Warm-up: What are the 6 Cs of Credit? Mr. Tower’s The Lee-Davis Way Character (integrity) Commons Capacity (ability to pay) School Store Collateral—what the bank can take if you don’t pay back Library Capital (net worth) Guidance Condition of you and economy New Gym Credit history and Credit scores

Types of Loans Secured loans—you promise that if you don’t pay the loan, the bank can take the collateral Examples of collateral: house, cash, jewelry, stocks, car, etc.

Types of Loans Unsecured loans—no collateral; riskier for creditors, so they charge higher interest rate

Types of Loans Cosigned Loans—promise to pay if the first signer of the loan does not pay

Costs of Credit Interest Measured with APR

Costs of Credit Variable interest rate—the rate changes Fixed interest rate—the rate stays the same Which one is better?

Costs of Credit The Truth in Lending Act Protects you! Requires credit company to tell you cost of loan (APR)

Costs of Credit The shorter the loan, the cheaper the price (because less interest has to be paid) Longer loan = more expensive

Costs of Credit Prepayment—when you pay larger payments than required Can reduce the length and cost of the loan

Risks of Credit Default—when you do not pay back your loan Can lead to foreclosure E.g. bank takes your home Can lead to repossession E.g. bank takes your car or collateral

Risk of Credit Credit card debt/bankruptcy Higher among young people

Risk of Credit If you only pay the minimum amount due each month, you will end up paying a lot more!

Credit Cards Regulated by Treasury Department (Comptroller of the Currency)

Credit Cards Payments are due at least 21 days after they are mailed and delivered

Credit Cards There is a legal limit on the interest rate hikes and fees banks can charge for a credit card If they want to change terms, they need to give you 45 days advance notice

Credit Cards CARD and Disclosure Act of 2009 Credit companies are banned from issuing credit cards to anyone under 21 unless… They have adult cosigner They prove they have enough income

Credit Cards CARD and Disclosure Act of 2009 Credit cards must stay 1,000 feet away from college campuses

Credit Cards CARD and Disclosure Act of 2009 Card companies cannot raise APR automatically when cardholder fails to make a payment on another card

Credit Cards CARD and Disclosure Act of 2009 Issuers need to tell you due dates, times, and implication of only paying minimum payments

Credit Cards CARD and Disclosure Act of 2009 If you have variable APR (most do), they can increase interest rates

Installment Loans A loan paid back with a set number of payments E.g. mortgage (house), student loan, auto loan If you prepay, you can reduce the length/cost of loan