credit chapter 11. what is credit? section 1 what is credit? credit- is the ability to borrow money...
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CREDIT
CHAPTER 11
What is Credit?
Section 1
What is Credit?
Credit- is the ability to borrow money in return for a promise of future repayment
Giving up the ability to spend in the future in order to spend now
Saving
Giving up spending now for the ability to spend later
Interest
Charge for unpaid balances Giving up more future spending than original
cost Spend $100 Interest is 12% APR (annual percentage rate) Interest per month would be 1% $1 of interest for one month $12 of interest for one year This is assuming you don’t add to the amount
Grace Period
Is the time between the billing date and the payment due date when no interest is charged
20 to 25 days If not paid off:
Interest is charged from the date of your purchase
Minimum Payment
2 percent (%) of your total balanceExample: $100 balance $1000x .02 x .02 $2 $20 As your balance goes down so does your minimum
payment Paying off a big charge little by ever-so-little also
means that a $1,000 debt can turn into a 22-year commitment -- and that you'll accumulate thousands more in interest in the meantime
Next Month Minimum Payment
$1000 starting balance
+ 20 interest (24% APR)- 20.40 min. payment (usually 2% of balance)
- $ 999.6 next months balance
+ 19.99 interest
1 20.39 min. payment
$ 999.20 next months balancehttp://cgi.money.cnn.com/tools/debtplanner/debtplanner.jsp
http://www.calculatorweb.com/calculators/creditcardcalc.shtml
Opportunity Cost
Is giving up what you would spend in the future with the money you spent on interest plus the cost of the item you bought now
Other
Never borrow more money than you can easily repay
Renting- money paid towards shelter without anything to show for it
Owning- using credit to live in a home while making payments; over time the home builds equity
Equity- difference between amount owed on a home and the home’s value
Investment- value of a product that grows over time
Other
Credit Limit- maximum amount you are allowed to charge on your account
Tax advantage = property tax and interest paid for home loans are deducted from taxes
Investing in yourself = education or training = higher income
Budget borrowed money repayments
Health Insurance
doesn’t pay for everything, BUT things happen so sometimes you will have to borrow money to pay for living expenses
When to Borrow
1. Is it important that I buy the good or service I want now?
2. Do I have to borrow to buy the product?
3. Can I afford to make the payments on the loan?
4. Will I be able to buy other products I want more if I borrow to buy this product?
How much to Borrow
No more than 20 to 25% of take home pay $1000 x .20 or .25 = $200 to $250
How to Qualify for Credit
Section 2
Credit Worthiness
Is a measure of your reliability to repay a loan To be credit worthy you must have the
ABILITY and WILLINGNESS to pay your debts
Character
Is a measure of your sense of financial responsibility
Do you take your obligations seriously?
Other Character Check
1. How long have you worked at the same job?
2. How long have you lived at your residence?
3. Do you have good work and school attendance?
4. Do you save regularly?
Character History
A record of your past borrowing and repayments
Most important factor is:
ALWAYS pay on time
Cosign a loan
Parent/adult agrees to pay the debt if you don’t
Not recommended to do this for friends or irresponsible family members
Capacity
Is a measure of your financial ability to repay a loan
Are you Financially Over Extended?
Lenders will require all debt payments then they will calculate the percentage to see if you can take on another loan
Capital
Is the value of what you own savings, investments, and property
More capital you have the safer you are to loan to
Credit Bureau
Is a company that collects information about consumers’ credit history and sells it to lenders
Information on Application
Liabilities are your debts Assets are things you own
Credit Rating
Is a measure of your credit worthiness Lenders have computerized systems called
FICO (Fair Isaac Corporation) Scores from 100 to 800 The higher the number the better Always pay on time and don’t take on more
debt that you can easily repay
Credit Reporting Companies
Equifax Experian TransUnion
Check once a year from each company www.annualcreditreport.com 1-877-322-8228
Sources of Consumer Credit
Section 3
Types of Consumer Borrowing
1. Loans
2. Credit Card Accounts
Loans
Given a certain amount of money all at once to make your purchase
Make specified payments with interest by a certain date
Credit Card Accounts
Amount purchased is added to account Pay what you want each month as long as
you are paying the minimum required
Secured Loan
Is backed by something of value pledged to insure payment
Safe for lender Not safe for borrower
Collateral
Property pledged to back a loan Car Boat Home Etc.
Installment Loan
Is repaid in a certain number of payments with a certain interest rates
Unsecured Loan
Is not backed by collateral Lender lends based on your credit worthiness Higher interest rates Credit cards are considered unsecured loans
because it’s an unspecified amount Up to the customer’s credit limit
Date specified = closed-endDate not specified = open-end
Other Sources of Loans
Finance Companies High interest rates because the borrower has
higher risk Life Insurance
Lower interest rates because the loan can be deducted from the life insurance policy if borrower passes away
Credit Card Cash Advances Very high interest rates 17 to 24% Can get borrower into a lot of financial trouble
Sources continued
Pawn Brokers Give up property to get money To get property back, borrower pays a high
fee Rent to Own Companies
Rent property until you pay it off Pay a lot higher for the item rented
CREDIT CARDS
Regular Charge Account You must pay your balance each month in full
with in a specific amount of time No interest rate since you are not borrowing
money Revolving Charge Account
Allows you to carry a balance from one month to another
Pay interest
Sources of Credit Cards
Large Company Visa MasterCard Discover American Express
Small Company Banks Gasoline Universities Charitable
organizations credit unions
Credit Card Incentives
Incentive Anything that is given in replacement of a
particular agreement or action Examples:
Free stuff (hats, shirts, cups, tickets, etc.) Points to win things later Money to Charity Money to Schools Low interest rates: 0% APR for one year!
Purpose Encourages you to use their card
Credit Card Costs
Annual fees $15 to $100 One time fee for the use of the card
Interest On all unpaid balances
3.9% to 24% 0% for 6 months to get you to pay on credit card;
buy interest builds if you don’t pay it off in the 6 months
This is called back pay
Loan as Alternative
Interest on a loan is lower than on a credit card
Loans are closed-end
Minimum Payment Trap
Interest plus a little more This is encouraged to extend amount of
money paid in interest More money on credit card and the longer it
stays the more money you will pay the credit card company
Credit Rights and Responsibilities
Section 4
Consumer Credit Rights
Truth in Lending At in 1968 Requires banks to calculate credit costs in
the same way1. Finance charge2. Annual Percentage Rate (APR)
Finance Charge Is the total cost a borrower must pay for a
loan Includes
Interest fees
Consumer Credit Rights continued
Annual Percentage Rate Is the finance charge calculated as a
percentage of the amount borrowedThe laws does not guarantee that you will pay
the lowest amount possibleGetting the best deal is up to you
Equal Credit Opportunity Act
It is illegal to refuse credit based on: Race Color Religion National origin Sex Marital status And age
Fair Credit Reporting Act
If you have been refused credit You have 30 days to request a free copy of
your file
Consumer Credit Reporting Reform
Requires credit bureaus to investigate disputed items on a credit report with in 30 days
Credit is a PRIVILEGE not a RIGHT
Refused Credit?
Gather contact info from lender who refused you credit
Request a credit report Study report for inaccuracies Report any errors Write up to 100 word statement explaining
uncontrolled circumstancesCheck every 6 months on all 3 credit reports
for errors
Fair Credit Billing Act
Part of the Truth in Lending Act Helps correct credit card billing mistakes Credit Bureaus must resolve the dispute with
in 90 days May not pay interest unless they deny the
dispute
Fair Debt Collections Practices Act of 1977 Law prohibits the use of harassment or
abusive conduct Threatening phone calls Deceptive means to get information
Consumer Credit Responsibilities
Lenders will not limit your credit Use common sense when taking on more
debt Use Self Control
Pay more than minimum balance Avoid too many credit cards Pay in cash Keep accurate records
Maintain a Good Credit Rating
Section 5
Start Small
It is easier to handle small limits than a card with a large credit limit
Don’t miss a payment Save regularly
Shows you can manage your money Married or not if you name is on the card it’s a
part of your credit Counts equally on the credit report
Common Credit Mistakes
Not paying bills on time Not contacting lender when a problem arises Read what you sign
You are legally bound to anything and everything you sign
Make sure you understand it, if not, don’t sign until you do
You have to fulfill what you signed
Acceleration Clause
Says that the entire debt is immediately due if you miss a payment
Balloon Payment
Large payment at the end of the loan+ Low payment until the end
- Pay large amount at end
Bankruptcy
Is a legal process in which people who cannot pay their debts must surrender most of their property The court sells the property to help pay the
debts In exchange for not paying the rest of the debt
Two Kinds: Chapter 7- total amount of debt forgiven Chapter 13- smaller payment plans to pay
debt; partially forgiven (discharged) but not all
Price of Bankruptcy
No property (boats, expensive vehicles, etc) 10 years on credit report Have trouble finding a place to rent Have trouble getting credit Gives you a new start, but is not
recommended unless absolutely necessary Keep what is absolutely necessary for living
Bed, couch, lamps, clothes, shoes, etc
True-Name Fraud
Involves using someone else’s identity to get cash or buy products using credit Criminals need your
SSN Credit card Driver’s license
The business responsible for debt Ruin credit record (at least for a while if you
catch it in time)
How to Protect Yourself
Never give your SSN, unless necessary Keep your personal documents in safe place Keep track of your bills Contact business if you find a mistake Guard your personal belongings Shred anything with your name, address, and
other personal information
Eleven Danger Signals of Debt Problems1. Paying only minimum
balance and continuing to use the card
2. Regularly using 3 or more cards
3. Missing payments, late payments
4. Receiving second and third notices from creditors
5. Borrowing money to pay old debts
6. Using savings or credit cards to pay normal bills
7. Intentionally using overdraft or automatic loan features on checking accounts
8. Not talking to your significant other about money or ONLY talking about money
9. Rely on extra income to make ends meet
10. Owe more than 20% of monthly income in debt
11. No savings for emergencies
10 Tips to Credit Discipline
1. Don’t have more credit cards than you need
2. Think it over before using
3. Combine your credit use with a savings plan when card is paid off continue with that amount in your savings
4. Pay part of a purchase with cash before using credit
5. Keep all receipts
6. Keep a record of purchases
7. Review each statement
8. Stop using credit when payment is 15% or higher
9. Don’t charge more than you can pay off in one billing cycle
10. Keep credit cards out of reach to avoid impulse shopping
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