Unit FiveUnit FiveCredit: Buy Now, Credit: Buy Now,

Pay LaterPay Later

Questions to be answered:Questions to be answered:

What is credit?What is credit? What does it cost to use credit?What does it cost to use credit? What are the advantages of using credit?What are the advantages of using credit? Where can you get credit?Where can you get credit? What questions should you ask yourself What questions should you ask yourself

before you use credit?before you use credit? What happens if you misuse credit?What happens if you misuse credit?

Overview: Credit 101Overview: Credit 101

CREDIT – means someone is willing to loan CREDIT – means someone is willing to loan you money – called principal – in exchange you money – called principal – in exchange for your promise to pay it back, usually for your promise to pay it back, usually with interest. with interest.

INTEREST – the amount you pay to use INTEREST – the amount you pay to use someone else’s money. The higher the someone else’s money. The higher the interest rate, the greater the COSTS OF interest rate, the greater the COSTS OF USING CREDIT.USING CREDIT.

All interest rates are quoted as an ANNUAL All interest rates are quoted as an ANNUAL PERCENTAGE RATE (APR). Which is the PERCENTAGE RATE (APR). Which is the amount it cost you a year to use credit, expressed amount it cost you a year to use credit, expressed as a percentage rate. It includes the interest, as a percentage rate. It includes the interest, transaction fees, and service charges.transaction fees, and service charges.

In addition to the APR, there may be other costs of In addition to the APR, there may be other costs of using credit:using credit:

ANNUAL FEE – most often used by credit card ANNUAL FEE – most often used by credit card companies, an annual fee is a yearly charge for the companies, an annual fee is a yearly charge for the privilege of using credit.privilege of using credit.

FINANCE CHARGE – the actual dollar cost of FINANCE CHARGE – the actual dollar cost of using credit – which is calculated by a lender.using credit – which is calculated by a lender.

ORGINATION FEEORGINATION FEE - usually associated with - usually associated with home loans, is a charge for setting up a loan.home loans, is a charge for setting up a loan.

Another key piece of information for using credit Another key piece of information for using credit wisely is the LOAN TERM – how long the loan last. wisely is the LOAN TERM – how long the loan last. THE LONGER THE LOAN TERM – THE THE LONGER THE LOAN TERM – THE GREATER THE COST OF USING CREDIT. The GREATER THE COST OF USING CREDIT. The longer you keep a balance on a credit card – the more longer you keep a balance on a credit card – the more money you have to pay in interest over that time. money you have to pay in interest over that time.

Example - $100,000 loan @ 10% for 30 years Example - $100,000 loan @ 10% for 30 years

Total pay out = $215,926.00Total pay out = $215,926.00

Benefits of CreditBenefits of Credit

Access to cash in an emergencyAccess to cash in an emergency The ability to use it now.The ability to use it now. Safety and convenience.Safety and convenience. Earn bonus points or miles.Earn bonus points or miles.

Sources of CreditSources of Credit

CREDIT CARDS – is synonymous with CREDIT CARDS – is synonymous with “buy now, pay later.” Unfortunately, ease “buy now, pay later.” Unfortunately, ease of use often translates into big bills down of use often translates into big bills down the road. Unlike other forms of credit, there the road. Unlike other forms of credit, there is no LOAN TERM with credit cards. You is no LOAN TERM with credit cards. You can pay the balance owed over a varied and can pay the balance owed over a varied and extended time – that’s where many people extended time – that’s where many people get into trouble. The longer you take to pay get into trouble. The longer you take to pay the balance owed – THE MORE IT COSTS the balance owed – THE MORE IT COSTS YOU IN FINANCE CHARGES. YOU IN FINANCE CHARGES.

Using Credit Cards to your Using Credit Cards to your AdvantageAdvantage

ANNUAL PERCENTAGE RATE (APR) – Compare all ANNUAL PERCENTAGE RATE (APR) – Compare all costs on credit cards – look for the lowest rates.costs on credit cards – look for the lowest rates.

ANNUAL FEE – look for cards with no annual fees.ANNUAL FEE – look for cards with no annual fees. GRACE PERIOD – the number of days during which no GRACE PERIOD – the number of days during which no

interest of finance charges will apply. PAY OFF THE interest of finance charges will apply. PAY OFF THE ENTIRE BALANCE OF YOUR CARD DURING THE ENTIRE BALANCE OF YOUR CARD DURING THE GRACE PERIOD.GRACE PERIOD.

MINIMUM PAYMENT – 2% of purchases or minimum MINIMUM PAYMENT – 2% of purchases or minimum payment per month. PAY YOUR BALANCE IN FULL payment per month. PAY YOUR BALANCE IN FULL EACH MONTH – CAN AVOID INTEREST CHARGES EACH MONTH – CAN AVOID INTEREST CHARGES ALTOGETHER.ALTOGETHER.

CREDIT LIMIT – is amount as to how much you can CREDIT LIMIT – is amount as to how much you can charge. Once you reach your limit your card is “MAXED charge. Once you reach your limit your card is “MAXED OUT.” Higher credit limits sound good, but big purchases OUT.” Higher credit limits sound good, but big purchases quickly compound into big interest payments with high quickly compound into big interest payments with high APR!APR!

Shop for best credit cardShop for best credit card

Go on to the Internet and shop for three Go on to the Internet and shop for three different credit cards. Compare:different credit cards. Compare:

APRAPR ANNUAL FEEANNUAL FEE GRACE PERIODGRACE PERIOD MINIMUM PAYMENTMINIMUM PAYMENT CREDIT LIMITCREDIT LIMIT OTHER FEES/NOTES OTHER FEES/NOTES

Other Sources of CreditOther Sources of Credit

INSTALLMENT LOANS – require you to INSTALLMENT LOANS – require you to make payments on a regular basis – usually make payments on a regular basis – usually monthly. Interest rates are generally lower monthly. Interest rates are generally lower than credit cards rates. You borrow a set than credit cards rates. You borrow a set amount with the loan term and payments amount with the loan term and payments are fixed for the life of the loan. Typically are fixed for the life of the loan. Typically run from two to six years. One needs to run from two to six years. One needs to check for prepayment penalties.check for prepayment penalties.

Credit Sources (cont)Credit Sources (cont)

STUDENT LOANS – banks, credit unions STUDENT LOANS – banks, credit unions and federal government make loans and federal government make loans available to pay for higher education. available to pay for higher education. Usually carry low interest rates – 4% to 8%Usually carry low interest rates – 4% to 8%

MORTAGES – much like an installment MORTAGES – much like an installment loan, except the length of the mortgage loan, except the length of the mortgage extends over a longer period of time – extends over a longer period of time – usually 15 to 30 years – the amount usually 15 to 30 years – the amount borrowed is usually much larger. borrowed is usually much larger.

Setting Limits on CreditSetting Limits on Credit

How much is to much? Two good rules of How much is to much? Two good rules of thumb: thumb:

Maximum of 20% of your net income Maximum of 20% of your net income should go toward all of your loan payments should go toward all of your loan payments (excluding a mortgage). Credit Cards, Car (excluding a mortgage). Credit Cards, Car Loans, any other Loans.Loans, any other Loans.

33% of net income is maximum about for 33% of net income is maximum about for mortgage loans. mortgage loans.

Comparing Credit OffersComparing Credit Offers

Remember to check for:Remember to check for: The APRThe APR The loan term or length of the loanThe loan term or length of the loan The maximum amount of the loanThe maximum amount of the loan The minimum payment amountThe minimum payment amount Any annual or up-front feesAny annual or up-front fees Any payment penaltiesAny payment penalties Additional fees, such as those for exceeding your Additional fees, such as those for exceeding your

credit limit, making a late payment, or bouncing a credit limit, making a late payment, or bouncing a check to the lendercheck to the lender

The amount of income to qualify for the creditThe amount of income to qualify for the credit

Credit ReportsCredit Reports

CREDIT REPORT – is simply your credit CREDIT REPORT – is simply your credit history, a record of you personal financial history, a record of you personal financial transactions. It will be with you for a long transactions. It will be with you for a long time, so make it shine! Lenders review it to time, so make it shine! Lenders review it to see how well you have managed credit in the see how well you have managed credit in the past. past.

It is your credit scoreboard, and it reflects It is your credit scoreboard, and it reflects your credit history for the past seven to 19 your credit history for the past seven to 19 years.years.

Three Major Three Major Credit Reporting AgenciesCredit Reporting Agencies

EquifaxEquifax Experian (formerly TRW)Experian (formerly TRW) Trans Union Trans Union

Building a good Credit HistoryBuilding a good Credit History

When using a checking account – don’t When using a checking account – don’t bounce checks.bounce checks.

When using a savings account – make When using a savings account – make additional deposits – regardless of the size.additional deposits – regardless of the size.

Always pay your bills on time – shows Always pay your bills on time – shows lenders you are responsible.lenders you are responsible.

Credit ScoringCredit Scoring

Factors generally included:Factors generally included: CAPACITY – lenders want to know if you have the ability CAPACITY – lenders want to know if you have the ability

to repay a loan. A pattern of rising income and/or steady to repay a loan. A pattern of rising income and/or steady employment.employment.

CHARACTER – lenders want to know if you are CHARACTER – lenders want to know if you are trustworthy. One way to measure this is by looking at you trustworthy. One way to measure this is by looking at you credit record.credit record.

CAPITAL - lenders take comfort in knowing you have CAPITAL - lenders take comfort in knowing you have personal items of value. In a worst-case scenario when you personal items of value. In a worst-case scenario when you don’t pay your bills at all, a lender might sell your don’t pay your bills at all, a lender might sell your personal possessions to repay your loans. Items of value personal possessions to repay your loans. Items of value include a car, investments account and your home.include a car, investments account and your home.

Ask yourself before signing on the Ask yourself before signing on the Dotted LineDotted Line

Do I really need this item right now or can I wait? Do I really need this item right now or can I wait? Can I qualify for credit?Can I qualify for credit? What is the interest rate (APR)?What is the interest rate (APR)? Are there additional fees?Are there additional fees? How much is the monthly payment and when is it due?How much is the monthly payment and when is it due? Can I afford to pay the monthly payments?Can I afford to pay the monthly payments? What will happen if I don’t make the payments on time?What will happen if I don’t make the payments on time? What will be the extra cost of using credit?What will be the extra cost of using credit? What will I have to give up to pay for it? (Opportunity What will I have to give up to pay for it? (Opportunity

cost)cost) All things considered, is using credit worth it?All things considered, is using credit worth it?

Rights and ResponsibilitiesRights and Responsibilities

DEBIT – the entire amount of money you owe to DEBIT – the entire amount of money you owe to lenders when you sign the application of a loan or lenders when you sign the application of a loan or a credit card. You are legally obligated to uphold a credit card. You are legally obligated to uphold what’s written in the agreement. If you fail to keep what’s written in the agreement. If you fail to keep your part of the bargain, lenders may take legal your part of the bargain, lenders may take legal action against you to recover what they can. action against you to recover what they can.

YOUR RIGHTS – can cancel a credit agreement YOUR RIGHTS – can cancel a credit agreement with a lender within three days – assuming you with a lender within three days – assuming you return the money borrowed. Are responsible to return the money borrowed. Are responsible to pay only $50 if someone uses your credit card pay only $50 if someone uses your credit card without your permission.without your permission.

Getting Out from Under Excessive Getting Out from Under Excessive DebtDebt

Spend less than you earn!!!Spend less than you earn!!! Delay gratification today to clean up yesterday’s mess.Delay gratification today to clean up yesterday’s mess. Apply your budget, if you consistently spend less than Apply your budget, if you consistently spend less than

you earn, you can use the additional money to pay off you earn, you can use the additional money to pay off your debt.your debt.

If you have several loans, try to make the minimum If you have several loans, try to make the minimum required payments on all of them.required payments on all of them.

Talk to your credits, let them know you are doing what Talk to your credits, let them know you are doing what you can to pay them back.you can to pay them back.

If money left after you’ve made the minimum If money left after you’ve made the minimum payments, use it to begin paying off one loan at a time. payments, use it to begin paying off one loan at a time. Start with the loan with the largest interest rate – not Start with the loan with the largest interest rate – not with the largest balance.with the largest balance.

BankruptcyBankruptcy

BANKRUPTCY - is a legal process that allows someone BANKRUPTCY - is a legal process that allows someone deeply in debt to create a plan to get out of it. Is very deeply in debt to create a plan to get out of it. Is very costly to everyone involved. Because of the growing costly to everyone involved. Because of the growing incidence of bankruptcy abuse, Congress has made incidence of bankruptcy abuse, Congress has made changes in the law. changes in the law.

CHAPTER 7 BANKRUPTCY - allows you to effectively CHAPTER 7 BANKRUPTCY - allows you to effectively erase most of your debt. Typically must be unemployed erase most of your debt. Typically must be unemployed or have a very low income, and must go through or have a very low income, and must go through financial counseling.financial counseling.

CHAPTER 13 BANKRUPTCY – allows you to pay back CHAPTER 13 BANKRUPTCY – allows you to pay back some your debts, but with more time. A court typically some your debts, but with more time. A court typically oversees the repayment plan to ensure accountability. oversees the repayment plan to ensure accountability.