1 1 A program of: The United States Bankruptcy Court, Middle District of Florida Tampa Division and The Tampa Bay Bankruptcy Bar Association

2 2 Credit 101 Credit- borrowing money; a loan. Credit- borrowing money; a loan. Principal- amount of money you borrow. Interest- amount you pay, in addition to repayment of principal, for the privilege of borrowing; usually a percentage of the total principal. Interest- amount you pay, in addition to repayment of principal, for the privilege of borrowing; usually a percentage of the total principal. Debt- something owed to another. Debt- something owed to another. Collateral- things offered by the borrower to the lender to secure the borrower’s performance in repaying a loan (e.g. car, house, boat, etc.). Collateral- things offered by the borrower to the lender to secure the borrower’s performance in repaying a loan (e.g. car, house, boat, etc.). Secured Loan- a secured loan has a borrower’s pledge of collateral; if the borrower doesn’t pay, lender can seize the collateral, sell it and keep the money. Secured Loan- a secured loan has a borrower’s pledge of collateral; if the borrower doesn’t pay, lender can seize the collateral, sell it and keep the money. Unsecured Loan- a loan where no collateral is pledged. Unsecured Loan- a loan where no collateral is pledged.

3 3 Annual Percentage Rate (APR)- the amount of interest charged by the credit issuer Annual Percentage Rate (APR)- the amount of interest charged by the credit issuer Introductory Rate- the rate of interest charged during the “introductory” period of a loan term (i.e.: 0% for 6 months and 17% thereafter). Introductory Rate- the rate of interest charged during the “introductory” period of a loan term (i.e.: 0% for 6 months and 17% thereafter). Annual Fees- the amount charged by the credit issuer for the privilege of using the credit extended; different from, and in addition to, interest rate. Annual Fees- the amount charged by the credit issuer for the privilege of using the credit extended; different from, and in addition to, interest rate. Late Fees- the amount charged if the minimum balance is not paid on time or within the grace period Late Fees- the amount charged if the minimum balance is not paid on time or within the grace period Credit 101 (continued)

4 4 Grace Period- the amount of time after the payment due date to pay the minimum balance without penalty. Grace Period- the amount of time after the payment due date to pay the minimum balance without penalty. Minimum Payment- the smallest amount you may pay on the debt without penalty. Minimum Payment- the smallest amount you may pay on the debt without penalty. Loan Term- the duration of the loan (e.g. 1 year, 3 years, 15 years). Loan Term- the duration of the loan (e.g. 1 year, 3 years, 15 years). Maturity Date- the specific date the term of the loan ends (i.e. January 15, 2021). Maturity Date- the specific date the term of the loan ends (i.e. January 15, 2021). Default- failing to pay on time or within the grace period; failing to pay entire debt by the maturity date. Default- failing to pay on time or within the grace period; failing to pay entire debt by the maturity date. Debt Collection- action taken by lender after borrower default; may include sending demand letters, telephone calls to request payment, and filing a lawsuit against the borrower. Debt Collection- action taken by lender after borrower default; may include sending demand letters, telephone calls to request payment, and filing a lawsuit against the borrower. Judgment Lien- lien in favor of lender on all of borrower’s real and personal property that may be imposed after judgment is entered by Court. Judgment Lien- lien in favor of lender on all of borrower’s real and personal property that may be imposed after judgment is entered by Court.

5 Commonly Available Types of Credit Credit Card—short term, unsecured loan made by card issuer to card holder for purchases of goods and services.  Penalty for non-payment: interest, late fees, debt collection, judgment lien. Student Loan—long term, unsecured loan made by lender to student for educational expenses—tuition, housing, books, food.  Penalty for non-payment: interest, late fees, debt collection, tax return set-off. Auto Loan—long term loan for vehicle purchase. Almost always secured by vehicle being purchased.  Penalty for non-payment: interest, late fees, repossession, debt collection, judgment lien. Home Loan/Mortgage—long term loan for home purchase. Almost always secured by property being purchased.  Penalty for non-payment: interest, late fees, foreclosure, deficiency judgment, judgment lien.

6 Credit Report A comprehensive report detailing all credit available to an individual—past and present— and that individual’s repayment history for each loan. Who might be interested in seeing your credit report?  Lenders  Employers  YOU

7 7 Credit Reporting Agencies Equifax, Experian, and TransUnion There are 3 major credit reporting agencies that maintain credit reports: Equifax, Experian, and TransUnion You may obtain a free copy of your credit report annually from each of the major credit reporting agencies. You may obtain a free copy of your credit report annually from each of the major credit reporting agencies. Go to this is the official site for an annual free report. Go to this is the official site for an annual free report. BEWARE: Credit Reports may be available through other website, but they may not be FREE! BEWARE: Credit Reports may be available through other website, but they may not be FREE!

8 8 FICO Credit Scores An engineer, Bill Fair, and a mathematician, Earl Isaac, developed a measure of credit risk based on the contents of a person’s credit report: they called it the “FICO Score.” An engineer, Bill Fair, and a mathematician, Earl Isaac, developed a measure of credit risk based on the contents of a person’s credit report: they called it the “FICO Score.” Your FICO score is determined by past use of credit and is like your grade point average for credit use. Your FICO score is determined by past use of credit and is like your grade point average for credit use. Your FICO Score is a 3-digit number between Your FICO Score is a 3-digit number between is best = A+ 850 is best = A+ 300 is worst = F 300 is worst = F

9 9 FICO Credit Scores Used by lenders: Used by lenders:  To decide whether to make you a loan at all  To determine the interest rate for your loan  To increase your credit limit  To determine treatment if you make a very late payment  NOTE: FICO Scores are not part of your credit report. To obtain your scores you must pay a fee – or -- a lender may tell you your score when applying for a loan.

10 Focus on CREDIT CARDS WHY? Widely available  You don’t have to be particularly credit-worthy to get one. Dangerous if used improperly or abused  Often more available credit than a person needs or can reasonably afford to repay.

11 11 Good reasons to have credit cards: Convenience: don’t have to carry lots of cash or write checks. Convenience: don’t have to carry lots of cash or write checks. Safety: usually little or no liability if stolen. Safety: usually little or no liability if stolen. If used properly, will help build a good credit rating. If used properly, will help build a good credit rating. Internet purchases Internet purchases Emergency situations Emergency situations Rewards points (travel, merchandise, cash) Rewards points (travel, merchandise, cash)

12 12 HOWEVER: PUTTING SOMETHING ON A CREDIT CARD DOES NOT MEAN YOU CAN AFFORD SOMETHING THAT YOU COULDN’T AFFORD OTHERWISE PUTTING SOMETHING ON A CREDIT CARD DOES NOT MEAN YOU CAN AFFORD SOMETHING THAT YOU COULDN’T AFFORD OTHERWISE

13 13 Wants vs. Needs A want is something you would like to have. It is not absolutely necessary.  Everything else A need is something you have to have--something you can't do without.  Food  Shelter  Clothing  Transportation

14 Common Problems Encountered by Credit Card Users Unable to pay the bill in full every month  Interest begins to accrue on unpaid amount  If you continue using the card, you have the previous month’s unpaid principal, plus interest, plus any new principal, all of which has to be repaid.  If you can’t pay all of that off in full at the end of month 2, you have even more interest accrual.  Paying the minimum amount is a fool’s game. Negatively impacts your credit report and your credit score.

15 15 What are the consequences of bad credit? How will it affect you in the future?

16 16 If your payment record is poor, your credit rating will suffer. If your payment record is poor, your credit rating will suffer. You may be denied credit or will be required to pay much higher interest rates. You may be denied credit or will be required to pay much higher interest rates. You might lose a job opportunity or be denied an apartment lease. You might lose a job opportunity or be denied an apartment lease. You may not be able to get student loans for undergraduate or graduate school. You may not be able to get student loans for undergraduate or graduate school. Your insurance rates may be higher. Your insurance rates may be higher.

17 17 Test your financial knowledge True Trueor False False

18 18 True or False? You must be 18 years old or older to obtain a credit card in your own name.

19 19 True When you turn 18, you may apply for a credit card in your own name and incur debt in your name, but you will need to prove sufficient income or get a co-signer in order to be approved. When you turn 18, you may apply for a credit card in your own name and incur debt in your name, but you will need to prove sufficient income or get a co-signer in order to be approved.

20 20 True or False? All credit cards charge the same annual percentage rate of interest on the balance you owe.

21 21 False Different banks charge different rates. Other important terms vary also, such as annual fees, late fees, grace period. Different banks charge different rates. Other important terms vary also, such as annual fees, late fees, grace period. Check out these website for a comparison of terms: Check out these website for a comparison of terms:   

22 22 True or False? After the teaser rate expires, the Annual Percentage Rate (APR) on a credit card can be changed at any time by the credit card issuer.

23 23 True The APR on your credit card can be changed AT ANY TIME by the credit card issuer, though the issuer is required to give written notice in advance of the change. Tricky & Sneaky!

24 24 THINK LIKE A LAWYER AND READ THE FINE PRINT!

25 25

26 26 True or False? If you pay your credit card balance in full each month, it doesn’t matter what rate of interest the bank charges on your credit card.

27 27 True Since you only pay interest on the unpaid amount each month, you may never pay any interest charge if you pay the entire debt.* Since you only pay interest on the unpaid amount each month, you may never pay any interest charge if you pay the entire debt.* Banks do not like it when you do this ! Banks do not like it when you do this ! *WARNING – question the issuer on this point as some credit cards accrue interest during the month! *WARNING – question the issuer on this point as some credit cards accrue interest during the month!

28 28 The true “cost” of buying on credit: What if you bought...

29 29 A new laptop computer system:  Laptop  Printer  Wireless mouse  Wireless Router  TOTAL: $2,000

30 30 And what if you use your credit card to buy the laptop and you make monthly payments of $300? And what if you use your credit card to buy the laptop and you make monthly payments of $300? Assume you never miss a payment and the annual percentage rate on your card is 8%. Assume you never miss a payment and the annual percentage rate on your card is 8%.

31 31 What will the laptop end up costing you? How long will it take you to pay for it?

32 32 Your total cost will be $2052 Your total cost will be $2052 It will take you SEVEN MONTHS to pay for it

33 33 Now, instead of an 8% rate of interest, assume that, because of your poor credit rating, you must pay interest at the rate of 24.9%. Now, instead of an 8% rate of interest, assume that, because of your poor credit rating, you must pay interest at the rate of 24.9%. Also assume that you pay only the MINIMUM MONTHLY PAYMENT of $45 per month (2.25% of the balance). Also assume that you pay only the MINIMUM MONTHLY PAYMENT of $45 per month (2.25% of the balance).

34 34 How long will it take you to pay for the computer? How much will you end up paying for the laptop?

35 35 It will take you nearly 125 MONTHS! It will take you nearly 125 MONTHS! Over TEN YEARS! Over TEN YEARS! TOTAL PAYMENT: $5, TOTAL PAYMENT: $5,595.84

36 36 Your choices: Your choices: Pay $2,000 cash now Pay $2,000 cash now Pay $2,052 over seven months Pay $2,052 over seven months Pay $5,595 over ten years Pay $5,595 over ten years

37 37 What If You Save That Money… If you save or invest $50 per month for 10 years: 5%=$7, %=$10, %=$13, And what if you could make what the credit card companies charge? 24.9%=$25,922.45

38 38 That’s how credit card companies earn approximately $30 BILLION a year in profit.

39 39 True or False? True or False? You pay no interest on a debit card purchase.

40 40 True A debit card works just like a check. A debit card works just like a check. You can only spend what you have. You can only spend what you have. Your ATM card Your ATM card is probably a debit card.

41 41 True or False? There is a credit report for everyone over the age of 18.

42 42 False There is a credit report only for those who have established a credit history. There is a credit report only for those who have established a credit history. Having no credit history can also have adverse consequences. Having no credit history can also have adverse consequences.

43 43 True or False? If you are late making a few payments on your credit card, the interest rate you pay may increase sharply.

44 44 True For example, on one Platinum VISA card, the rate jumps from 4.9% to 24% if you pay late or miss even one payment. Late charges also accrue. For example, on one Platinum VISA card, the rate jumps from 4.9% to 24% if you pay late or miss even one payment. Late charges also accrue.

45 45 True or False? If you miss just one or two payments on your credit card, it won’t hurt your credit rating.

46 46 False That negative information can legally remain on your report for up to 7 years. That negative information can legally remain on your report for up to 7 years.

47 47 True or False? If you apply for a car loan, the lender will probably review your credit report.

48 48 True People who lend you money will almost always review your credit report. If your credit is poor, your interest rate will be higher, and you may not be able to get a loan at all. People who lend you money will almost always review your credit report. If your credit is poor, your interest rate will be higher, and you may not be able to get a loan at all. Remember: You may receive free copies of your credit report each year. Remember: You may receive free copies of your credit report each year.

49 49 True or False? When you apply for a job, your prospective employer may review your credit report.

50 50 True A prospective employer can review your credit report if you give written authorization. A prospective employer can review your credit report if you give written authorization. More employers are asking to see credit reports. More employers are asking to see credit reports. What happens if you refuse to let employers see report? What happens if you refuse to let employers see report?

51 51 True or False? Bouncing just one check won’t cause you credit problems.

52 52 False If you bounce a check, your bank may put your name in ChexSystems. You could be “blacklisted” by financial institutions for up to 5 years - this means you cannot use a checking account. If you bounce a check, your bank may put your name in ChexSystems. You could be “blacklisted” by financial institutions for up to 5 years - this means you cannot use a checking account.

53 53 True or False? The average college student owes several thousand dollars in credit card debt today.

54 54 True Credit card debt is rising rapidly among young adults. Credit card debt is rising rapidly among young adults. This is in addition to student loan debt. This is in addition to student loan debt. Don’t fall into the trap of spending money you don’t have. Don’t fall into the trap of spending money you don’t have. Doing so may result in you having to file bankruptcy. Doing so may result in you having to file bankruptcy.

55 Tips for Using Credit Responsibly Before you make a purchase on credit, determine:  How much the purchase will really cost you  Whether you can actually afford the purchase  If it is better to wait and pay in cash

56 56 Tips: How to Establish Good Credit Using a checking account or debit card. Using a checking account or debit card. Pay bills in full and on time Pay bills in full and on time Do not open any credit cards you don’t need. Do not open any credit cards you don’t need. Do not have a balance on your credit card exceeding more than 20-30% of your credit limit. Do not have a balance on your credit card exceeding more than 20-30% of your credit limit.

57 57 Tips for choosing a Credit Card  Annual Fee  Interest Rate  Introductory  Balances v. Cash Advances  Fixed v. Variable  Default Interest  Grace Period  Method of Computation  Rewards

58 Make a Budget INCOME Total Monthly Wages: $1,600 Less taxes and other deductions: $400 NET MONTHLY PAY: $1,200 EXPENSES/SAVINGS Rent: $500 Utilities: $30 Food: $200 Clothing: $100 Laundry: $20 Recreation: $50 Transportation: $100 Savings: $200 TOTAL EXPENSES: $1,200

59 59 Rules to Remember for Building Good Credit: 1. Have a budget and stick to it. 2. Don’t have more than 1 credit card. 3. Shop around and get the best deal for everything, including credit cards themselves. 4. If you can eat it, drink it, or it costs less than $10, don’t charge it. 5. Use a debit card, check, or cash whenever possible. 6. Pay off all balances in full every month. 7. Never make just a minimum payment. 8. Know the difference: Needs v. Wants 9. Check your credit report yearly and correct errors. 10. Find out what your credit score is.

60 60 THE END