Personal Finance Section Credit and Debt

Personal Finance Section Credit gives extra punch to your purchasing power; but reckless handling of credit can bury you in debt. Americans receive hundreds of credit card applications each year. Credit Card companies want to lend you money because they make money off us.

Personal Finance Section Are you credit worthy? Loans, credit cards, and other methods of deferred payment is known as credit. Banks and other institutions must make sure that a person will repay their debt before they can give them credit. Creditors are not going to give people credit based on their word. They ask many questions to check on your financial past and demand evidence of your financial health.

Personal Finance Section The Four Cs Creditors look for capacity, capital, character, and collateral when judging your credit worthiness. Capacity – is your ability to repay the debt. Capital – is your regular income plus the money in your savings. Character is your willingness to repay your debt. Collateral – which is property used to secure a loan. If you default on a loan or fail to repay it, the creditor takes ownership of the collateral.

Personal Finance Section Often the item that you are purchasing – i.e. a car – is what you use as collateral. If you fail to pay your loan, you may lose your car.

Personal Finance Section 4 Steps to Establishing Credit Maintain savings and checking accounts While these are not credit, they can be used to show that you know how to manage your money. Get a department-store charge card Store cards, which can be used only to make purchases from that particular retailer, are usually easier to obtain than a bank credit card. This is a way to establish good credit.

Personal Finance Section 4 Steps to Establishing Credit Use your bank deposits as collateral for a credit card. Your limit – or maximum amount you’re allowed to borrow – would not exceed the amount of your deposit. Have someone with good credit cosign your credit application. A cosigner agrees to pay your debt if you fail to do so. With a cosigner, you can use someone else’s good credit to establish your own.

Personal Finance Section Information Creditors Can’t use: The Equal Credit Opportunity Act forbids creditors from using age, gender, marital status, race, color, religion, national origin, or public assistance income when establishing your credit worthiness. You cannot be discriminated against because of any one of the items listed above.

Personal Finance Section Maintaining Good Credit: When you borrow money from a financial institution, you are renting money. Eventually you have to pay it all back, along with interest and fees – called finance charges. Finance charges can be quite expensive and add up quickly.

Personal Finance Section Making late payments, missing payments, borrowing more than you can pay back will damage your credit history. To maintain good credit – develop good habits of paying your bills on time, don’t over-borrow from credit card companies.

Personal Finance Section Types of Credit: Loans Single payment loans – short-term loans paid off in one lump sum. Installment loans – repaid at regularly scheduled intervals or installments – usually monthly. Each payment applies to principal (amount borrowed) and interest (charge for renting)

Personal Finance Section Types of Credit: Credit Cards Most popular form of credit in the US. It is open-ended or revolving credit. You can borrow on a ongoing basis and pay back each month. You can buy almost anything with a credit card. Receive a monthly billing statement.

Personal Finance Section Finance Charges and Terms Annual Percentage Rate (APR) – tells you what the credit will cost you. It is a finance charge expressed as an annual interest rate. Terms – length of the loan. If you pay for your car in 3 years instead of 5, your monthly payments will be higher, but in the end, you will pay less interest.

Personal Finance Section How to Choose a Credit Card What is the APR? the lower the better Is the APR fixed or variable? What is the periodic rate? The interest rate that is applied to your account balance each billing period. How are finance charges computed? Most creditors use your average daily balances to determine the finance charge. Is there a grace period? No interest is charged if you pay your full bill before a certain date. What fees does the creditor charge? Creditors charge an annual membership fee, as well as fees for late payments, cash advances, or exceeding the credit limit.

Personal Finance Section Know Your Rights Creditors are required by Truth in Lending Laws to disclose certain information. They must tell you the exact finance charge on your loan. Fair Credit Reporting Act protects you from errors on your credit reports issued by credit bureaus. You are entitled to know the reason for any negative activity on your report and have any errors corrected.

Personal Finance Section If you are in debt and subject to debt collection, be aware that debt collectors must ensure the accuracy of the bill in question and allow you to dispute the bill if you believe it to be in error. Debt collectors may not threaten, harass, or otherwise abuse you in pursuit of the debt.

Personal Finance Section Review Name two types of credit and explain how they are different? How does collateral discourage borrowers from defaulting on a loan? How do the Equal Credit Opportunity Act and Truth in Lending Laws protect consumers?