Credit Chapter 10. Credit The ability to borrow money in return for a promise of future repayments The ability to borrow money in return for a promise

CreditCredit

Chapter 10Chapter 10

CreditCredit

The ability to borrow money in return for a The ability to borrow money in return for a promise of future repaymentspromise of future repayments

Usually includes interestUsually includes interest

When you save, you give up the ability to When you save, you give up the ability to spend now.spend now.

When you obtain credit, you give up the When you obtain credit, you give up the ability to spend later.ability to spend later.

Never borrow more than you can easily Never borrow more than you can easily repayrepay

Home OwnershipHome Ownership

EquityEquity Difference between what you owe and Difference between what you owe and

the valuethe value Values go upValues go up Tax advantagesTax advantages Renting vs. OwningRenting vs. Owning

(something to show vs. nothing to show(something to show vs. nothing to show

Other Reasons to BorrowOther Reasons to Borrow

EducationEducation Salary goes upSalary goes up Investment in yourselfInvestment in yourself

Health care costsHealth care costs

ConsiderationsConsiderations

Is it important that I buy the good or Is it important that I buy the good or service I want now?service I want now?

Do I have to borrow to buy the product?Do I have to borrow to buy the product? Can I afford to make the payments on Can I afford to make the payments on

the loan?the loan? Will I be able to buy other products I Will I be able to buy other products I

want more if I buy this product?want more if I buy this product? Many borrow for wants, not needs.Many borrow for wants, not needs.

CreditCredit

Debt payments should not be more Debt payments should not be more than 20-25 % of your take home paythan 20-25 % of your take home pay

Credit worthiness – measure of your Credit worthiness – measure of your reliability to repay a loanreliability to repay a loan

Three C’s of credit:Three C’s of credit: CharacterCharacter CapacityCapacity CapitalCapital

CharacterCharacter

Credit HistoryCredit History Other indications of responsibilityOther indications of responsibility

Having a job for a long timeHaving a job for a long time Living at the same address for a whileLiving at the same address for a while Having good school and work Having good school and work

attendanceattendance Saving regularlySaving regularly

COSIGN A LOANCOSIGN A LOAN

CapacityCapacity

Ability to pay back (expenses vs. Ability to pay back (expenses vs. income)income)

Are you already overextended?Are you already overextended?

CapitalCapital

Value of what you ownValue of what you own SavingsSavings InvestmentsInvestments PropertyProperty

Things you could sell if you needed Things you could sell if you needed to pay loan backto pay loan back

Credit RatingCredit Rating

Loan applicationLoan application Credit bureausCredit bureaus

Information obtained from:Information obtained from: StoresStores BanksBanks Utilities, Utilities, CourtsCourts CreditorsCreditors

TransUnion, Equifax, ExperianTransUnion, Equifax, Experian

Credit RatingCredit Rating

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

credit)credit)

LOANSLOANS

Secured loanSecured loan CollateralCollateral Installment loanInstallment loan

Closed-end creditClosed-end credit Fixed payments, fixed payoff date, fixed loan amountFixed payments, fixed payoff date, fixed loan amount

Unsecured loanUnsecured loan Granted on credit rating aloneGranted on credit rating alone Usually higher interest rates than secured loansUsually higher interest rates than secured loans Sometimes credit cards are considered Sometimes credit cards are considered

unsecured, open-end creditunsecured, open-end credit

Places to Obtain LoansPlaces to Obtain Loans

BanksBanks Savings and loan institutions (mostly real Savings and loan institutions (mostly real

estate)estate) Credit unionsCredit unions Finance companies Finance companies

Higher interest, higher risk clientsHigher interest, higher risk clients Life insurance companiesLife insurance companies

Borrow against policy collateralBorrow against policy collateral Low ratesLow rates Balance deducted from death benefitsBalance deducted from death benefits

Places to Obtain LoansPlaces to Obtain Loans

Credit card cash advanceCredit card cash advance High interest! 17-24%High interest! 17-24%

PawnbrokersPawnbrokers Turn over property to get loanTurn over property to get loan High interestHigh interest

Rent-to-ownRent-to-own ExpensiveExpensive

Credit CardsCredit Cards

Regular charge accountsRegular charge accounts Pay balance in full each monthPay balance in full each month American Express, Diner’s Club, dept. American Express, Diner’s Club, dept.

storesstores Revolving charge accountsRevolving charge accounts

Interest is chargedInterest is charged May take years to pay offMay take years to pay off Minimum balanceMinimum balance


SourcesSources Banks, dept. stores, charities, gasoline Banks, dept. stores, charities, gasoline

companies, universities, credit unions, companies, universities, credit unions, and more!and more!

IncentivesIncentives CostsCosts

Annual feesAnnual fees InterestInterest

Introductory rates usually only temporaryIntroductory rates usually only temporary


Grace periodGrace period 15-25 days 15-25 days Time between billing and due dates Time between billing and due dates

where no interest is chargedwhere no interest is charged Credit limitCredit limit PenaltiesPenalties Watch for surprise charges on your Watch for surprise charges on your

statement!statement!

Downside of CreditDownside of Credit

Most expensive optionMost expensive option Consider loan as alternativeConsider loan as alternative Minimum payment trapMinimum payment trap

Most of this payment is pure interestMost of this payment is pure interest Choose the least expensive cardsChoose the least expensive cards

Credit Rights & Credit Rights & ResponsibilitiesResponsibilities

Truth in Lending Act of 1968Truth in Lending Act of 1968 Must report information the same wayMust report information the same way Finance chargesFinance charges Annual percentage rate (APR)Annual percentage rate (APR)

Equal Credit Opportunity Act (1975, Equal Credit Opportunity Act (1975, 1977)1977) Equal opportunities for credit Equal opportunities for credit Illegal to refuse credit based on race, Illegal to refuse credit based on race,

color, religion, national origin, sex, color, religion, national origin, sex, marital status, or agemarital status, or age


Fair Credit Reporting Act of 1971Fair Credit Reporting Act of 1971 Organizations must identify the credit Organizations must identify the credit

bureau that supplied the information bureau that supplied the information used to make their decisionused to make their decision

If denied, you have 30 days to request a If denied, you have 30 days to request a free copy of your filefree copy of your file

Request a copy for a small feeRequest a copy for a small fee


Consumer Credit Reporting Reform Consumer Credit Reporting Reform Act (1996)Act (1996) Requires credit bureaus to investigate Requires credit bureaus to investigate

disputed items on a credit report within disputed items on a credit report within 30 days30 days

If bureau can’t verify the information the If bureau can’t verify the information the item must be removed from the recorditem must be removed from the record

If you were refused credit If you were refused credit unfairlyunfairly

Contact the bureau the lender usedContact the bureau the lender used Write to the bureau and request a Write to the bureau and request a

copy of reportcopy of report Study for inaccuraciesStudy for inaccuracies Report errors in writingReport errors in writing If no errors, but unusual If no errors, but unusual

circumstances, can attach a 100-circumstances, can attach a 100-word explanation to your reportword explanation to your report


Fair Credit Billing Act (part of Truth in Fair Credit Billing Act (part of Truth in Lending Act)Lending Act) Helps consumers correct credit card billing Helps consumers correct credit card billing

mistakesmistakes You have the right to refuse paying for You have the right to refuse paying for

something you didn’t chargesomething you didn’t charge You have 60 days to contact credit cardYou have 60 days to contact credit card They have 30 days to replyThey have 30 days to reply They have 90 days to resolveThey have 90 days to resolve You are not charged interest during this timeYou are not charged interest during this time Inferior products may also be disputedInferior products may also be disputed


Fair Debt Collections Practices Act Fair Debt Collections Practices Act (1977)(1977) Stops debt collection agencies from Stops debt collection agencies from

using abusive practicesusing abusive practices Stops abusive or threatening phone callsStops abusive or threatening phone calls Stops deceptive means to get informationStops deceptive means to get information

Applies to agencies that are in business Applies to agencies that are in business of collecting debt (not to individuals or of collecting debt (not to individuals or businesses trying to collect their own businesses trying to collect their own accounts)accounts)


Credit is a privilege not a rightCredit is a privilege not a right Lenders are in business to make moneyLenders are in business to make money

—will give you lots of credit to make —will give you lots of credit to make more money!more money!

Pay more than the minimumPay more than the minimum Avoid too many cards (flyers in mail)Avoid too many cards (flyers in mail) Pay cash when possiblePay cash when possible Save receipts for charges/verify Save receipts for charges/verify

accuracyaccuracy

Maintain a Good Credit Maintain a Good Credit RatingRating

Start smallStart small Department credit cardDepartment credit card

Do not miss a paymentDo not miss a payment Save regularlySave regularly Call lender if issue—work with them!Call lender if issue—work with them! Negative credit more difficult to fixNegative credit more difficult to fix

Stays on credit for years!Stays on credit for years! Read what you signRead what you sign


Acceleration clauseAcceleration clause Payment in full is due if you miss one paymentPayment in full is due if you miss one payment

Balloon paymentBalloon payment Final payment is larger than the regular Final payment is larger than the regular

paymentspayments BankruptcyBankruptcy

Legal process in which people cannot pay their Legal process in which people cannot pay their debt and must surrender most of their propertydebt and must surrender most of their property

Lost propertyLost property Credit reporting for 10 yearsCredit reporting for 10 years


True-Name FraudTrue-Name Fraud SSN, DL’s #, and credit card # being SSN, DL’s #, and credit card # being

used by someone elseused by someone else Never give this information out!!Never give this information out!!

Help for Credit ProblemsHelp for Credit Problems

Deb Consolidation LoansDeb Consolidation Loans Could pay more in long runCould pay more in long run Don’t use the extra monthly income to Don’t use the extra monthly income to

spend!spend! Credit Counseling ServicesCredit Counseling Services

Documents

Credit Chapter 10. Credit The ability to borrow money in return for a promise of future repayments The ability to borrow money in return for a promise