The Costs and Methods of Obtaining Credit Morgan Napier and Kaitlin Nelke.

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Presentation transcript:

The Costs and Methods of Obtaining Credit Morgan Napier and Kaitlin Nelke

What is a Loan? Loan: money that you borrow and must repay. Cost money to the borrower in the form of interest. Make sure that you will be able to meet your monthly expenses while paying off your loan. Add up all your monthly expenses and subtract the total from your take-home pay.

The Finance Charge and the Annual Percentage Rate (APR) The Finance Charge: the total dollar amount you pay to use credit Annual Percentage Rate (APR): the cost of credit on a yearly basis. Expressed as a percentage. An APR of 18% means you pay $18 per year on each $100 you owe.

Tackling the Trade Offs Term Versus Interest Costs Longer-term financing: smaller monthly payments, large amount of interest charges Shorter-term financing: larger monthly payments, small amount of interest charges Lender Risk Versus Interest Rate Variable Interest Rate A Secured Loan Up-front Cash A Shorter Term

Calculating the Cost of Credit Simple Interest: the interest computed only on the principal amount that you borrow. Simple Interest on the Declining Balance: The method used to pay back a loan using more than one payment. Add-On Interest: This method has interest added onto the full amount of the original principal. Cost of Credit and Inflation: Inflation reduces the buying power of money.

The 5 Cs of Credit Character: Will You Repay the Loan? Creditors want to know who they will be lending their money to. Capacity: Can You Repay the Loan? Your income and debts you already have will affect your ability to pay additional ones. Capital: What are Your Assets and Net Worth? If you lose your source of income, you could repay your loan from your savings or by selling some of your assets. Collateral: What if You Do Not Repay the Loan? Creditors look at the kind of property or savings you have, because these can be offered as collateral to secure the loan. Conditions: What if Your Job is Insecure? Credit rating: a measure of a person’s ability and willingness to make credit payments on time.

FICO and Vantages Vantagescore features a common score range of How Can I Improve My Credit Score? Credit score Long term, responsible credit behavior is the most effective way to improve future scores. Pay bills on time, lower balances, and use credit wisely to improve your score over time.

Credit and Equal Opportunity Age: The ECOA is a very specific about how a person’s age may be used as a factor in credit decisions. Turn down or decrease credit because of your age Ignore retirement income in rating your application Close your credit account because you have retired Close credit account because you reach a certain age. Public Assistance: You can’t be denied credit because you receive social security or public assistance. Housing Loans: Bans discrimination against you based on the race or nationality of the people in the neighborhood where you live. This process is called redlining.

What If Your Application Is Denied? What is done: The ECOA gives you the right to know the reasons. You are entitled to know the specific information that led to the denial. Then you can contact the credit bureau and ask for a copy of your credit report. No fee for this if application has been denied. You may ask bureau to investigate any information that’s inaccurate, and correct its records.

Credit Bureaus Credit Bureau: an agency that collects information on how promptly people and businesses pay their bills. Examples: Experian, Trans Union, and Equifax. These firms make money by selling the information they collect to creditors who are considering loan applications. They get their information from banks, finance companies, stores, credit card companies, and other lenders.

Your Credit File Typical Credit Bureau File Contains: name, address, Social Security number, birth date, employer, position, and income previous address previous employer Spouse’s name, employer, Social Security number, and income Homeowner or renter status Checks returned for insufficient funds. When using credit: Credit Bureau is informed of your account number, the date, amount, terms, and type of credit.

Fair Credit Reporting & Who Can Obtain a Credit Report? Fair Credit Reporting Act: regulates the use of credit reports. Law requires the deletion of out of date information Getting your credit report: May be issued only to properly identified persons for approved purposes. Provided for use in connection with credit transaction, underwriting of insurance, or some other legitimate business need. Neighbors can’t be given credit information about you. Just asking for this may end with a fine, imprisonment, or both. Anyone with computer or modem can easily access credit bureau files.

Time Limits on Unfavorable Data & Incorrect Information Time Limits: Most credit files may be reported for only seven years. If you declare personal bankruptcy, that could be reported for ten years. Credit agency can’t disclose information in your credit file that is more than 10 years old. Incorrect Information: Credit bureaus are required to follow reasonable procedures to make sure that the information in their files is correct. If you challenge the accuracy of an item on your credit report, the bureau must remove the item unless the lender can verify if the information is accurate.

Legal Action What You Can Do: You have a legal right to sue a credit bureau or creditor that has caused you harm by not following the rules established by the Fair Credit Reporting Act. An unauthorized person who obtains a credit report under false pretences may be fined up to $5,000, imprisoned for one year, or both. The same is also to anyone who willfully provides credit information to someone not authorized to receive it.

The End