Credit

What is Credit?

• when goods, services or money is received in exchange for a promise to pay a definite sum of money at a future date

• Credit is derived from the Latin word “credo” meaning “I believe”

Installment Credit (aka Closed-end Credit) A one time

loan that is repaid

in a specified number of equal payment

s

Auto Loans, Mortgages, & Student

Loans

May require a co-signer

Second signer who will pay for the loan if the first

party defaults

Non-Installment Credit (aka Revolving or Open- end Credit)

Credit is extended

in advance with a

specific credit limit

Credit Limit

Maximum dollar

amount loaned

Varies among individuals based upon

Creditworthiness

Borrower pays interest if credit is not paid back in full

each monthExamples are Credit Cards & Department Store Cards

What is a Credit Report?

• Record created by the CRA (Credit

Reporting Agency) that provides a detailed report of an individual’s credit history

• Includes:• Personal Information• Account Summary• Public Records• Credit Inquiries

What is a Credit Score?

• Numeric “grade” of a consumer’s financial reliability

• Most common scoring system is FICO• Range from 300-850, with 850 being the

best

What affects your credit score?

What affects your credit score?

Good

• Pay bills on time

• Length of credit history

• Variety of credit

Bad

• Late Payments

• Too much credit (amount)

• Too many credit cards

• Too many inquiries

• Too much new credit

What are the 3 Credit Bureaus?

Experian, Equifax, TransUnion

How does your credit score affect you?

• Affects what types of loans you can get

• Affects your interest rate

• May affect where you can live (landlords look at it)

Credit Score Impact

THIS IS BASED UPON A 30 YEAR FIXED MORTGAGE RATE FOR A $300,000 LOAN

FICO Score

Interest Rate

Monthly Payment

30 Year Amount

760 5.9% $1,787 $643,320

650 7.2% $2,047 $736,920

590 9.3% $2,500 $900,000

$256,680 saved over the lifetime of this loan

because of a good credit score!

Are Credit Cards Bad?

Yes & No

• Can paralyze you with debt

• Are important for online purchases

• Can build your credit

• Should NEVER be used as your emergency fund

• Bottom line: they must be used responsibly

Credit Cards 101

Rule #1: Don’t buy stuff you can’t afford

• Treat your credit card like a debit card. Make sure you have enough money in your bank account before spending

• http://www.nbc.com/saturday-night-live/video/dont-buy-stuff/n12020

Rule #2: Always pay off your full balance each month

• Minimum payment: the minimum required to pay off each month• Usually only a small percentage (2.5-5%) of the total

balance due

Minimum Payments

Payment Made

~ Time to pay off card

~ Total amount

of interest

paid

~ Total amount

paid

Full Payment

Partial Payment

Minimum Payment

To prepare for her first semester of college, Miranda purchased a new computer for $1000 and textbooks

for $500, spending a total of $1500 on her credit card charging 15% APR. How much would Miranda

pay in interest if she makes the minimum payment?

$1500 1 month $0 $1500

$135 1 year $125 $1625

$30 11 years $1413 $2913

Rule #3: Never make a late payment

• Usually have to pay a fee

• Will lower your credit score

• Will remain on credit report for 7 years

Rule #4: Check your account frequently

• Keep a record of your own (receipts, register, etc.)

• Identify mischarges or fraudulent charges

• Remember online subscription fees

Rule #5: Know your Credit Card

• Schumer box - Credit card issuers are required to disclose the terms and fees of credit cards in an easy to read box format

Credit Card Interest

Interest is charged each month the balance is not paid in full

The cost of credit expressed as a yearly interest rate

Rate at which interest is charged is referred to as:

Annual Percentage Rate (APR)

APR’s

• Fixed-rate APR- cannot change during the period of time outlined in a credit card agreement

• Variable-rate APR- may change depending on other factors (such as economic conditions)

• Introductory Rate- a teaser rate (sometimes 0%) that only lasts a specified amount of time (i.e. 6 mos)

• Good APR? < 12 %

Other terms to know

• Late Payment Fee

• Over-the-limit fee

• Balance Transfers

• Cash Advance

• Annual fees (maintenance fee)

• Minimum interest charge

• Loss of APR or Penalty APR

Benefits Credit Cards May Offer

• Skymiles

• Discount on merchandise or services

• Cash back

• Rewards bonus points (redeemable for cash back, gift cards, discounts)

• Higher cash back on revolving categories