or non-traditional sources of credit
Usually has higher interest rates and fees
Usually a “bad deal” and used when in financial distress

14. Types of Alternative Credit Payday Loan (Financial Distress)
Short-term loan that provides immediate cash to the borrower to be paid back with fees on the borrowers next pay day.
The loan…
Total loan: $360
Lender fees: $60
Amount the borrower receives: $300
Borrower writes post-dated check for $360.
On the agreed upon date (payday)
Lender seeks repayment of $360 by either depositing the post-dated check or some other acceptable form of payment.
If the borrower does not have money in their account or is unable to pay:
Additional fees and possible legal action
or pay $60 fee again to keep the existing loan outstanding

15. Types of Alternative Credit rent-to-Own
Borrower leases tangible items with the condition that the item will be owned by the renter when the term of rent is completed
Interest rate paid: $800
(ouch!)
Total paid:
$1,800
Pay$50 per month for 36 months
Purchase a 50” LCD TV valued at $1,000
What are alternative options to above?

16. Types of Alternative Credit Title and/or Pawn Loan
The loan…
Borrower gives the lender their automobile title or some other personal property (jewelry) in exchange for loan. Loan amount is based on value of item.
To get their item back, the borrower must…
Pay the lender back plus fees/interest on the due date and then they get their collateral back.
Worst type of deal!
If credit terms are not met…
The lender keeps the item (collateral)
Is this a good practice? What are alternatives?

17. The 20-10 Rule of Thumb What is the Maximum that One Should Borrow?
Total amount borrowed should be less than 20% of annual net income
Monthly debt payments should be less than 10% of monthly net income
Housing debt & payments are not included as a part of Rule!
Why should individuals limit their debt?

18. We will learn later how to earn a high credit rating!
How to Obtain Credit
Evaluate your credit report and score
A poor (low) credit score will result in either higher interest rates or the loan not being approved.
Credit Score
Check
Personal information
Credit requested
Information about your ability to repay the credit
Typical questions
A form requesting information about a credit applicant and a request for a specific amount of credit.
Credit application
Exact process depends on the type of credit and the lender
We will learn later how to earn a high credit rating!

19. Credit: your responsibilities
Borrow only what you can repay in full. Follow the rule of thumb (slide 17).
Read and understand the credit contract.
Pay debts in full on or before the due date.
Notify creditor if you cannot meet payments.
Report lost or stolen credit cards promptly.
Never give your credit card number over the phone unless you are certain of the caller’s identity.
Maintain a credit rating over 760. Check your credit rating and report at least once per year.
teens – lesson 7 - slide 7-C

20. your rights Truth in Lending Act (1968)
Ensures consumers are fully informed about interest rates, cost, and terms of credit (borrowing).
Requires many disclosures by lenders!
State Usury Laws
Limits maximum interest to be charged on loans!
teens – lesson 7 - slide 7-D

21. Compare different lenders!
Shopping for Credit
Compare different lenders!
Compare several lenders to choose best terms.
Read the credit contract carefully!
Ask questions if unclear, choose, and then apply!

22. Shopping for Credit Evaluate the contract Carefully!
What is the annual interest rate or APR?
Are there any fees?
What are the consequences of a missed or late payment?
What happens if the loan is not paid back in full?
Do you trust and feel comfortable with the lender?

23. Credit Scores
“Manage your credit score to 760 or higher (out of 850) to get the lowest interest rates on future loans”
PFHS Personal Finance Teachers

24. How Credit Reports & Scores are Created
A continuous, accessible credit report! CRAs turn information over to a third party (FICO or Vantage) to calculate a credit score ( )!
Credit Report Agencies (CRA’s)
Keeps a record of a consumer’s credit account history.
Lender
Reports a consumer’s account history to Credit Reporting Agencies.

25. Credit Reporting Agencies
Three U.S. CRA’s:
- Equifax
- Experian
- TransUnion
(Know Names for Test!)
A person’s credit score, calculated by FICO or Vantage, may vary slightly depending on which CRA data was used.
If credit has never been used (or reported) an individual will not have a credit report or score

26. Categories in a Credit Report
Personal Information
Credit Account Information
(Specific Credit Info)
Public Record Information
Inquiry Information
Four Categories

27. Information provided to lenders when applying for credit
personal Information
Information provided to lenders when applying for credit
Name
Current and previous addresses
Telephone number
Full or partial social security number
Date of birth
Employment history

28. Credit Account Information
Specific information about each credit account you have or have had
Types of Information
Type of Credit
Loan Amount or Credit Limit
Date
Account Balance
Payment Information

29. Information from federal, state and county
Public Records
Information from federal, state and county
public court records
Collection Agencies
Businesses hired by lenders to pursue payments on debts not paid back according to contract terms
Bankruptcy
When an individual or business is not able to repay outstanding debts, they may file for bankruptcy protection.
Tax liens
Taxes not paid in full such as property or real estate taxes.
Foreclosure
Borrower fails to keep up with mortgage payments and the lender takes possession of the property

30. Negative No Impact Inquiry Information
One is seeking additional credit
No Impact
Checking your own credit report
Doesn’t Lower Credit Score!
Lowers credit score when your lender checks score (must have your permission)

31. Types of Lenders Who Report to CRAs
Depository institutions
Credit card companies
Retail stores that offer credit accounts
Mortgage and finance companies
Lenders report all information, positive and negative

32. Key Payment-Data Furnishers Who Report to CRAs
Landlords
Cell phone companies
Utility accounts
Medical providers (payment information only)
Pay all of your bills on time and in full!
CRA’s receive regular payment information. Payment history from lenders and data furnishers represents approximately 35% of your credit score!

33. Information Not in a Credit Report
Medical information about where the person was treated and for what
Race & Gender
Religion & Nationality
Your final Personal Finance Grade.
Criminal background
Buying habits

34. How Long Does CRA Info Stay on your credit Report?
Some items remain on your credit report longer than others
Always
Accounts in good standing
10 years
Closed accounts in good standing
7 years
Late or missed payments
7-10 years
Public record information
2 years
Inquiries

35. 850 is the highest score (Perfect). Goal is to have 760 or above!
Credit Score
Reflects information in the entire credit report
At a particular point in time
Numeric “grade” of a consumer’s financial reliability
850 is the highest score (Perfect). Goal is to have 760 or above!
Mathematical number created to help a lender evaluate the risk associated with lending a consumer money

36. Credit Scores: How Calculated?
Scores based on: 1) Payment history (35%), 2) Credit Utilization Ratio (30%), 3) Length of History (15%), 4) Credit Mix (10%), 5) New credit (10%).
Scoring System
Score Range
FICO & Vantage
Generally, higher score = higher chance of credit repayment and you are awarded a lower interest rate
How the score is calculated depends on the credit agency data that FICO or Vantage uses. Score of 760 or above (out of 850) is an excellent credit score and what you should aim for!

37. Building a Great Credit Score!
Pay your bills consistently and on time
Maintain reasonable amounts of available credit
Keep your credit card utilization ratio low (<20%)
Have a mix of different types of credit accounts
Do not have too many of one type of account
Check your credit report at least annually
Positive Credit History
Higher Credit Score

38. (3-year fixed rate loan, automobile)
Credit Score Impact
Credit history helps a lender determine the terms of credit granted
Example: $15,000 loan
(3-year fixed rate loan, automobile)
FICO Score
Interest Rate
Monthly Payment
3 Year Amount
760
6.16%
$457
$16,452
660
8.77%
$475
$17,100
590
14.43%
$516
$18,576
$2,124 can be saved over the lifetime of this loan because of a great credit score!

39. Credit History Affects More than Credit
Insurance Rates (lower credit score means higher insurance bills)
Employment (see a modified version of report but no score)
Utility Services (Gas, Electric, Water). May request deposit.
Home Purchases (credit score most important here)

40. Strategies to Build a Credit Score
Acquire and positively manage all lines of credit
Get Small closed-end loan
From a depository institution
Set up automatic payments
Example: Car Loan
Get Credit card with a co-signer
Co-signer – person who is equally responsible for paying back debt
Get A Secured Credit Card
Requires a cash security deposit
Ensures the credit card company will be paid as they have collateral
Become an Authorized User on a Credit Card
Authorized user is not legally responsible for the debt but they will build a credit history
Having no credit history may be just as challenging to a consumer as having a negative history

41. Requesting a Credit Report
One free credit report annually per Law!
One Credit report free for each of the 3 CRAs
Adverse Mistakes are Made on Credit Reports. Fix Them!
Only government-sponsored free website

42. If an Error is Found
Contact the CRA & company that provided the incorrect information
Credit agency has 30 days to investigate
If error found, correct information must be provided to all three CRA’s
If dispute is not resolved, consumer may add a dispute statement to their report

43. Filing For Personal Bankruptcy 
When you file for personal bankruptcy it is complete PF failure. It goes on your credit report for 7-10 years and you will likely never get a loan again.
When you file for bankruptcy:
You owe nothing on credit cards with balance.
You owe nothing on your collateralized loans such as your car and home, but you also cannot keep them. You may keep them if you can make the payments after bankruptcy including past due amounts.
You still owe your student loans; not canceled!

44. Summary Credit score Credit history
Used to assess financial risk
Credit history
Enables lenders to make more objective lending decisions
Credit score
To develop a positive credit history
Manage your money responsibly
Your Present Habits Impacts Your Ability to Obtain Credit

45. Credit Cards

46. Credit Cards: A Necessary Tool for Building a Solid Credit Rating!
What is a credit card?
Who can get a credit card and how?
The key features of a credit card.
What happens if you lose a credit card?
How to read a credit card statement

47. What is a credit Card?
A credit card is a plastic card used to buy goods & services by accessing a line of credit with a limit that has been established in advance by the bank named on your credit card. The vendor is paid immediately by the bank on your card. The bank then bills you once per month for the charges on your card.
The cost of a credit card is expressed as either interest on unpaid balances and annual fees.
Interest rates on credit cards are very high if the balance is not paid in full by due date.
A typical interest rate charged on any balance not paid in full is 12%. You can buy a home with a loan at only 4.5%! Pay your credit card balance off in full!

48. The smallest amount that can be paid in order to keep the account current is called the minimum payment.

49. Who can get a credit card?
Over 21- need credit history and proof of sufficient income to make payments
Under 21- by law, must have a co-signer and have proof of sufficient income to make payments
A Pre-approved credit card application- means that a person has passed the initial credit check with a “soft” inquiry that does not hurt your credit score..

50. Credit Card Features ) Annual Percentage Rate
“APR”
The cost of credit expressed as a yearly interest rate
Pay your balance off in full by due date to escape interest charges!

51. Credit Card Features Cash Advance
(Credit Cards can be used at any ATM for Cash)
But: Interest charged from day of advance (Don’t do it!)

52. Happens when a person transfers their balance from one card to another
Credit Card Features
Balance Transfer Rate
Balance Transfer Rate (fee for transferring balance from a card; usually a % of balance)
Happens when a person transfers their balance from one card to another

53. Credit Card Features
“Introductory Rate”
A lower interest rate for a set period of time, afterward it increases to a predetermined rate

54. Credit Card Features
Annual Fee-yearly fee that may be charged for having a credit card. Aim to get a card with no annual fee ($75-$100) unless the rewards on the card justify it.
Late Fee- charged when a cardholder does not make at least the minimum monthly payment by the due date.
Over the Limit Fee- charged if the account balance goes over the set credit limit

55. Credit Card Penalty APRs
Penalty APRs (raising your interest rate from current APR)
Your interest rate (APR) may be raised if either of these occur:
You are 60 days past due in a payment. You are current if you make the minimum payment even though not a good idea.
You have made purchases that exceed your credit limit.

56. Credit Card Features
Grace Period-The credit-card issuer may allow a certain number of days to pay your balance in full past the due date before tacking on the interest charges. Many cards have no grace period.

57. Credit Card Features Rewards (Make Money / Save Money)
Frequent flyer miles
Discounts on cars and other products
Warranties for items purchased
Travel insurance
Cash rebates (This is what I elect)
Do the rewards outweigh the costs? Most always; yes! Rewards, safety, and building up your credit history are the benefits; mismanaging your money and hurting your credit rating are the risks!.

58. Report lost or stolen cards IMMEDIATELY!
Lost Cards
Report lost or stolen cards IMMEDIATELY!
How much are you liable for?
$0 if reported before it is fraudulently used
$0 if just your card number is stolen
$50 if it is used without authorization but reported within 2 days
Higher amounts if not reported within 2 days

59. Debit or Credit

60. Credit Card Statement

61. The Schumer Box
A Schumer Box is an easy-to-read table or “box” that discloses the rates, fees, terms and conditions of a credit card agreement as required under the Federal Truth in Lending Act

62. Real Life Story

63. Activities:
Shopping for a Credit Card
Reading a Credit Card Statement