A program of: The United States Bankruptcy Court, Middle District of Florida Tampa Division and The Tampa Bay Bankruptcy Bar Association

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A program ofThe United States Bankruptcy
Court, Middle District of FloridaTampa
DivisionandThe Tampa Bay Bankruptcy Bar
Association
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Credit 101

• Credit- borrowing money a loan.
• Principal- amount of money you borrow.
• Interest- amount you pay, in addition to
  repayment of principal, for the privilege of
  borrowing usually a percentage of the total
  principal.
• Debt- something owed to another.
• Collateral- things offered by the borrower to the
  lender to secure the borrowers performance in
  repaying a loan (e.g. car, house, boat, etc.).
• Secured Loan- a secured loan has a borrowers
  pledge of collateral if the borrower doesnt
  pay, lender can seize the collateral, sell it and
  keep the money.
• Unsecured Loan- a loan where no collateral is
  pledged.

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Credit 101 (continued)

• Annual Percentage Rate (APR)- the amount of
  interest charged by the credit issuer
• Introductory Rate- the rate of interest charged
  during the introductory period of a loan term
  (i.e. 0 for 6 months and 17 thereafter).
• Annual Fees- the amount charged by the credit
  issuer for the privilege of using the credit
  extended different from, and in addition to,
  interest rate.
• Late Fees- the amount charged if the minimum
  balance is not paid on time or within the grace
  period

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Credit 101 (continued)

• Grace Period- the amount of time after the
  payment due date to pay the minimum balance
  without penalty.
• Minimum Payment- the smallest amount you may pay
  on the debt without penalty.
• Loan Term- the duration of the loan (e.g. 1 year,
  3 years, 15 years).
• Maturity Date- the specific date the term of the
  loan ends (i.e. January 15, 2021).
• Default- failing to pay on time or within the
  grace period failing to pay entire debt by the
  maturity date.
• Debt Collection- action taken by lender after
  borrower default may include sending demand
  letters, telephone calls to request payment, and
  filing a lawsuit against the borrower.
• Judgment Lien- lien in favor of lender on all of
  borrowers real and personal property that may be
  imposed after judgment is entered by Court.

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Commonly Available Types of Credit

• Credit Cardshort term, unsecured loan made by
  card issuer to card holder for purchases of goods
  and services.
• Penalty for non-payment interest, late fees,
  debt collection, judgment lien.
• Student Loanlong term, unsecured loan made by
  lender to student for educational
  expensestuition, housing, books, food.
• Penalty for non-payment interest, late fees,
  debt collection, tax return set-off.
• Auto Loanlong term loan for vehicle purchase.
  Almost always secured by vehicle being purchased.
  
• Penalty for non-payment interest, late fees,
  repossession, debt collection, judgment lien.
• Home Loan/Mortgagelong term loan for home
  purchase. Almost always secured by property
  being purchased.
• Penalty for non-payment interest, late fees,
  foreclosure, deficiency judgment, judgment lien.

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Credit Report

• A comprehensive report detailing all credit
  available to an individualpast and presentand
  that individuals repayment history for each
  loan.
• Who might be interested in seeing your credit
  report?
• Lenders
• Employers
• YOU

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Credit Reporting Agencies

• There are 3 major credit reporting agencies that
  maintain credit reports Equifax, Experian, and
  TransUnion
• You may obtain a free copy of your credit report
  annually from each of the major credit reporting
  agencies.
• Go to www.annualcreditreport.com- this is the
  official site for an annual free report.
• BEWARE Credit Reports may be available through
  other website, but they may not be FREE!

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FICO Credit Scores

• An engineer, Bill Fair, and a mathematician, Earl
  Isaac, developed a measure of credit risk based
  on the contents of a persons credit report they
  called it the FICO Score.
• Your FICO score is determined by past use of
  credit and is like your grade point average for
  credit use.
• Your FICO Score is a 3-digit number between
  300-850.
• 850 is best A
• 300 is worst F

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FICO Credit Scores

• Used by lenders
• To decide whether to make you a loan at all
• To determine the interest rate for your loan
• To increase your credit limit
• To determine treatment if you make a very late
  payment
• NOTE FICO Scores are not part of your credit
  report. To obtain your scores you must pay a fee
  or -- a lender may tell you your score when
  applying for a loan.

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Focus on CREDIT CARDS

• WHY?
• Widely available
• You dont have to be particularly credit-worthy
  to get one.
• Dangerous if used improperly or abused
• Often more available credit than a person needs
  or can reasonably afford to repay.

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Good reasons to have credit cards

• Convenience dont have to carry lots of cash or
  write checks.
• Safety usually little or no liability if stolen.
• If used properly, will help build a good credit
  rating.
• Internet purchases
• Emergency situations
• Rewards points (travel, merchandise, cash)

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HOWEVER

• PUTTING SOMETHING ON A CREDIT CARD DOES NOT MEAN
  YOU CAN AFFORD SOMETHING THAT YOU COULDNT AFFORD
  OTHERWISE

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Wants vs. Needs

• A want is something you would like to have. It is
  not absolutely necessary.
• Everything else

• A need is something you have to have--something
  you can't do without.
• Food
• Shelter
• Clothing
• Transportation

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Common Problems Encountered by Credit Card Users

• Unable to pay the bill in full every month
• Interest begins to accrue on unpaid amount
• If you continue using the card, you have the
  previous months unpaid principal, plus interest,
  plus any new principal, all of which has to be
  repaid.
• If you cant pay all of that off in full at the
  end of month 2, you have even more interest
  accrual.
• Paying the minimum amount is a fools game.
• Negatively impacts your credit report and your
  credit score.

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What are the consequences of bad credit?

• How will it affect you in the future?

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• If your payment record is poor, your credit
  rating will suffer.
• You may be denied credit or will be required to
  pay much higher interest rates.
• You might lose a job opportunity or be denied an
  apartment lease.
• You may not be able to get student loans for
  undergraduate or graduate school.
• Your insurance rates may be higher.

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Test your financial knowledge

• True
• or
• False

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True or False?

• You must be 18 years old or older to obtain a
  credit card in your own name.

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True

• When you turn 18, you may apply for a credit card
  in your own name and incur debt in your name, but
  you will need to prove sufficient income or get a
  co-signer in order to be approved.

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True or False?

• All credit cards charge the same annual
  percentage rate of interest on the balance you
  owe.

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False

• Different banks charge different rates. Other
  important terms vary also, such as annual fees,
  late fees, grace period.
• Check out these website for a comparison of
  terms
• www.cardtrak.com.
• www.smartmoney.com
• www.bankrate.com

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True or False?

• After the teaser rate expires, the Annual
  Percentage Rate (APR) on a credit card can be
  changed at any time by the credit card issuer.

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True

• The APR on your credit card can be changed AT ANY
  TIME by the credit card issuer, though the issuer
  is required to give written notice in advance of
  the change.
• Tricky Sneaky!

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THINK LIKE A LAWYER AND READ THE FINE PRINT!
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True or False?

• If you pay your credit card balance in full each
  month, it doesnt matter what rate of interest
  the bank charges on your credit card.

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True

• Since you only pay interest on the unpaid amount
  each month, you may never pay any interest
  charge if you pay the entire debt.
• Banks do not like it when you do this !
• WARNING question the issuer on this point as
  some credit cards accrue interest during the
  month!

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The true cost of buying on credit

• What if you bought ...

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A new laptop computer system

• Laptop
• Printer
• Wireless mouse
• Wireless Router
• TOTAL 2,000

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• And what if you use your credit card to buy the
  laptop and you make monthly payments of 300?
• Assume you never miss a payment and the annual
  percentage rate on your card is 8.

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What will the laptop end up costing you?

• How long will it take you to pay for it?

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• Your total cost will be 2052
• It will take you SEVEN MONTHS to pay for it

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• Now, instead of an 8 rate of interest , assume
  that, because of your poor credit rating, you
  must pay interest at the rate of 24.9.
• Also assume that you pay only the MINIMUM MONTHLY
  PAYMENT of 45 per month (2.25 of the balance).

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How long will it take you to pay for the computer?

• How much will you end up paying for the laptop?

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• It will take you nearly 125 MONTHS!
• Over TEN YEARS!
• TOTAL PAYMENT 5,595.84

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• Your choices
• Pay 2,000 cash now
• Pay 2,052 over seven months
• Pay 5,595 over ten years

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What If You Save That Money

• If you save or invest 50 per month for 10 years
• 5 7,764.11
• 10 10,242.25
• 15 13,760.85
• And what if you could make what the credit card
  companies charge?
• 24.9 25,922.45

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• Thats how credit card companies earn
  approximately 30 BILLION a year in profit.

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True or False?

• You pay no interest on a debit card purchase.

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True

• A debit card works just like a check.
• You can only spend what you have.
• Your ATM card
• is probably a
• debit card.

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True or False?

• There is a credit report for everyone over the
  age of 18.

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False

• There is a credit report only for those who have
  established a credit history.
• Having no credit history can also have adverse
  consequences.

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True or False?

• If you are late making a few payments on your
  credit card, the interest rate you pay may
  increase sharply.

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True

• For example, on one Platinum VISA card, the rate
  jumps from 4.9 to 24 if you pay late or miss
  even one payment. Late charges also accrue.

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True or False?

• If you miss just one or two payments on your
  credit card, it wont hurt your credit rating.

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False

• That negative information can legally remain on
  your report for up to 7 years.

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True or False?

• If you apply for a car loan, the lender will
  probably review your credit report.

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True

• People who lend you money will almost always
  review your credit report. If your credit is
  poor, your interest rate will be higher, and you
  may not be able to get a loan at all.
• Remember You may receive free copies of your
  credit report each year.

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True or False?

• When you apply for a job, your prospective
  employer may review your credit report.

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True

• A prospective employer can review your credit
  report if you give written authorization.
• More employers are asking to see credit reports.
• What happens if you refuse to let employers see
  report?

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True or False?

• Bouncing just one check wont cause you credit
  problems.

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False

• If you bounce a check, your bank may put your
  name in ChexSystems. You could be blacklisted
  by financial institutions for up to 5 years -
  this means you cannot use a checking account.

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True or False?

• The average college student owes several thousand
  dollars in credit card debt today.

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True

• Credit card debt is rising rapidly among young
  adults.
• This is in addition to student loan debt.
• Dont fall into the trap of spending money you
  dont have.
• Doing so may result in you having to file
  bankruptcy.

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Tips for Using Credit Responsibly

• Before you make a purchase on credit, determine
• How much the purchase will really cost you
• Whether you can actually afford the purchase
• If it is better to wait and pay in cash

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Tips How to Establish Good Credit

• Using a checking account or debit card.
• Pay bills in full and on time
• Do not open any credit cards you dont need.
• Do not have a balance on your credit card
  exceeding more than 20-30 of your credit limit.

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Tips for choosing a Credit Card

• Annual Fee
• Interest Rate
• Introductory
• Balances v. Cash Advances
• Fixed v. Variable
• Default Interest
• Grace Period
• Method of Computation
• Rewards

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Make a Budget

• INCOME
• Total Monthly Wages 1,600
• Less taxes and other deductions 400
• NET MONTHLY PAY 1,200

• EXPENSES/SAVINGS
• Rent 500
• Utilities 30
• Food 200
• Clothing 100
• Laundry 20
• Recreation 50
• Transportation 100
• Savings 200
• TOTAL EXPENSES 1,200

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Rules to Remember for Building Good Credit

1. Have a budget and stick to it.
2. Dont have more than 1 credit card.
3. Shop around and get the best deal for everything,
   including credit cards themselves.
4. If you can eat it, drink it, or it costs less
   than 10, dont charge it.
5. Use a debit card, check, or cash whenever
   possible.
6. Pay off all balances in full every month.
7. Never make just a minimum payment.
8. Know the difference Needs v. Wants
9. Check your credit report yearly and correct
   errors.
10. Find out what your credit score is.

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