Credit

Credit When you borrow money, with the expectation of repayment over time at additional cost, to acquire a good or service now that you could not otherwise obtain

The Good of Credit Plastic was introduced in 1959 Credit has enabled many people to live better by paying for goods or services as part of their regular living expenses rather than having to wait until they could afford to make a purchase. Egypt: Son doesn’t marry until he has a house and furniture paid for (late 30’s or early 40’s). Women marry older men

The Good of Credit Cards Allow people to make purchases without paying cash. May be used at a variety of locations: stores, restaurants, hotels, etc. Examples: Visa, MasterCard, Discover, American Express Are used by 85% of the adult population. Make bill paying simple with one check for lots of purchases Allow Taking advantage of sales Allow shopping on line or by phone Allow the avoidance of carrying large sums of cash

Credit Terms to Remember Interest: percentage added Cost incurred when borrowing money. The amount the borrower must pay for use of someone else’s money. It may be a bank, credit card company, or a store. Debt: amount of money owed Equal to the principal plus interest Principal The amount originally borrowed

Credit Card Terms to Remember Credit Limits Travel Insurance Annual Fees Extended Warranty Grace Period Finance Charge Over limit Fees Collision on rentals Late payment Fees Discounts Cash Advance Fees Cash back Year-end Summaries Float on payment

Explanation of Statement

Smart Consumers Consider Marginal Analysis Compare the marginal cost and the marginal benefit of a decision before they act upon it Estimate total costs Estimate total revenues Subtract total revenues from total costs Determine if there is enough profit to cover loan costs Decide to apply for the loan or not

4 Types of Charge Accounts: Regular Charge Accounts: Known as a 30-day charge. At the end of 30-day period, the store sends a bill for the entire amount. No interest is charged, but the entire bill must be paid on time. Revolving Charge Accounts: Allows you to make additional purchases from the same store even if you have not paid the previous month’s bill in full. Don’t have to reapply like a loan. Installment Charge Accounts: Items purchased & paid for through equal payments spread over a period of time. Part of the payment is applied to the principal and part to interest. Ex: furniture, appliances, etc. Budget Accounts: A utility company allows you to make fixed monthly payments based on your average monthly usage in the past. This helps you avoid bill increases when you use more utilities in a particular month, but unpaid usage can accumulate.

The Bad of Credit Cards People regularly charge more than they can afford to pay Finance charges can add substantially to your expenses and purchases end up costing more Can drive you into debt/bankruptcy Might lose property entirely

Safety Tips / Canceling Your Card Never give your card number or card to anyone! (restaurant) Never make your PIN number available to anyone! (Computer file labeled PIN NUMBERS) Cancel 40 days before annual renewal date to avoid annual fee Not your purchase: 60 days to notify card company in writing; 90 days to resolve problem Defective merchandise – you can legally refuse to pay if over $50 Lost or Stolen: report IMMEDIATELY

Three C’s of Credit Character – payment history of individual Capacity – earnings and current debt the individual has or their ability to take on new debt Collateral – Capital – ability to put property or assets up to secure credit – security for loan if you default

Co-signer Parents/person with an acceptable credit rating who guarantees to repay the loan if you default DEFAULT – not making payments on your loan – usually from 90-270 days delinquent

Finance Charge It is the cost of credit expressed in dollars and cents. It takes into account interest costs plus any other charges connected with the credit. Computing can vary from creditor to creditor. Previous Balance Average Daily Balance Adjusted Balance Past Due Balance

Annual Percentage Rates Also known as the APR It is the cost of credit expressed as a yearly percentage rate. Can be fixed or variable Must take into account any non-interest costs of credit such as membership fees.

Government Regulation of Credit CARD Act (2009): affords consumers more detailed information and expanded options in the area of credit. Equal Credit Opportunity Act (1974) Prohibits discrimination in giving credit on the basis of sex, race, color, religion, national origin, gender, marital status, age or receipt of public assistance. Fair Credit Billing Act (1974) Sets up a procedure for the quick correction of mistakes that appear on consumer credit accounts. Fair Debt Collection Practices Act (1977) Prevents abuse by professional debt collectors; applies to anyone employed to collect debts owed to others; does not apply to banks or other businesses that collect their own accounts.

The Ugly of Credit Personal Bankruptcy When an individual(s) take too many loans, use to many credit cards, and pile up debts that cannot be paid off they may need to file for personal bankruptcy. In Bankruptcy, a debtors give most of what they own to be distributed to their creditors. Taxes and Student Loans cannot be discharged. It is very difficult to reestablish credit after declaring bankruptcy. Bankruptcy should be your last resort!

Chapter 12 and 13 Bankruptcy Chapter 12 and 13 of the Bankruptcy Code is the opportunity to repay some or all the debts in their name, in better terms, i.e. lower or no interest. Chapter 12: family farmers and Chapter 13: other individuals. As long as you have a steady, reliable income, less than $269,250 in unsecured debt and less than $807,750 in secured debt, you can file Chapter 13 While debtors are allowed to keep all of their property, the court approves a new interest-free plan for repayment within a 5 year limit. If you are successful they discharge the bankruptcy.

Chapter 7 Bankruptcy “Liquidation" bankruptcy Debtor might get to keep some property, such as his/her primary residence or personal items like clothing It cancels your debts, but the bankruptcy court liquidates (sells) some of your property for the benefit of your creditors. "Chapter 7" refers to the chapter of the federal Bankruptcy Code that contains the bankruptcy law.

Chapter 11 Similar to Chapter 13 The main difference is no limit regarding the amount of money owed by the debtor. Originally only intended for large corporations, individuals can now file Chapter 11 as well.

Tips to Borrow By The average American household with at least one credit card has nearly $15,950 in credit-card debt (in 2012), according to CreditCards.com, and the average interest rate runs in the mid- to high teens at any given time. 2. Borrowing for a home or college usually makes good sense. Just don't borrow more than you can afford to pay back, and shop around for the best rates. 3. Don't use a credit card to pay for things you consume quickly, such as meals and vacations, if you can't afford to pay off your monthly bill in full in a month or two. Instead, put aside some cash each month for these items so you can pay the bill in full. If there's something you really want, but it's expensive, save for it over a period of weeks or months before charging it so that you can pay the balance when it's due and avoid interest charges. 4. Write down everything you spend for a month, cut back on things you don't need, and start saving the money left over or use it to reduce your debt more quickly. 5. Pay down the balances of loans or credit cards that charge the most interest while paying at least the minimum due on all your other debt. Once the high-interest debt is paid down, tackle the next highest, and so on.

6. If you just pay the minimum due on credit-card bills, you'll barely cover the interest you owe, to say nothing of the principal. It will take you years to pay off your balance, and potentially you'll end up spending thousands of dollars more than the original amount you charged. 7. It may be convenient to borrow against your home or your 401(k) to pay off debt, but it can be dangerous. You could lose your home or fall short of your investing goals at retirement. 8. Build a cash cushion worth three months to six months of living expenses in case of an emergency. If you don't have an emergency fund, a broken furnace or damaged car can seriously upset your finances. 9. Don't pour all your cash into paying off a mortgage if you have other debt. Mortgages tend to have lower interest rates than other debt, and you may deduct the interest you pay on the first $1 million of a mortgage loan. 10. If you have more debt than you can manage, get help before your debt breaks your back. There are reputable debt counseling agencies that may be able to consolidate your debt and assist you in better managing your finances. But there are also a lot of disreputable agencies out there.