UNDERSTANDING CREDIT AND ITS USE Keith Carpenter

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UNDERSTANDING CREDIT AND ITS USEKeith Carpenter
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TOPICS COVERED

• What Is Credit, and Is It Necessary?
• Establishing Credit
• Credit Card Use
• Loans Which Type Is For You
• Avoiding the Pitfalls Of Credit Use
• Credit Reports
• Protecting and Re-establishing
• Credit

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WHAT IS CREDIT?WHY IS CREDIT NECESSARY?
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ESTABLISHING CREDIT

• Bill Payment History
• Co-signed Loans
• Joint Loan/Credit Card
• Checking Account History
• Secure Credit Cards
• Secure Loans
• Small Loans
• Negotiate A Loan By Making A
• Large Down Payment

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CREDIT CARD USE

• Convenient form of borrowing
• Represents a unsecure revolving line
• of credit
• A portion of balance interest is paid
• each month.
• Note For charge cards ( i.e. American
• Express) the full balance must be paid
• each month.

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CREDIT CARD USE

• Terms of the Credit Card
• (Different cards have different terms.)
• Annual Percentage Rate (APR) rate of interest
  
• you are charge on as a yearly rate (variable
  vs. fixed)
• Fees- annual fees, late fees, or over-the-limit
  fees
• Grace Period- The timeframe, in number of days,
  you
• have to pay you balance before you are
  charged
• interest.
• Balance Computation Method- This will determine
  
• how your interest is calculated (most credit
  card
• companies use the average daily balance method)

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CREDIT CARD USE

• Gold Platinum Credit Cards
• Usually have higher credit limits
• Usually given to people with good
• credit history and higher incomes
• Some offer airline and hotel rewards
• and discounts for frequent use

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CREDIT CARD USE

• Things To Look Out For
• Promotional Rates
• Introductory Rates
• Application Fees
• Pre-approved Credit Cards
• Credit Card Terms

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CREDIT CARD USE

• Legalities
• You must be 18 years old and have a
• source of income to qualify for a
• credit card
• Giving false information about your
• income or any other item on a credit
• application is a crime (fraud)

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CREDIT CARD USE

• Monthly Statement
• New Balance
• Minimum payment due
• Credit Line
• Credit Available
• Payment Due Date
• Previous Balance
• Finance charges (interest fees)
• Itemized purchases and cash advances

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CREDIT CARD USE

• Balance Computation Method
• (by using the average daily balance method)
• Daily Periodic Rate APR / 365 days
• Daily Rate x Balance Daily Finance Charge

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LOANSInstallment Loans

• Installment Loans- loans that are repaid in equal
  monthly payments, or installments, for a specific
  period of time, usually several years.

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LOANSLending Terms

• Fixed Rate Loan- A loan that has an interest rate
  that
• stays the same throughout the term of the loan.
  (Most
• installment loans have fixed rates.)
• Variable Rate Loans- A loan that has an interest
  rate
• that might change during any period of the
  loan, as
• written in the loan agreement, or contract.
• Annual Percentage Rate (APR)- The cost of your
• loan expressed as a yearly percentage rate.
• Finance Charge- The dollar amount the loan will
  cost
• you, including interest, service charges, and
  loan fees.

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LOANSLending Terms (Cont.)

• Collateral- The asset you promise to give the
  lender
• if you do not pay back the loan.
• Secured Loan- A loan where the borrower offers
• collateral for the loan. The borrower gives up
  their
• right to the collateral if the loan is not paid
  back as
• agreed.
• Unsecured Loan- A loan where the lender does not
• require collateral.

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LOANSLoan Approval Process

• The primary areas that lenders review when
  deciding whether or not to approval a loan are
• Capacity
• Capital
• Character

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LOANSLoan Approval Process

• Capacity- your present and future ability to meet
  your payment obligations.
• Income (How much can be paid towards bills?)
• Current Debt
• Living Expenses (rent, utilities, food)
• Revolving Credit

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LOANSLoan Approval Process

• Capital- refers to your savings and other assets
  that can be used as collateral for a loan.
• Auto
• Savings / Certificate of Deposit
• Home equity
• Item being purchased

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LOANSLoan Approval Process

• Character- refers to how you have paid bills or
  debts in the past. (Credit reports give most of
  the information in this area)
• Payment history
• Late Payments
• Delinquency
• Bankruptcy

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LOANSAuto Loan vs. Auto Leasing

• With auto, you own the car out-right at the end
  of the
• loan. At a lease you must turn the car back
  end, or
• you can purchase it for around book value.
• Leases charge you extra for exceeding normal wear
  
• and tear on the car you are also charged
  extra for
• exceeding mileage limitation in the contract.
• You must have full coverage auto insurance with
  both
• an auto loan or an auto lease.

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LOANSLow Interest Auto Loans By Dealership

• Large Down-payment
• Short-term Loan (2-3 years)
• Excellent Credit History
• High Income

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LOANSFinancial Institution Auto Loans Found By
Dealership

• Dealers may have agreement with lenders.
• Dealers may get your loan with the lender that
• will give the the best deal (pay back), rather
  than
• the best interest rate.
• Always negotiate the price of the car, rate than
• the amount you can afford. ( lower monthly
• payments, but longer terms / higher interest)

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LOANSHome Equity Loans

• A loan or line of credit, using the home you own
• as collateral.
• The amount of the loan can be up to as much
• equity that you have in your home.

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LOANSHome Equity Loans

• Pros
• Low interest loan
• Interest may be tax deductible
• Cons
• Extends the time until you fully own your home
• If you default on the loan, you could lose your
• home

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LOANSHome Equity Loans

• Due to serious nature and consequences of the
  home equity loan. There is a law in-place called
  right to rescind or right to cancel.
• This law gives the borrower 3 days to reconsider
  a signed home equity loan, and cancel the loan
  without penalty.

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LOANSTips

• Always as k the lender, if there is a penalty for
  
• early pay-off.
• Avoid Balloon Loans- payments are low at first,
• but they increase later.
• Some financial institutions give lower rates on
• auto loan, if you make a large down payment.
• Pay-off higher interest loans first.

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LOANSTips

• On auto loans it is important to keep the loan
  principle at or below the book value of your car.
• Depreciation of Vehicle
• Good Down-payment or payment against
• principle
• Insurance only pays the value of the car, not
• what you owe.

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LOANSTips

• Always shop around for the best APR.
• Before making a purchase by loan, ask yourself
• do you really need the item, and is a loan
• necessary, and is it in your budget.
• Then decide what terms best suits your needs.

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Avoiding The Pitfalls OF Credit Use

• Have a short-term plan for paying off credit
• cards
• Mainly use credit for necessities (home, car,
• furniture, appliance, etc.)
• Avoid making loans or using credit card to pay
• bills (this is a sign of financial trouble)
• Do not use credit card for cash advances (high
• interest rate)

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Avoiding The Pitfalls Of Credit Use

• Avoid impulsive spending with credit card
• ask yourself, do I need this now, or can I wait
  
• until later and pay cash?
• Do not count on future pay raises when
• making a loan in the present (Unforeseen
• events can occur).
• Ask yourself if you can reasonably make the
• monthly payments before making a new loan.

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CREDIT REPORTS

• Credit reports consist of information about where
  you live, where you work, your credit history,
  and pertinent personal information.
• Financial institution use your report when
  deciding to grant you a loan. It lets them know
  your past payment/credit history, and how much
  debt you currently have. However, it is not the
  only consideration in making a credit decision.

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CREDIT REPORTS

• Identifying information in credit reports
  include
• Name
• Social security number
• Current and previous addresses
• Telephone number
• Birth date
• Current and previous employers
• Spouses name

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CREDIT REPORTS

• Your credit history is part of the report. It
  shows your account record with different
  creditors (how much credit has been granted, and
  how you have repaid it)
• Credit reports also contain inquires, a list that
  identifies creditors and other authorized parties
  who have requested, and received your credit
  report.
• Lastly the report has public record information
  (i.e. collection accounts, bankruptcies,
  foreclosures, tax liens, civil judgments, and
  delinquent child support).

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CREDIT REPORTSNegative Credit Report Information

• The timeframe that negative information stays on
  your credit report is as follows
• General civil judgments 7 years
  from date filed
• Tax liens
  7 years from date paid
• 
  (If it is not paid, it will
• 
  remain on indefinitely.)
• Chapter 13 bankruptcies, that
  
• have been dismissed or discharged. 7 years
• All other bankruptcies
• (such as Chapter 7)
  7 years

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CREDIT REPORTSCredit Reporting Agencies

• Equifax 1-800-997-2493
• Experian (formerly TRW) 1-888-397-3742
• TransUnion 1-800-888-4213

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CREDIT REPORTSReview Of Credit Report

• You should review your credit report regularly
• It is your responsibility to ensure your credit
  report
• is accurate.
• If you think there is an error in your report,
• contact the credit reporting agency, and
• write them a dispute letter.
• Credit reporting agencies are required to conduct
  
• an investigation within 30 days of receiving a
• dispute letter.

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Protection and Rebuilding Credit

• Pay your bills on time to keep financial and
  other charges to
• a minimum. And if you cannot pay the
  balance,pay more
• than the minimum amount.
• Keep your credit card receipts to compare charges
  with
• the monthly bill.
• Keep a record of your account numbers, expiration
  dates,
• and card company phone numbers.
• Carry only the credit cards you think you will
  use.
• Protect your credit card and account numbers to
  prevent
• unauthorized use.

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Protection and Rebuilding Credit

• If your credit card is lost or stolen, notify the
  credit
• card company immediately.
• If you notice unauthorized charges on your credit
  
• card bill, notify the credit card company
  immediately.
• Check your credit report periodically (usually
• annually), to ensure no unauthorized loans or
  credit
• charges are present. Notify the lender and the
  credit
• reporting agency.

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Protection and Rebuilding Credit

• If you find yourself starting to have financial
• problems, create a plan for paying back your
  debts,
• and suspend using credit cards.
• If for some reason you cannot make a loan payment
  ,
• contact the lender immediately.
• Avoid starting the bankruptcy process it is a
• determent to your credit health.
• Once you have you debt under control, follow the
  
• same procedures used for establishing credit
  for
• re-building your credit history

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Remember using credit can make things convenient.
If used wisely credit can be a valuable tool.