Journal 3/10 List three advantages of using a credit card List three disadvantages of using a credit card

The World of Credit

What is credit? Credit is a not a right it is a privilege and a convenience. Credit is a promise and a contract. Someone loans money based on a promise to repay that money plus interest. Credit lets you charge a meal or pay for a car repair on a credit card or get a loan to buy a car. You get to buy something now and pay for it later. But credit is not free money. It is money was borrowed and it must be paid back.

Types and sources of credit single-payment credit Items and services are paid for in a single payment, within a given time period, after the purchase. Interest is usually not charged. Utility companies, medical services Some retail businesses

Types and sources of credit installment credit Merchandise and services are paid for in two or more regularly scheduled payments of a set amount. Interest is included. Some retail businesses, such as car and appliance dealers Money may also be loaned for a special purpose, with the consumer agreeing to repay the debt in two or more regularly scheduled payments. Commercial banks Consumer finance companies Savings and loans Credit unions

Types and sources of credit revolving credit Many items can be bought using this plan as long as the total amount does not go over the credit user’s assigned dollar limit. Repayment is made at regular time intervals for any amount at or above the minimum required amount. Interest is charged on the remaining balance. Retail stores Financial institutions that issue credit cards

The 3 C’s CharacterCharacter CapitalCapital CapacityCapacity

The 3 C’s character—will you repay the debt? From your credit history, does it look like you possess the honesty and reliability to pay credit debts? Have you used credit before? Do you pay your bills on time? Do you have a good credit report? Can you provide character references? How long have you lived at your present address? How long have you been at your present job?

The 3 C’s capital—what if you don’t repay the debt? Do you have any valuable assets such as real estate, savings, or investments that could be used to repay credit debts if income is unavailable? What property do you own that can secure the loan? Do you have a savings account? Do you have investments to use as collateral?

The 3 C’s capacity—can you repay the debt? Have you been working regularly in an occupation that is likely to provide enough income to support your credit use? Do you have a steady job? What is your salary? How many other loan payments do you have? What are your current living expenses? What are your current debts? How many dependents do you have?

your responsibilities Borrow only what you can repay. Read and understand the credit contract. Pay debts promptly. Notify creditor if you cannot meet payments. Report lost or stolen credit cards promptly. Never give your card number over the phone unless you initiated the call or are certain of the caller’s identity.

Reasons to have a Credit Card Establish a good credit rating Convenience Make telephone and online purchases Reserve cars Able to buy needed items now Don’t have to carry cash Creates a record of purchases More convenient than writing checks Consolidates bills into one payment

Disadvantages of Credit Cards Interest (higher cost of items) May require additional fees Financial difficulties may arise if one loses track of how much has been spent each month Increased impulse buying may occur

Watch “Give Yourself Some Credit”

How a Credit Card works…. Loan Annual Fee Interest Annual Percentage Rate (APR) Minimum payment Cash advance charge Late charge Over limit charge

Interest Rates can make a difference Example  A card with a $1,000 balance  $25 per month payment  APRPayoff Time  10%4 years  15%4.7 years  18% 5 years

examples of finance charges average daily balance adjusted balance previous balance monthly1.5% rates18% previous balance$400 payments$300 On 15th day (new balance =$100) average daily balance $250*N/A finance charge $3.75 (1.5% x $250) $1.50 (1.5% x $100) $6.00 (1.5% x $400) * To figure average daily balance: ($400 x 15 days) + ($100 x 15 days) = $250 x 30 days

Activity reading a credit card statement

Pass Out “The Statement” Worksheet

What Is Credit History? Credit bureaus gather and compile information supplied by your creditors. Credit bureaus are privately owned companies, not government agencies. –Currently the three most prominent are Equifax, Experian and TransUnion. EquifaxExperianTransUnion The information they gather includes how much of your total credit limit you still have available in your combined accounts, whether you've made late payments, whether any of your accounts have been referred to a collection agency. Typically creditors send monthly reports of their customers' credit activities to the credit bureau to which the creditor subscribes.

What Is Credit History? Credit bureaus only compile the data reported to them; they do not verify the accuracy of that data. It is the responsibility of the credit grantor and consumer (that's you) to ensure that the credit record is accurate. For many years The Fair Credit Reporting Act has ensured that a person denied credit, has the right to see their credit report at not cost. It also specifies the rights and responsibilities of creditors, debtors and reporting agencies.The Fair Credit Reporting Act

Credit History Without credit our lives would be very different. Without good credit, improving the quality of our lives would be very difficult. Good credit begins when you establish your first credit record. In time these records become your credit history. By using credit sensibly and responsibly you build a "good" credit history

Building a Credit History Establish a steady work record. Pay all bills promptly. Open a checking account and don’t bounce checks. Open a savings account and make regular deposits. Apply for a local store credit card and make regular monthly payments. Apply for a small loan using your savings account as collateral. Get a co-signer on a loan and pay back the loan as agreed.

What is a Credit Inquiry? You can and may have a credit record and not even know it. Every time a person or business asks about your credit history, they have made a "credit inquiry" and that inquiry becomes part of your credit record. Nearly every time you apply for a product or service that you will use and pay for at the end of the month, like cable or telephone service, or apartment rental, the supplier of that product or service will make a credit inquiry. They will decide whether or not to risk doing business with you now, on the basis of how reliably you have kept your past promises to pay.

What Is a Credit Report? A credit report is a record of how well you have paid your bills in the past. In essence it is a record of how well you've kept your previous promises to pay money owed to others. Credit records are kept by credit bureaus (also called credit reporting agencies), which use personal identifiers to tie a payment history to the person responsible for the actions recorded in it.

What Is a Credit Report? Important personal identifiers include your name, current address, date of birth, Social Security number, mother's maiden name, previous addresses, your past and present employers, plus public records such as bankruptcies, foreclosures, liens and legal judgments against you.

reading a credit report

manner of payment codes status type of account code O Open (entire balance due each month) R Revolving (payment amount variable) I Installment (fixed number of payments) status timeliness of payment 0 Approved not used; too new to rate 1 Paid as agreed days past due days past due days past due 5 Pays or paid 120+ days past the due date; or collection account 6 Making regular payments under wage earner plan or similar arrangement 7 Repossession 8 Charged off to bad debt

Why is it important to establish and maintain a good credit history? Having a good credit history will be a central part of making a successful personal and financial future for yourself. Your credit history can help open doors to you or keep them locked. People and businesses will use this record of how well you kept your previous payment agreements to judge whether they can risk making a similar agreement with you. The following are examples of those who often make decisions about your future based on your credit history Cell phone companies Landlords Lenders Insurers even possible employers often make decisions about your future based on your credit historyemployers

Protecting your credit Check your credit report frequently. Except under certain circumstances, there is a small charge for this service. The three primary credit bureaus are Equifax, Experian and TransUnion. EquifaxExperianTransUnion Use caution when requesting a copy of your credit report. Never give personal information to someone unless you initiated the contact, on the telephone, by mail or on the web.

how much can you afford? (the rule) never borrow more than 20% of your yearly net income If you earn $400 a month after taxes, then your net income in one year is: 12 x $400 = $4,800 Calculate 20% of your annual net income to find your safe debt load. $4,800 x 20% = $960 So, you should never have more than $960 of debt outstanding. Note: Housing debt (i.e., mortgage payments) should not be counted as part of the 20%, but other debt should be included, such as car loans, student loans and credit cards. monthly payments shouldn’t exceed 10% of your monthly net income If your take-home pay is $400 a month: $400 x 10% = $40 Your total monthly debt payments shouldn’t total more than $40 per month. Note: Housing payments (i.e., mortgage payments) should not be counted as part of the 10%, but other debt should be included, such as car loans, student loans and credit cards.

Tips for Establishing and Keeping Good Credit Make Payments on Time - It sounds so simple, but life is hectic and things do slip our minds. Establish a routine for paying your bills and keep to it. Mail payments a week before they are due so they arrive on time. Those late fees can add up.! Pay What You Owe - Of course it is best to pay the entire amount due each month, but at least pay more than the "Total Minimum Due." Never skip a payment.

Keep your "available balance" in mind. It is the difference between your credit limit and your balance due. Having an "available balance" means there is credit available in the event of an emergency and you can avoid incurring "Over Limit" charges. Before applying for a new credit card or loan examine your spending and work out a realistic budget. This will allow you to pay your bills and still live comfortably. Do Not Overextend Yourself

Avoid Impulse Purchases For some reason impulse buys are especially hard to pay off. Try to avoid putting the things you buy on impulse on your credit card. When you do your spending plan, allow room in your budget for a few impulse purchases; then stick to your plan. When tempted by something, delay the purchase and think about it for at least a day or two. If you think about it, you might decide you don't want it after all. Also try "visual spending." Imagine paying for the item with cash. Is it still worth it?

Reasons NOT to have a credit card Can’t repay Can’t repay If you do not have the income to pay off your credit card bill in full when it arrives in the mail, WAIT until you can afford to use a credit card.If you do not have the income to pay off your credit card bill in full when it arrives in the mail, WAIT until you can afford to use a credit card. Can’t control spending Can’t control spending Lethal in the hands of a compulsive spenderLethal in the hands of a compulsive spender

Credit Decision Making Project