Credit8.04

Discuss the factors on which credit is granted and the cost of credit.

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Process of Obtaining Credit1. Credit Application

2. Documentation

3. Processing

4. Underwriting

5. Closing

6. Funding

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T008-04.02

Credit Application Form on which you provide information

needed by a lender to make a decision about granting credit or approving a loan.

Provide the following information: Salary, Employer, Outstanding Credit (Debt),

Assets, Credit References, Checking and Savings Accounts, Stock Portfolio, etc.

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Documentation

Creditor will collect and verify necessary documentation for the extension of credit. Examples: Bank statements, credit card

statements, past W-2’s, etc.

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Processing

Building of loan file. Evaluating credit worthiness.

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Credit Worthiness Terms (Processing)The C’s of Credit Worthiness Capacity

Your ability to pay (income) Character

Earned by paying bills on time and being a trustworthy, reliable, stable person.

References – people you have borrowed from in the past. Collateral

Security to help guarantee that the creditor will be repaid.

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Credit Worthiness Terms (Processing) continued Credit History

Indicates the amount of debt you have and your payment history.

Capital How much you have beyond what you owe.

Credit Limit Maximum amount you can borrow.

Cosigner Responsible for a loan if you, the original debtor, do not

pay.

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Underwriting Reviewing loan for soundness. Consumer Reporting Agencies

Company that compiles and keeps records on consumer payment habits.

Used to evaluate creditworthiness. Examples: Equifax, Experian, and

TransUnion.

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Closing

Representative explains terms of credit. Debtor signs appropriate forms.

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Funding

Creditor will issue credit/funds to the debtor.

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Denial of Credit

Fair Credit Opportunity Act requires that credit denial cannot be based on sex, family, religion, etc.

Must be based on ability to pay back loan.

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Cost of Credit Interest Rates

Percentage that is applied to debt. Principal

Amount of money borrowed. Time Factor

Length of time for which interest will be charged. Maturity Date

Date on which a loan must be repaid.

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Finance Charge or Fees Cost of credit stated in a dollar figure

Annual Percentage Rate (APR) Indicates how much credit costs on a yearly basis.

Grace Period Time period during which no finance charges will

be added to an account. Cash Advance

Borrow money on a credit card.

Cost of Credit continued

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T008-04.13

Simple Interest FormulaI=PRT

I=Interest

P=Principal

R=Rate

T=Time

T008-04.14

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