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 of future repayments Usually includes interest Usually includes interest When you save, you give up the ability to spend now. When you save, you give up the ability to spend now. When you obtain credit, you give up the ability to spend later. When you obtain credit, you give up the ability to spend later. Never borrow more than you can easily repay Never borrow more than you can easily repay

Home Ownership Equity Equity Difference between what you owe and the value Difference between what you owe and the value Values go up Values go up Tax advantages Tax advantages Renting vs. Owning Renting vs. Owning

Other Reasons to Borrow Education Education Salary goes up Salary goes up Investment in yourself Investment in yourself Health care costs Health care costs

Considerations Is it important that I buy the good or service I want now? Is it important that I buy the good or 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 the loan? 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? Will I be able to buy other products I want more if I buy this product? Many borrow for wants, not needs. Many borrow for wants, not needs.

Credit Debt payments should not be more than % of your take home pay Debt payments should not be more than % of your take home pay Credit worthiness – measure of your reliability to repay a loan Credit worthiness – measure of your reliability to repay a loan Three C’s of credit: Three C’s of credit: Character Character Capacity Capacity Capital Capital

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

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

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

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

Credit Rating FICO scoring system ( ) FICO scoring system ( ) Payment history (largest factor) Payment history (largest factor) Current debt Current debt Length of credit history Length of credit history New accounts and inquiries New accounts and inquiries Kind of credit used (# of cards, available credit) Kind of credit used (# of cards, available credit)

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

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

Places to Obtain Loans Credit card cash advance Credit card cash advance High interest! 17-24% High interest! 17-24% Pawnbrokers?? Pawnbrokers?? Turn over property to get loan Turn over property to get loan High interest High interest Rent-to-own Rent-to-own Expensive Expensive

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

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

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

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

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

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

Credit Rights & Responsibilities Consumer Credit Reporting Reform Act (1996) Consumer Credit Reporting Reform Act (1996) Requires credit bureaus to investigate disputed items on a credit report within 30 days Requires credit bureaus to investigate disputed items on a credit report within 30 days If bureau can’t verify the information the item must be removed from the record If bureau can’t verify the information the item must be removed from the record

Credit Rights & Responsibilities Fair Credit Billing Act (part of Truth in Lending Act) Fair Credit Billing Act (part of Truth in Lending Act) Helps consumers correct credit card billing mistakes Helps consumers correct credit card billing mistakes You have the right to refuse paying for something you didn’t charge You have the right to refuse paying for something you didn’t charge You have 60 days to contact credit card You have 60 days to contact credit card They have 30 days to reply They have 30 days to reply They have 90 days to resolve They have 90 days to resolve You are not charged interest during this time You are not charged interest during this time

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

Maintain a Good Credit Rating True-Name Fraud True-Name Fraud SSN, DL’s #, and credit card # being used by someone else SSN, DL’s #, and credit card # being used by someone else Never give this information out!! Never give this information out!!

Maintain a Good Credit Rating Start small Start small 1 Card 1 Card Do not miss a payment Do not miss a payment Save regularly Save regularly Call lender if issue—work with them! Call lender if issue—work with them! Negative credit more difficult to fix Negative credit more difficult to fix Stays on credit for years! Stays on credit for years! Read what you sign Read what you sign

Maintain a Good Credit Rating Acceleration clause Acceleration clause Payment in full is due if you miss one payment Payment in full is due if you miss one payment Balloon payment Balloon payment Final payment is larger than the regular payments Final payment is larger than the regular payments Bankruptcy Bankruptcy Legal process in which people cannot pay their debt and must surrender most of their property Legal process in which people cannot pay their debt and must surrender most of their property Lost property Lost property Credit reporting for 7-10 years Credit reporting for 7-10 years

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

Help for Credit Problems Debt Consolidation Loans Debt Consolidation Loans Could pay more in long run Could pay more in long run Don’t use the extra monthly income to spend! Don’t use the extra monthly income to spend! Credit Counseling Services Credit Counseling Services