LESSON THREE: SAVVY SHOPPING Debit and Credit LESSON THREE: SAVVY SHOPPING

PREPAID CARDS Also known as prepaid debit, stored value, or gift cards. May require activation. Spending is limited to the card amount. Do not need a bank account or a credit history. For some card types: Manage cash reloads and account information online. Prepaid payroll card: Employers deposit wages directly to the card.

If a loan holder cannot repay his or her debt, then bankruptcy protection may be imposed by a court. According to the Federal Trade Commission (FTC), consumers must get credit counseling from a government-approved organization and complete a debt education course before debts are cleared Consumers who are having trouble paying their home mortgage on time may face foreclosure. Foreclosure is a court process and involves a lawsuit in which a bank or mortgage company seeks to take an owner’s property to satisfy a debt.

Credit Scenarios Page 55

Lesson Four: Managing Credit When a debt is paid on time and with no missed payments, this will reflect positively on a consumer’s credit report. Shows that the consumers is creditworthy— that he or she has used credit successfully with a history of paying bills on time Maintaining good credit will allow a consumer to get loans

How can lenders get the information necessary to issue a line of credit to someone? Credit Reports: Credit Scores:

Where does this information come from? Credit reporting companies keep records on a consumer’s credit experience. Credit report includes: Where a consumer lives How they pay their bills Have they been sued or arrested Have they filed for bankruptcy

Credit Report Companies Equifax Experian Transunion Must provide a free credit report to a consumer once every 12 months Sell the information in credit reports to creditors, insurers, employers (with written consent) and other businesses who use it to evaluate credit application

Responsible borrower=good credit rating Irresponsible borrower=poor credit rating

Should you lend the $? You have $1,000 in a savings account. A good friend comes to you and asks for $300 to buy a bike. Your friend will use the bike to ride to and from work where she will earn $100 per week, $25 of which will go toward paying you back. Do you loan your friend the money?

Should you lend the $? Same situation; however, the person who asks to borrow the money is someone you don’t know well. Do you loan this person the money? What would you want to see or know about a person before you loan him/her the money?

Managing Credit Lenders need some way of understanding the financial risk of giving consumers lines of credit. Before they agree to loan the money, they’ll want to know Where they work and live How much money they make and spend Their ability to repay debts. May be able to buy a $300 bike w/o a loan; however, what about a house? A car?

How you spend your money and pay your bills will have an impact on whether you’ll be able to borrow money and at what cost (interest rate).

ARE YOU A GOOD CREDIT RISK? Do you pay your bills on time? Have you missed any payments? How many credit accounts do you have? Have you paid off a loan before? Are you maxed out on your credit cards? Are you near your credit limit? Do you have outstanding debt? How much? Creditors will look at your payment history, outstanding debt, credit-use history, and ownership of valuable assets such as real estate, personal property, and investments and savings. Good debt is the term used when debts are paid on time.

CREDIT DINGS! Making late payments Exceeding your credit limit Applying for credit frequently Having an account turned over to a credit agency for collection

What does a credit score mean? Credit score influences the credit available to a consumer If a potential borrower has a high score, the bank will loan the money with a high degree of expectation that it will be paid back. This borrower would be considered a low-risk borrower.

FICO Score FICO came from Fair Isaac Company—the company that developed the score. Founded in 1956 by Bill Fair and Earl Isaac, They developed the formula for the FICO score.

FICO Credit Score Credit Type Score Range Very good to excellent 720-850 Fair to good 660-719 Fair 600-659 Poor 300-599

BUILDING GOOD CREDIT Choose a credit card carefully Look for no annual fees/low interest rates Use the credit to build a payment history Don’t charge more than you can pay An extension of your checkbook, not paycheck Pay your bills on time—Don’t skip payments

IDENTITY THEFT More than 9 million people have their identity stolen each year. Page 66