Credit Management Review

Credit use review Remember … paying with credit is paying with someone else’s money. Benefits Convenience Buy now pay later Don’t need to carry cash Emergencies Costs Credit problems Spending beyond what you can afford Interest and fees Sacrifice other spending

Types of credit review Open-ended Credit Cards Lines of Credit Home equity line of credit Student loan line of credit Closed-ended Personal Loans Student loans Car loans Mortgages Primary (main home) Secondary (main home, second home, motor home) Refinance – replace primary mortgage to get a lower interest rate or money for something (wedding, college, boat, etc.)

Type of financing you would use Type of Credit (open or closed-ended) Types of loans review Purchase Type of financing you would use Type of Credit (open or closed-ended) Secured (Yes/No) Installment (Yes/No) House Personal loan (mortgage) Closed Yes Home Equity Line of Credit Personal loan Open Usually New or used Car Yes (usually) College tuition Student loan (personal loan) No Holiday shopping Credit card

History of Credit in America Bartering General store gave first credit Monthly, seasonal and yearly credit Bank loans had very high interest rate 1900s Moved from agricultural to labor based economy Weekly paychecks People bought luxuries Credit became its own business

History of Credit in America US credit protection laws Credit abuse / over use became common Today Internet exploded use of credit cards by consumers and businesses. Companies issue credit because they make $$ Even non-banks now issue all purpose credit cards Stores Gas stations

Credit cards today You need a Credit or Debit card number to: Rent a car Reserve a hotel room Buy gasoline at night in some neighborhoods Replacing travelers' checks More use leads to more competition More competition leads to user rewards Points (for travel, electronics, etc.) Cash back

The Cost of Credit There is an opportunity cost of borrowing You have to pay interest to the lender. The lender charges interest because that’s how they make money. Principal: The amount you borrowed minus any principal payments your have made. When you make payments, part goes to principal and part goes to interest. Interest: The cost of borrowing Interest Charge: = Principal x Interest Rate There is also a risk of late fees if your payment arrives late. Cash advance fees are charged when you get cash with your credit card.

The Cost of Credit Ex: Buy a television for $500. Financing is 5% interest for the year. You will pay $500 * 1.05 = $525 total. Principal = $500 Interest Charge = $500 * 5% . Cost of borrowing = $25. Ex: Finance $4500 for a car for work. Principal = $4500 Interest Charge = $4500 * 5.9% = $265.50

How Debt Works

5 C’s of Creditworthiness Lenders use these to decide if you are credit worthy. Character: reputation (who you are) Capacity: ability to pay (income/salary/paycheck) Capital: net worth or what you own Collateral (asset that secures the loan) Conditions Principal Interest rate Length of time Investopedia explains 'Five Cs Of Credit' This method of evaluating a borrower incorporates both qualitative and quantitative measures. The first factor is character, which refers to a borrower's reputation. Capacity measures a borrower's ability to repay a loan by comparing income against recurring debts. The lender will consider any capital the borrower puts toward a potential investment, because a large contribution by the borrower will lessen the chance of default. Collateral, such as property or large assets, helps to secure the loan. Finally, the conditions of the loan, such as the interest rate and amount of principal, will influence the lender's desire to finance the borrower.

Consumer Bankruptcy The U.S. Constitution affords you “the ability of relieve all or part of your debts when you can no longer meet your obligations to creditors and lenders” (About.com). When you declare bankruptcy, the court will take possession of your assets (what you own of value) and liquidate it (sell it for cash) in order to pay off you debtors (the people/businesses you owe money to. Chapter 7 – Your liquidated assets are used to pay off your debt. Anything debt left unpaid will be discharged, or forgiven, meaning you are no longer responsible for paying it. Chapter 13 – The court sets up a repayment schedule to help you repay debts. More information at incharge.org/ and bankruptcylawyer.net