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7.0 OBJECTIVE UNDERSTAND WAYS TO PROTECT PERSONAL AND FAMILY RESOURCES.
7.02 C-students will be able to understand how to establish credit and maintain good credit
ESTABLISHING CREDIT
Creditors lend to people who can reasonably be expected to pay them back – all questions asked relate to “ability to repay”
Creditors look at credit-related information to determine if one is a good risk
A creditor’s evaluation of one’s ability and willingness to repay debts is a credit rating
ESTABLISHING CREDIT
Credit rating reflects the consumer’s credit history
Credit ratings are based on 3 Cs (review objective 6.03 housing options) Character---a person’s reputation for being honest
and their financial history Capacity---a person’s employment history and
ability to earn money Capital---a person’s financial worth
HOW TO ESTABLISH GOOD CREDIT
Take out a small, short term loan Make EVERY payment ON TIME! Pay off on time OR early Examples:
Low limit credit card – $500 MasterCard Car loan – may have to be co-signed by parent
Pay ALL your bills ON TIME! Rent to your landlord Premiums to your auto insurance Cell phone bill Utility bill Medical bills with doctor, hospital
CONSIDERATIONS WHEN SHOPPING FOR CREDIT Choosing the Right
Lender Annual fees to keep card Annual percentage rate
(APR)--- the amount whether it changes
Method used to calculate interest Previous balance Adjusted balance
Minimum payment amounts
Grace period Minimum finance
charge Any other fees
Cash advance Late fees
Credit limit Special features and
services Rebates, earning
points, free air miles
LOAN SOURCES Preferred lenders
Most reliable lenders Examples:
Banks Credit unions Savings & loan
associations Consumer finance
companies* May accommodate lower
credit rating for higher APR
Insurance policy loans Credit card companies Private loans**
Non-preferred lenders
May take advantage of people with poor credit; typically charge high interest rates
Examples: “payday” lenders Pawnbrokers loan sharks auto title loan lenders tax refund loan
*-usually higher interest rate**- if family, may cause tension
CREDIT DOCUMENT- THE CONTRACT
Credit contracts are legal binding documents that allow debtors to use credit to obtain goods and services.
READ the agreement BEFORE signing! Who is your best
advocate?
Know the content of the credit contract before signing such as: $ Amount of finance
charges Repairs covered Add-on features Reduction of finance
charge if contract paid in full prior to ending date
Receive a copy of the contract
Repossession conditions Know what you are signing!
JUMPSTART PRINCIPLE:
YOUR CREDIT PAST IS YOUR CREDIT FUTURE
What do you think this means?
PSA videos on http://www.ftc.gov/freereports PSA = Public Service Announcement
Go to http://www.ftc.gove/freereports Find information on how to obtain a credit report What are the 3 major credit reporting bureaus? What do they do?
Before approving loan, loan officer or underwriter will run credit report (credit check)
A credit report is like a report card of how people manage their credit
Report reflecting how well a person has used credit resources
Credit Reporting
Three national credit reporting agencies: Equifax Experian TransUnion
500- poor credit score 700+ good credit score
Provide information about employment history, credit accounts, balances, payment patterns
Consumers should check each of the three credit reports annually to verify accuracy
The Fair Credit Reporting Act---can get a free copy of credit reports every 12 months
The FTC site http://www.ftc.gov/freereports explains how to obtain the free reports
Credit Reporting
CAUTIONS WHEN SEEKING LOANS
Typically, must provide information related to ability to repay loan: Income Employment history Residence Credit history Savings
The lender will likely run a credit check (report).
If approved, borrowers may
have right to rescission (cancel) within three days if they choose; a provision of the Truth in Lending Act*
* How else does Truth In Lending Act protect consumers?
CAUTIONS WHEN SEEKING LOANS
Always “read the fine print” and know the terms of loans before signing watch for issues like balloon
payments
Consider if this would be wise or unwise use of credit
Remember that, once signed, borrowers are bound by the terms of the agreement
Consumers can apply for loans in person, online, over the telephone or in writing
WHAT DO YOU THINK?
How can having bad credit negatively affect a person?
If bills are not paid, what items can be repossessed?
If bills are not paid, what items can be foreclosed?
If bills are not paid, what items can be turned off?
http://whatsmyscore.org/contgest/videos.php
MAINTAINING GOOD CREDIT Evaluate the need to borrow
Can the purchase be avoided, delayed or bought on lay-away?
Identify and use the right type of credit for the intended purchase
Shop for the best terms Know how you will pay it back before you borrow Only use the amount of credit that you can afford to
repay Meet all the terms of credit contracts and agreements Keep accurate records of charges, statements, and
payments Consult creditors immediately if you cannot pay on time Resolve billing errors promptly
JUMPSTART PRINCIPLE:
Don’t borrow money that you can’t repay!
Create a tip sheet/brochure on: Credit card use Establishing and maintaining good credit Getting out of debt Knowing when and why to borrow
SIGNS OF A DEBT PROBLEM Consumers find
themselves stressed and constantly worrying over their finances
Having no savings Having reached the
credit limit on most of their credit cards
Skipping payments on some bills in order to pay others
Using cash advances on one credit card to pay another
Relying on credit cards to purchase day-to-day items like groceries and fast food
Relying on credit cards to pay monthly bills
Opening new credit card accounts in response to reaching the credit limit on others
Regularly receiving contacts from creditors/collection agencies trying to collect unpaid debts
video link: signs of debt problems
STRATEGIES FOR GETTING OUT OF DEBT
Actively deal with the problem; ignoring it will only make it worse
Get help from trained people---a credit counselor or credit counseling service
Develop a spending plan that includes living expenses and debt repayment funds
Learn to live within your budget!
Stop using credit; focus on repaying the debt owed
Contact creditors immediately, let them know your situation, ask to have credit terms adjusted
Get credit card with “teaser” rate
Pay bills automatically through EFTs!
Spend smarter!
video link: tips for getting out of debt
video link: credit counseling
BANKRUPTCY…A LAST RESORT
Legal relief or forgiveness from repaying certain debts
Try to deal with debts using ALL MEANS available before filing for bankruptcy
Bankruptcy carries serious, long-term consequences---part of one’s credit report for ten years! Chapter 7---must sell certain personal belongings, use
proceeds to repay debts Chapter 13---can retain most personal property, but
must propose a repayment plan, go to credit counseling, receive financial management education, and be employed
video link: when to file bankruptcy
BANKRUPTCY EXCLUSIONS
No Bankruptcy Forgiveness for: Taxes owed including fines & penalties Court ordered debt
Alimony Child support Liability from lawsuits
College loans
video link: filing personal bankruptcy
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Chapter 7---must sell most personal belongings of value, use proceeds to repay debts
1. File the following with the US District Court:a. List of all creditors and amounts owedb. List of all property ownedc. Statement about financial affairsd. List of current income and expensese. Trustee is selected-independent party
2. Sale for cash (liquidation) of non-exempt assets by trustee3. Proceeds (Cash) used to pay each creditor same % 4. Money left over, if any, returned to debtor5. Creditors cannot sue for additional claims after filing
Chapter 7 Bankruptcy Procedure
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CHAPTER 7: PROPERTY- EXEMPT & NON-EXEMPT
Exempt Property – can keep Up to $7500 equity in home Up to $1200 in vehicle Up to $500 in jewelry Up to $750 in tools of trade Up to $200 per item of household goods, max $4000 Rights to social security benefits All amounts in excess, subject to sale for cash
Nonexempt property- cannot keepeverything else included in liquidation and distribution to
creditors, examples: Bank Accounts Stocks Bonds
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Extended Time Payment Plan or Reorganization Applies to individuals with regular income
(currently working) Trustee handles future earnings of debtor Trustee handles payment of bills Unsecured debts less than $250,000 and/or secured debts
of less than $750,000 Submit reasonable plan for repayment of debts within
three years May be extended to five years
CHAPTER 13 BANKRUPTCY
PRINCIPLES OF FINANCIAL PLANNINGFROM THE JUMP$TART COALITION
Map your financial future Money doubles by the “Rule of 72” Your credit past is your credit future Start saving young Stay insured Budget your money Don’t borrow what you can’t repay Don’t expect something for nothing High returns equal high risks Know your take-home pay Compare interest rates Pay yourself first
http://www.jumpstartcoalition.org/files2010/2010_J$_Calendar.pdf
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