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 balanceExample: $100 balance $1000x .02 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)- 20.40 min. payment (usually 2% of balance)

- $ 999.6 next months balance

+ 19.99 interest

1 20.39 min. payment

$ 999.20 next months balancehttp://cgi.money.cnn.com/tools/debtplanner/debtplanner.jsp

http://www.calculatorweb.com/calculators/creditcardcalc.shtml

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 www.annualcreditreport.com 1-877-322-8228

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-endDate 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 way1. Finance charge2. 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 borrowedThe laws does not guarantee that you will pay

the lowest amount possibleGetting 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 circumstancesCheck 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 Problems1. 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