Elements of Credit

What is Credit?

Buying something now and paying for it later.

Lending

Imagine you are lending something of value to a friend.

What things would you consider before lending something you own of value?

Know About Credit

• Annual Fee – some cards have no annual fee but others do• Annual Percentage Rate (APR) – amount paid on outstanding balance• Balance – amount owing• Credit Bureau – collects information about consumer credit usage• Credit line – maximum dollar amount that can be charged on your

card

Credit score going up or down?

Score goes up when

a.Debt payments are made on time and in full

Types of credit for students

Student loans

Line of credit

Credit cards

Cost of Credit

Credit worthy

What to consider:

Payment history – do you pay your bills on timeAmount owed to current creditorsLength of credit historyTypes of credit usedNumber of open accounts

Credit Score

Credit worthy is put together in a credit report. The person will get a score. The score will show how risky it is to lend money to that individual. Education, race, gender, age, religion etc does not matter when it comes to getting credit.

Credit Cards

Consumer is taking out a loan for the amount of the purchase, and agreeing to pay the amount back with interest.

Interest is the cost of using credit. Expressed in a percentage.

Credit Terms

Annual Fee

The fee you pay per year in order to keep your credit card. Some have no annual fee, while others carry high fees.

Annual percentage rate (APR)The percentage charged every year on top of any outstanding payments (amounts left to pay after the due date)

Cash back/rewards – cash back or travel rewards

InterestInterest is the cost of borrowing.Interest Rate – the percentage a financial institution charges for the money lent.

Interest can be a cost & income.

A Cost – if money is borrowed

A Loss – if money is deposited in the bank

Terms continued

Balance - the amount owed on the card. If you spend $500 on a card last month, the balance on your statement will read that you owed $500.

Minimum Payment – The smallest amount you can pay toward your credit balance. If your balance is $30 and the minimum payment is $10, you can pay $10 instead of $30. The remaining $20 you will be charged interest.

Cards

Debit cards – look like a credit card, butdoes not extend credit. Money is withdrawnfrom your account at the time of purchase.

How can I stay out of debt?

Wants – something you would like or desire to have, but it is not necessary.

- ice cream is a want. You want ice cream but you don’t need it.

You may want a Coach bag, but you don’t need it.

Needs – something you have to have, something you can’t do without. For example – food, clothing, shelter, health care, water

Tax Free Savings Account (TFSA)

Individuals who are 18 years and older and have a valid insurance number.

Set money aside tax-free.

A great way to save money.

What happens if you do not pay?

• There is no debtor’s prison.• Credit cards will be discontinued.• Letters will be sent to encourage payment.• Credit card companies sell the contracts to a Debt Collector who

receives a commission (percentage of what is collected)• Credit proposal – agreement to put all the debt amounts together

and a payment schedule set up• Bankruptcy – this is a legal procedure

Credit Fraud

Credit card fraud is an act of theft involving a credit card, and can happen in several ways, such as losing your card, or getting your card stolen. Your credit card may then be used to purchase goods and services without paying by someone other than yourself. It pays to be vigilant in the use of your credit card.

Preventing Credit Fraud• Guard your social insurance number, PINSs, passwords and account numbers,

and don’t leave them in an unsecure place.• Keep your table, laptops, call phone, and any other technology device in a safe

and secure place. Do not leave them unattended.• Do not leave your credit card unattended and avoid sharing your PIN with others.• When making online purchases, make sure to verify that the website is secure

(look for the “lock” symbol and that the URL begins https://)• Cover your PIN and take your receipt when using an ATM or debit card machine.• Use the chip technology for debit and credit cards to reduce your chances of

credit fraud as the microchip is extremely difficult for criminals to duplicate.

3 C’s of Credit

Character – are you honest, reliable to repay the debt based on your history

Capital – what do you own of value – real estate, personal property, savings

Capacity – your ability to pay off the debt Are you working? How much do you earn? Do you have other debts?

A Secured Credit Card

This is a credit card that is backed by money you have already deposited into a linked account. So you are spending your own money, but building credit.

20/10 Rule of Credit

Keep your total borrowing (excluding rent) should not exceed 20% of your income.

The amount of interest you pay per month should not be greater than 10 of your monthly income.

How to Build a Credit History

• Establish a steady work record.• Pay all bills promptly• Open a chequing account and don’t bounce cheques• Open a savings account and make regular deposits• Apply for a local store credit card and make regular payments.

Needs & Wants

“If I Had a Million Dollars” What would you do?

Whenever we make a spending decision, choosing one option affects whether or not we can make another choice. This is called “opportunity costs”. Example: You want a new phone for $200 but you also have a car payment. If you buy the phone you have to consider how you will pay the car payment. Need vs Wants

Keep Good Records

• What is the name and contact information for your bank? Credit union?• What debts do you have – cell phone, owe your friend• Stay organized – recognize that it is important to live within your

means