Credit

1
Credit

• Chapter 10

2
Credit

• The ability to borrow money in return for a
  promise of future repayments
• Usually includes interest
• When you save, you give up the ability to spend
  now.
• When you obtain credit, you give up the ability
  to spend later.
• Never borrow more than you can easily repay

3
Home Ownership

• Equity
• Difference between what you owe and the value
• Values go up
• Tax advantages
• Renting vs. Owning
• (something to show vs. nothing to show

4
Other Reasons to Borrow

• Education
• Salary goes up
• Investment in yourself
• Health care costs

5
Considerations

• Is it important that I buy the good or service I
  want now?
• Do I have to borrow to buy the product?
• Can I afford to make the payments on the loan?
• Will I be able to buy other products I want more
  if I buy this product?
• Many borrow for wants, not needs.

6
Credit

• Debt payments should not be more than 20-25 of
  your take home pay
• Credit worthiness measure of your reliability
  to repay a loan
• Three Cs of credit
• Character
• Capacity
• Capital

7
Character

• Credit History
• Other indications of responsibility
• Having a job for a long time
• Living at the same address for a while
• Having good school and work attendance
• Saving regularly
• COSIGN A LOAN

8
Capacity

• Ability to pay back (expenses vs. income)
• Are you already overextended?

9
Capital

• Value of what you own
• Savings
• Investments
• Property
• Things you could sell if you needed to pay loan
  back

10
Credit Rating

• Loan application
• Credit bureaus
• Information obtained from
• Stores
• Banks
• Utilities,
• Courts
• Creditors
• TransUnion, Equifax, Experian

11
Credit Rating

• FICO scoring system (100-800)
• Payment history (largest factor)
• Current debt
• Length of credit history
• New accounts and inquiries
• Kind of credit used ( of cards, available
  credit)

12
LOANS

• Secured loan
• Collateral
• Installment loan
• Closed-end credit
• Fixed payments, fixed payoff date, fixed loan
  amount
• Unsecured loan
• Granted on credit rating alone
• Usually higher interest rates than secured loans
• Sometimes credit cards are considered unsecured,
  open-end credit

13
Places to Obtain Loans

• Banks
• Savings and loan institutions (mostly real
  estate)
• Credit unions
• Finance companies
• Higher interest, higher risk clients
• Life insurance companies
• Borrow against policy collateral
• Low rates
• Balance deducted from death benefits

14
Places to Obtain Loans

• Credit card cash advance
• High interest! 17-24
• Pawnbrokers
• Turn over property to get loan
• High interest
• Rent-to-own
• Expensive

15
Credit Cards

• Regular charge accounts
• Pay balance in full each month
• American Express, Diners Club, dept. stores
• Revolving charge accounts
• Interest is charged
• May take years to pay off
• Minimum balance

16
Credit Cards

• Sources
• Banks, dept. stores, charities, gasoline
  companies, universities, credit unions, and more!
• Incentives
• Costs
• Annual fees
• Interest
• Introductory rates usually only temporary

17
Credit Cards

• Grace period
• 15-25 days
• Time between billing and due dates where no
  interest is charged
• Credit limit
• Penalties
• Watch for surprise charges on your statement!

18
Downside of Credit

• Most expensive option
• Consider loan as alternative
• Minimum payment trap
• Most of this payment is pure interest
• Choose the least expensive cards

19
Credit Rights Responsibilities

• Truth in Lending Act of 1968
• Must report information the same way
• Finance charges
• Annual percentage rate (APR)
• Equal Credit Opportunity Act (1975, 1977)
• Equal opportunities for credit
• Illegal to refuse credit based on race, color,
  religion, national origin, sex, marital status,
  or age

20
Credit Rights Responsibilities

• Fair Credit Reporting Act of 1971
• Organizations must identify the credit bureau
  that supplied the information used to make their
  decision
• If denied, you have 30 days to request a free
  copy of your file
• Request a copy for a small fee

21
Credit Rights Responsibilities

• Consumer Credit Reporting Reform Act (1996)
• Requires credit bureaus to investigate disputed
  items on a credit report within 30 days
• If bureau cant verify the information the item
  must be removed from the record

22
If you were refused credit unfairly

• Contact the bureau the lender used
• Write to the bureau and request a copy of report
• Study for inaccuracies
• Report errors in writing
• If no errors, but unusual circumstances, can
  attach a 100-word explanation to your report

23
Credit Rights Responsibilities

• Fair Credit Billing Act (part of Truth in Lending
  Act)
• Helps consumers correct credit card billing
  mistakes
• You have the right to refuse paying for something
  you didnt charge
• You have 60 days to contact credit card
• They have 30 days to reply
• They have 90 days to resolve
• You are not charged interest during this time
• Inferior products may also be disputed

24
Credit Rights Responsibilities

• Fair Debt Collections Practices Act (1977)
• Stops debt collection agencies from using abusive
  practices
• Stops abusive or threatening phone calls
• Stops deceptive means to get information
• Applies to agencies that are in business of
  collecting debt (not to individuals or businesses
  trying to collect their own accounts)

25
Credit Cards

• Credit is a privilege not a right
• Lenders are in business to make moneywill give
  you lots of credit to make more money!
• Pay more than the minimum
• Avoid too many cards (flyers in mail)
• Pay cash when possible
• Save receipts for charges/verify accuracy

26
Maintain a Good Credit Rating

• Start small
• Department credit card
• Do not miss a payment
• Save regularly
• Call lender if issuework with them!
• Negative credit more difficult to fix
• Stays on credit for years!
• Read what you sign

27
Maintain a Good Credit Rating

• Acceleration clause
• Payment in full is due if you miss one payment
• Balloon payment
• Final payment is larger than the regular payments
• Bankruptcy
• Legal process in which people cannot pay their
  debt and must surrender most of their property
• Lost property
• Credit reporting for 10 years

28
Maintain a Good Credit Rating

• True-Name Fraud
• SSN, DLs , and credit card being used by
  someone else
• Never give this information out!!

29
Help for Credit Problems

• Deb Consolidation Loans
• Could pay more in long run
• Dont use the extra monthly income to spend!
• Credit Counseling Services